Commentary

Get out the Bubbly?- by Greg Strid

Sales of existing homes and condos increased 2.9 percent
to a seasonally adjusted annualized rate of 5.03 million,
crawling past the 4.85 million low-ball concensus estimate
from America’s practitioners of the dismal science- sometimes
known as economists. So, is it time to bring out the bubbly?

This marks the strongest showing for existing home sales
since last October. But, sales are off by almost 24 percent
from year ago levels. Inventories of unsold homes also fell-
by 3 percent to 4.03 million, which translates to a 9.6 months
supply at current sales levels. Though inventory levels are
declining, they are still much higher than during the frenzied
market of two years ago.

It seems as though the condo has been fairing worse than its
cousin, the single-family home. Although condo sales rose by
3.7 percent last month compared to a gain of 2.8 for single-
family homes, condo sales are off by 29.7 percent form a year
ago, and inventories actually rose by 14 percent last month,
representing a 13 month supply.

The real reasons for the bounce in sales and overall decline in
inventories may be coming from the rapid descent of home
prices. The median sales price for single-family American
chateaus sank by 8.2 percent last year, and now stands at
$195,900. This painful dropoff is the largest since 1968, the
first year that realtors began tracking them. This, coupled
with the Fed’s slashing of interest rates, may have caused
a few more buyers to step in.

So much for the crowd’s belief in ever-rising real estate prices.
And, for those thinking that this momentary upswing in the level
of existing home sales marks a bottom-I’ve got a bridge topped
off with poorly built condos to sell you.

The grotesque conditions- mainly the disappearance of lending
standards and the willingness of investors from around the globe
to ignore risk- that fueled this real estate bubble are rapidly
reversing. It is harder to get mortgages, especially those of
the “jumbo” variety that helped float prices to the stratosphere.
It seems that credit standards are regaining sanity, and investors
are sobering up to the concept of risk when assessing potential
returns.

Markets never move in a straight line- up or down. Today’s
“good news” is just a respit. The real estate market is in the
middle of a prolonged correction that will see further price
declines, and stubbornly high inventory levels. And, as in
previous asset market price corrections, once a bottom is in
place, it will not then lead to another idiotic gallop to the
heavens. Conclusion: let’s keep the Champaign on ice for now.

©Greg Strid 2008

© 2008 Splendid Marbles.