Commentary

New Home Sales Hit 7 Year Low

New home sales cratered 8.3 percent last month to a seven-year, and the median sales price of an American castle dropped by 7.5 percent, representing the largest decline in 37 years.

More alarmingly, new home sales are off 21.2 percent over the past year. As for the scary drop in the median sales price, this would be even larger if non-monetary incentives, such as free vacations, new cars and first born children of top executives were included.

There was one small nugget of good news in this garbage dump of a report: the inventory of unsold homes fell by 1.5 percent. But this still means that there is still 8.2 months worth of inventory sitting out in the sun, representing the largest supply of new homes since March.

The publicly traded home builders appear to be struggling the most. Completed dwellings now represent 34 percent of all homes for sale in the market, the highest level in the past several years. With home builders racking up larger losses with each passing quarter, the pressure to liquidate inventory will continue to mount.

This will result in added downward pressure for existing home prices because the glut of unsold inventory from home builders will overwhelm demand and push overall market prices lower. The increasing cost of jumbo mortgages – the ones too large for Fannie Mae or Freddie Mac to purchase – is also adding strength to the unwelcome headwind that is buffeting the U.S. real estate market.

Wall Street is currently ignoring this gathering storm. The deflation of the housing bubble will reduce household wealth, and in turn consumer spending. And, the dollar continues its decline as confidence in the U.S. economy wanes. It will only be a matter of time before the housing implosion causes a recession. As for Wall Street, the intoxicating effects of last week’s rate cut will only postpone the inevitable correction in equity prices that will occur when overly-optimistic profit forecasts are exposed to the light of economic reality.

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© 2007 Splendid Marbles.