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Hopeful glimmers in the housing slump

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If you're a homeowner, the recent movement of home prices is as sickening to watch as a mountaineer falling off a cliff. As recently as a year ago, prices of existing homes were rising an amazing 15 percent a year. But the rate of increase has been going down, down, down. In August, the year-over-year change went below zero for the first time since 1995. The National Association of Realtors announced Sept. 25 that the median price nationally in August 2006 was $225,000, 1.7 percent lower than in August 2005.

Time to punch that pulsing-red panic button? Not yet. Because several other pieces of news in the Realtors' report were better than expected, indicating that the housing downturn may not be quite as bad as some fear. For example:

• The decline in the number of existing homes sold was less than economists expected. It fell 0.5 percent to 6.3 million. There was no change at all in the number of single-family homes sold in August. The decrease was entirely in the category of condominiums and cooperative apartments.

• The inventory of unsold homes, albeit the highest in terms of months' supply since April 1993 increased from July to August by a modest 1.5 percent, the smallest amount so far in 2006. If inventories start to top out, it will be a good sign for housing.

• According to an analysis by JPMorgan Chase (JPM), the inflow of "new offers" -- that is, existing homes coming onto the market -- held steady in August and was down 5 percent from a year earlier. [Those numbers are not seasonally adjusted.] This shows the market is adjusting to reality.

Fed relief?

Investors certainly saw a silver lining in the Sept. 25 news. The stocks of D. R. Horton (DHI), KB Home (KBH), Lennar (LEN), Pulte Homes (PHM), and other homebuilders all rallied for the day. Pulte led the way as its share price rose more than 4 percent, to $32.66.

Stocks overall were lifted by hopes that the Federal Reserve will hold off on further interest rate hikes, at least for a while. Richard Fisher, the president of the Dallas Federal Reserve, said after a speech in Mexico that the slowing U.S. economy is likely to tamp down inflation. Lower inflation would give the Fed more latitude to hold the line on interest rates [see, 9/25/06, "Stocks Climb on Fed Remarks, Housing Data"].

Make no mistake, housing is slumping, and things are probably going to get worse before they get better. Global Insight, the forecasting firm, wrote, "The housing slowdown is about a year old. It probably has another year to run." The firm expects that existing-homes sales will drop nearly 10 percent in 2006 and nearly 15 percent in 2007, and begin to turn around in the second half of '07.

Pricing realism

The point is, things could be worse. For one thing, mortgage rates have been falling lately. Freddie Mac (FRE), the big mortgage buyer, says that the national average commitment rate for 30-year fixed-rate loans fell about a quarter-point in August, to 6.52 percent, from 6.76 percent in July. And they've fallen more since, to 6.40 percent last week. That increases consumers' buying power.

You can even put a positive spin on the price decline, as the National Association of Realtors did in its announcement. NAR president Thomas M. Stevens said, "sellers are starting to become more realistic" and cut prices in order to move the merchandise.

The Realtors' own numbers lend credence to the "realism" theory -- by region, it appears that sellers in the Northeast were the most realistic and ones in the Western region, which is dominated by California, were the least realistic. Prices fell the most in the Northeast, but at least volumes were up. California had a slight increase in prices, but volumes fell the most.

Here are the numbers by region:

Northeast: Sales volume up 1.5 percent. Median price down 3.9 percent.

Midwest: Sales volume up 0.6 percent. Median price down 1.1 percent

South: Sales volume down 0.9 percent. Median price down 2.6 percent.

West: Sales volume down 2.4 percent. Median price up 0.3 percent.

Next up in the parade of housing data is the report on Wednesday, Sept. 27, on sales of new homes in August. Action Economics is calling for a 3 percent decline, to an annual rate of 1.04 million units.

Copyright © 2006 The McGraw-Hill Cos., Peter Coy. All Rights reserved. -- WASHINGTON -- Sept. 26, 2006

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