Another week, another gloomy housing report. Today the National Association of Realtors reported that purchases of existing homes dropped unexpectedly 2.2 percent in May.
The deceleration of the housing market can be largely attributed to the expiration of the first time home buyer tax credit on April 30th. Many believe that the tax credit dragged home sales from the summer months into the spring, and the market is suffering as a result. Mortgage application data would back this assertion up, as purchase applications are currently at their lowest point since 1997, despite mortgage rates at near historic lows.
The decline in home sales can also be attributed to the general malaise that is affecting the economy. The economic recovery appears to be weakening, as unemployment remains high, demand for consumer goods is beginning to wane, and foreclosures continue to remain at record levels.
The Federal Reserve begins a two day meeting today to address monetary policy. Few expect the Fed to raise interest rates at this meeting, as inflation is currently at 1.5 percent, below the Fed’s target level of 2 percent. Unless inflation becomes an issue, expect the Federal Reserve to keep rates low to encourage economic growth.
According to the National Association of Realtors there is an 8.3 month supply of pre-owned homes on the market. This is a number that is likely to grow substantially in the coming months as more and more foreclosed homes make their way to the market. This huge supply will likely cause further downward pressure on home prices.
Not only is the glut of supply causing prices to decline, but it is also causing homebuilder stocks to take a beating. New homes cannot compete with foreclosed homes from a price standpoint, and builders are suffering. Home construction is a major source of employment in the United States, and unemployment will likely remain high until we see some improvement in the housing market.
It looks like we could be looking at a rough summer and fall. What do you think? Let us know in the comments section below.
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