As the U.S. economy softens, real estate's struggle worsens
The housing market just can't seem to find its footing. After a rising for two months straight, pending home sales fell off a cliff in April. The National Association of Realtor's Pending Home Sale Index fell by 11.6% during the month. That's the biggest decline since the home buyer credit expired about a year ago. The index is now the lowest since September. What's weakening Americans' home buying demand?
The chart shows the disturbing drop quite clearly:
At 81.9, the index is in pretty ugly territory. You can see that it was rarely lower than this -- even between the time when the housing bubble had popped and the home buyer credit took effect. The already anemic demand for home buying appears to have weakened even further.
This might seem somewhat surprising. Since home prices have begun declining again, the deals out there are getting better. Of course, this same trend could be driving potential buyers to the sidelines for the time being: no one wants to buy a home only to have its value decline in the next year.
The National Association of Realtors has a different explanation. Its chief economist Lawrence Yun says:
The economy hit a soft patch in April from sharply rising oil prices, widespread severe weather with the heaviest precipitation in 20 years, and a sudden rise in unemployment claims.
In fact, higher inflation in general is likely squeezing many Americans' budgets, which makes grim the prospect of buying a new home. Although unemployment hasn't risen much, since it also hasn't declined much, there aren't hordes of newly employed Americans with fresh salaries to put towards a mortgage payment. Putting all these factors together means that the relatively weak pace of sales is slowing.
It will be interesting to keep an eye on home sales over the next couple of months. The summer is traditionally busy season for realtors. At this point, it looks like they'll have farther to climb to reach even a relatively brisk pace of home sales during the warm months.
But if gas prices begin to soften, the weather improves, hiring picks up a bit, and consumers seek deals due to falling prices, then stronger sales could follow. Of course, that's quite a few conditions that need to be satisfied. It's pretty likely that a few will be met and a few won't, which probably translates into somewhat higher, but still relatively few, home sales.
Image Credit: REUTERS/Richard Clement
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