Housing Prices Falling, New Construction Sluggish

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U.S. home prices fell again in October, and economists forecast continued declines in real estate values.

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The median sales price fell to $221,000 in October, a year-over-year decline of 3.5 percent, according the National Association of Realtors (NAR). While the October figure was the sharpest descent on record, David Lereah, chief economist for the NAR, said the context of the number was skewed by the corresponding price spike October 2005.

Nevertheless, the sector is correcting, and Lereah said he expects home prices to continue falling for the rest of the year as the market enters the typically slower winter season, with the inventory homes for sale rising 1.9 percent at the end of October. The inventory of offerings rose to 3.85 million, a seven-and-a-half month supply at the current pace of sales.

The National Association of Realtors points to October's figures for sales of existing homes as evidence that the market is stabilizing. Sales of pre-owned homes were at a seasonally adjusted annual rate of 6.24 million units in October, up a half a percentage point from the pace of 6.21 million in September, the NAR reported. That's in dramatic contrast to the year-over-year comparison 11.5 percent below October 2005.

Meanwhile, other measurements indicate continued correction. For example, sales of new single-family homes were at a seasonally adjusted annual rate of 1.004 million units in October, which represents a 3.2 percent dip below September, and 25.4 percent below October 2005, according to the U.S. Commerce Department.

And key indicators of future activity in the housing sector are also lagging sharply. Housing construction starts were down again in October, when the seasonally adjusted annual rate slowed to a six-year low, according to the Commerce Department (DOC). Permits for new construction, another indicator of future activity, fell for a ninth straight month, to the lowest point since December 1997.

The slowdown in the housing market has not only impacted property values, but has struck hard at industries that had been riding high on the boom. Markets for building materials, where manufacturers had been producing at record volumes to meet demand, are correcting rapidly.

In lumber, for example, the November Random Lengths Framing Lumber Composite price, the forest products industry's key indicator, was 23 percent below the year-ago level.

As a result, manufacturing plants across the Western and Southern U.S. are cutting jobs in the fourth quarter, as are major homebuilders, who are also reporting lower earnings.

Economists say that the drop in housing construction is the key to getting home prices back on the rise. "I view the decline in starts as a healthy development," said David Seiders, chief economist for the National Association of Home Builders (NAHB). "We know that inventory is too high, so the faster we get back in balance, the better."

Former Federal Reserve Chairman Alan Greenspan had similar comments, saying on Nov. 28 that the worst of the housing adjustment was over. Greenspan also said that he did not see the housing market crashing and taking the economy with it.

Mortgage debt is always a concern, Greenspan said in a widely reported speech to America's Community Bankers (ACB) Annual Convention, “but measures of household financial stress do not, at least to date, appear overly worrisome."

A current Fed official said that lower oil prices and a U.S. commercial property boom will help offset the serious problem of a cooling housing market, Dallas Federal Reserve President Richard Fisher said in an interview with a German financial newspaper.

Handelsblatt quoted Fisher as saying the current U.S. interest rates of 5.25 percent are at the appropriate level, but it was better to err on the upside than the downside.

"If I am wrong, then better to go in the direction of combating inflation because of the great damage that it causes," he told the newspaper last week during a visit to Germany.

Handelsblatt said Fisher, who is not a member of the Federal Reserve's rate-setting committee this year, described the downturn in the housing market as a "very serious problem" which had been exacerbated by keeping rates too low for too long.

But he thought the U.S. economy would rebound in the fourth quarter from the slow annual growth of 1.6 percent in the third quarter, the paper said.

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