What’s at stake: Existing housing sales in July plunged 25.5 percent below the level of a year ago, the National Association of Realtors said on Tuesday, as buyers lost the spur of a government tax credit. The steep descent surprised nearly every analyst – market expected 13% drop for the month relative to June level but It actually fell 27% on the month – and put the volume of single-family home sales at the lowest level since 1995. Real estate helped drive this recession, and no one expects it to be a help in getting out. Instead, the urgent question is how much it will drag down other parts of the fragile recovery.

Latest housing data and the end of the tax credit

Calculated Risk has a useful summary of the housing news for the week ending August 28^th.

·         The National Association of Realtors reported Existing Home Sales are 25.5 percent below the 5.14 million-unit level in July 2009.

·         Total housing inventory at the end of July increased 2.5 percent to 3.98 million existing homes available for sale, which represents a 12.5-month supply at the current sales pace, up from an 8.9-month supply in June. Below 6 months of supply house prices are typically rising. Above 6 or 7 months of supply, house prices are usually falling. This isn't perfect - it is just a guideline but this is a key reason why Calculated Risks expect house prices to fall further later this year as measured by the Case-Shiller.

·         New Home Sales fell by 32.4 per cent in July year-on-year to a record low adjusted annual rate of 276,000, commerce department figures showed. New home sales are important for the economy and jobs – and this indicates that residential investment will be a sharp drag on GDP in Q3.

·         The total percent of loans delinquent or in the foreclosure process declined only slightly in Q2 from Q1 to 14.42% and the rate is the second highest on record. In 33 states and the D.C., 10 percent or more of homeowners with mortgages have negative equity.

Eurointelligence notes that this is important news because of the impact of the US housing market on the US economy, and the impact of the US economy on the global economy. Calculated Risk says the general problem is excess supply at current prices. Market clearing will only occur if prices fall again. The blog also makes the point that Obama’s housing tax credit was an unmitigated failure because it only benefited those buyers who would have bought anyway. The outcome of this constellation is now another period of falling house prices. And we all know what that means for the stability of the financial system, and the economy at large. Eurointelligence also notes that house prices have fallen by even less in the UK and in Spain, and that the situation in both countries is not too dissimilar from that in the US. The UK real estate market is maintained by ultra-cheap and easily available mortgages. The same goes for the Spanish market.

The Curious Capitalist reports that lots of people have been talking about the tax credit and how that has been distorting the housing market for the past few months. The claim is that the $8,000 housing tax credit caused people to rush to buy houses in the beginning of the year, and therefore making the housing market appear weaker than it is today. But as Megan McArdle over at the Atlantic points out sales were falling even before the relatively small tax credit, compared to the cost of a house and moving.

Dean Baker argues that we should expect house prices to continue to fall, with nationwide prices dropping another 15 to 20 percent to complete the process of deflating the bubble. This price decline is inevitable and in many ways desirable. Trying to delay this adjustment process with schemes like the homebuyers’ tax credit was a pointless waste of money.

Does the recovery depend on housing?

Agustín Bénétrix, Barry Eichengreen and Kevin O’Rourke argue that economic recovery without housing market recovery is unlikely to be sustained. How the crisis ends will also depend, in part, on housing markets. Construction is a particularly volatile component of economic activity. Changes in house prices can powerfully impact consumer confidence. House-price developments have obvious implications for bank balance sheets and the condition of financial institutions. All these are reasons for worrying that economic recovery without housing-market recovery is unlikely to be sustained. According to their research, five variables go a long way toward explaining whether a slump is poised to end: the cumulative rise in house prices prior to the slump; the cumulative house price fall during the slump; GDP growth in the current quarter; mortgage interest rates in the current quarter; and private credit growth during the current year.

Jeff Frankel argues that we can absolutely have a recovery where the housing sector lags behind. Just because housing was the first sector to go into recession does not mean that it has to be the first coming out. To the contrary. The inventory of unsold homes is too big to allow a strong recovery in construction anytime soon, unfortunately. But housing seldom does lead the expansion, even after more ordinary recessions. Other components of demand – consumption, business fixed investment, and exports – are more likely to lead the way.

Laura Tyson argues that the housing market may have triggered the recession, but it will not be the trigger for a sustained recovery. What’s needed is a significant number of new jobs to reduce the unemployment rate, to boost household incomes, and to strengthen household spending. Weak demand is the primary reason for disappointing sales of new and existing homes, although more stringent conditions imposed by lenders are also curtailing transactions. Unemployment, particularly unemployment that lasts for many months, and the resulting painful losses in income have become the major catalysts behind foreclosures. More than 1 million households are likely to lose their homes to foreclosures this year. Declining housing prices mean that more households find themselves saddled with mortgages that exceed the value of their homes; and such households are more likely to default on their loans either out of necessity or choice.

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