Existing home sales were “better than expected” this morning, but a look under the hood shows some cause for concern. As we noted on Friday, prices are already double dipping. While sales are up inventories remain extremely high. Econoday detailed the report:
“A big rise in existing home sales was helped by a steep fall in prices, in a good news/bad news report for September. The annual pace of existing home sales, showing sales strength across all categories, jumped 10.0 percent to a higher-than-expected 4.530 million rate. The median price fell 3.3 percent to $171,700 with the average price down 3.5 percent to $218,200. The jump in sales cleared out some of the supply, which fell 1.9 percent to 4.040 million units for 10.7 months of supply vs. 12.0 months in August and vs. 12.5 in July.”
As I’ve long argued, the housing market is simply a story of supply and demand at this point. There is too much supply on the market and deflationary trends are putting a cap on demand. Thus prices remain too high. The double dip appears to be unfolding right on cue as the government finally allows the market to clear. Unfortunately, the headwind is likely to persist. Calculated Risk has an excellent story this morning regarding the future wall of supply:
“Although inventory decreased slightly from August 2010 to September 2010, inventory increased 8.9% YoY in September. This is the largest YoY increase in inventory since early 2008.”
“Note: Usually July is the peak month for inventory.
The year-over-year increase in inventory is very bad news because the reported inventory is already historically very high (around 4 million), and the 10.7 months of supply in September is far above normal.
And double digit months-of-supply suggests house prices will continue to fall.”
The story here hasn’t changed much. It’s still an econ 101 story – supply and demand rule the day. Supply will continue to put pressure on the market and weak end demand will cap demand. The economic risk to the downside increases due to this change in asset prices. Remember, housing was the first domino to topple in this credit crisis. Before any recovery ensues, we’ll likely see a sustainable bottom in housing prices. In my opinion, we’re not there yet.