August 24, 2006

Existing-home Sales “Plunge,” But This Is NOT an “Implosion” (Updated for New-Home Sales)

Filed under: Economy,MSM Biz/Other Bias — Tom @ 8:06 am

From MarketWatch (link requires free registration):

July was dry for the U.S. real estate market, as sales of existing homes plunged 4.1% to a two-year low, prices stagnated and the number of homes on the market soared to a 13-year high, according to a report from the National Association of Realtors released Wednesday.

The report shows a continued implosion in the housing market, with inventories up sharply while prices are softening. Sales are down 11.4% in the past year to a seasonally adjusted annual rate of 6.33 million compared with 6.60 million in June.

OK, not pretty. But in historical context, it simply is not as ugly as indicated:

So we’re roughly back to a level between 2003 and 2004. EVERYBODY was saying that the housing market was overheated in 2004 and 2005, and that the sales rates in those years were not sustainable over the long term. Additionally, please, PLEASE note that the median nationwide sales price has NOT dropped.

True, the 2004-2005 market built up expectations for sellers; hence the high inventory number. But this too will pass as expectations align with reality — perhaps with selling prices that were lower than a year ago by the time it all sorts out, but perhaps not.

The big point is that this is NOT an implosion. I’m not going to sit here and say that an implosion isn’t possible, but I’ll be dipped if I’m going to let MarketWatch claim that one is happening now when it clearly isn’t.


UPDATE: The following exchange took place later this morning –

(from Tom Blumer to Rex Nutting, the article’s author)

It (your report) wasn’t balanced. If you had shown your readers the 2003-2006 chart that is here and considered it in light of what everyone was saying in 2004-2005 (“this isn’t sustainable”), it becomes clear that there is no “implosion” going on:

I posted on your article:


(From Rex to Tom)

Everyone was saying it wasn’t sustainable and now we are getting the proof of that.


(From Tom to Rex)

Fine. Then what is happening isn’t an “implosion” (“a violent collapse inward”).

And I missed where you told readers that 2004-2005 “wasn’t sustainable,” or that annual sales level are still above what they were before the 2004-2005 boom.

UPDATE 2: Here’s the new-home big picture released today (note — I believe the Y/Y column is miscalculated, and should read -16.2% [-208/1280] and -1.8% [-$4,208/$234,208]):

New-home sales, which are more volatile, are slightly below the 2003 level, again at about the level they were before the unsustainable overheating of 2004 and 2005. The median price is down a little less than 2% from a year ago. Lower new-home sales are surely not good news for the homebuilding industry, whose profits have suffered during the past few quarters. But lower new-home prices aren’t hurting prospective homebuyers, who don’t suffer from a loss in asset values because ….. they’re not homeowners yet.

Nothing in today’s new-home information indicates an “implosion,” either.

UPDATE 3: Ken Shepherd at the Business & Media Institute has a great piece on how television news coverage is inaccurately playing up the “Housing Chill.”

UPDATE 4: Commenter “dscott” has some great historical perspective and analysis of the current situation at the related NewsBusters post.

Cross-posted (except Updates 3 and 4) at



  1. Just to set the record straight.

    I wrote this in May 2005:
    “Critics of the Fed have charged that its low interest rate policies are driving investors into real estate, fueling an unsustainable bubble in housing prices that could become a large drag on the economy if prices were to collapse.”

    Here’s a quote from my Sept. 2004 report about a drop in home sales: “It is a correction from unsustainable levels,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics.’
    Heres’ something I quoted in July 2004 about a drop in housing starts: “We’re coming off some unsustainable numbers,” said David Seiders, chief economist for the homebuilders.

    And here’s a headline from a story I wrote on March 1, 2003:
    No housing bubble, Fed’s Kohn says
    In which I wrote: “Many critics have said the Fed’s easy money policies are pushing home sales and prices too high, just as low rates in 1999 and 2000 encouraged investors to pump too much money into tech stocks in the Nasdaq. The economy is still recovering from that debacle nearly three years later.”

    There’s more, but why bother? I’ve been writing about this bubble from the beginning.

    Comment by rex — August 25, 2006 @ 3:56 pm

  2. #1:
    I have been writing about this bubble from the beginning.

    Unless I am misinterpreting, that sentence indicates a belief that, from the very beginning, the *bubble* was an inevitability, and now, that *this bubble* is an established fact.

    The definition of a real estate bubble is here:

    A real estate bubble or property bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid increases in the valuations of real property such as housing until they reach unsustainable levels relative to incomes and other economic indicators, followed by decreases that can result in many owners holding negative equity (a mortgage debt higher than the value of the property). Unlike a stock market crash following a bubble, a real-estate *crash* is a slow process, because sellers just decide not to sell. Historically due to inflation, prices did not fall in nominal terms, rather they stayed *flat* for a period of 3-5 years. However, due to low inflation in most countries, future corrections may result in a fall in both real and nominal house values.

    I do not like that definition, as I would expect declining prices to be characteristic of any kind of bubble.

    But since I do not write dictionaries (yet :–>), I will just say that even based on its criteria, there are two years until ANYONE, and that includes you, can declare that there has been real estate bubble.

    Comment by TBlumer — August 25, 2006 @ 4:42 pm

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