Economists and forecasters were predicting an awful 13% decline in existing home sales for July, to 4.65 million units. This, we were told solemnly, would be the worst since 2009.
In hindsight, those making the predictions seem to have been the sort of wild-eyed optimists whose sunny belief in the strength of the housing market got us into this mess in the first place. The actual figure for home sales, according to the National Association of Realtors, was 3.83 million--a 27% decline. The last time single-family home sales were this low, Bill Clinton was president, "This is How We Do It" was topping the Billboard charts, and our nation was grieving over a recent terrorist attack--in Oklahoma City.
When Peter and I were shopping for a house before we got married, we were astonished by the effect that the tax credit seemed to be having on people. Prices were climbing rapidly, as people got into bidding wars that raised the price by more than 8%. Inventory vanished rapidly; the average days on the market for a new property that wasn't ridiculously overpriced, half-finished, or occupied by tenants who wouldn't let the place be shown, was 1-4 days. This was insane, given that here in DC, a modest rowhouse in an "emerging" neighborhood, with dated or incomplete renovations, starts at $300,000 and marches rapidly north from there. A relatively small tax credit should not have driven people into such frenzy.
This housing collapse is the aftermath of that mania.
The depth of the collapse suggests that in fact, the housing tax credit was not generating new demand as much as moving demand forward a few months. That means that we're going to have to work out the aftermath in months of low home sales.
The NAR report strives to accentuate the positive, but this isn't easy, when the "positive" consists entirely of a modest year-on-year price increase. Given mortgage rates at 4.5% for a 30-year fixed, and a historic mutli-year collapse in home prices, the fact that we managed to eke out a 4% year-on-year increase isn't exactly comforting.
Should we rethink buying a house? Well, we can't; at this point, we're couch-surfing our relatives while we wait for our house to close; there's no way out but forward. And in our case, we're planning to stay put for a long time, so as long as DC rents don't utterly collapse, this is still a good plan for us. But this only reinforces my belief that housing is no longer a good way to generate wealth. The government can't fix this market, which needs to find a new, lower level. It can only very temporarily distort it.
Update: Dan Indiviglio says it with charts.