More “good” news out on the housing front yesterday; the National Association of Realtors reports that its index of pending home sales fell to the lowest level on record last month – down a whopping 22% from this time last year.
Home purchase agreements dropped in all four regions of the country. Apparently more than 10% of pending sales contracts “fell through at the last minute in August, as a result of canceled loan commitments from lenders” according to a Bloomberg article.
This is just another sign that the lingering impact of the credit crunch correction is far from over.
So while Wall Street rejoices in the recent Fed rate cut, Main Street USA is still feeling the pain of frozen credit markets and a much tighter lending environment. According to Bloomberg, the main trouble is that less lending is taking place “because of mortgage availability issues.”
“So far, the Fed's half-point rate cut on Sept. 18 has failed to lower mortgage rates and boost demand. Average 30- year, fixed-rate mortgage rates ended last week at 6.42 percent, compared with an average 6.3 percent the prior week,” according to the article.
Housing in Freefall
Sales of existing homes fell in August to the lowest level in five-years, while new-home sales dropped to a seven-year low. At the same time, home prices continue to fall, feeding a self-reinforcing vicious circle of dwindling household net worth – it’s a reverse “wealth effect,” and is bound to get worse before it gets any better.
The graph above shows just how dependent new home buyers became on sub-prime mortgages and other “creative financing” options during the boom years of the housing bubble. But now in the wake of the housing bust, American homeowners face a deepening bear-market in residential real estate.
And as more adjustable rate loans reset higher in coming months, it will put even more downward pressure on home prices. As one economist quoted in the Bloomberg article put it: “The existing homes market is now in freefall.”
No bottom in sight just yet; stay tuned…
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