Residential property sales in the US increased in August after plunging in July but activity is still low and analysts warn it will fall further along with prices.
August saw an increase in sales of 7.6% after the ending of the homebuyer tax credit scheme led to falling sales in July, according to the latest index from CoreLogic. But the market is still very weak said senior economist Sam Khater.
‘The home sales market remains very weak coming into October. In the short term, this reflects the homebuyer tax credit which shifted demand forward and whose impact will be felt for a few more months. Over the longer term, negative equity and high unemployment serve as the main obstacles to a more resilient home sales market,’ he explained.
Paul Dales, an economist at Capital Economics, said even after the increase in August sales, they are still at the second lowest level seen in 14 years. ‘Looking ahead, as the distortion from the tax credit continues to fade, home sales will rise further. But when unemployment is so high, negative equity so widespread and the threat of further price falls becoming a reality, demand for housing will remain relatively weak,’ he warned.
With between 20% and 25% of home owners in the US estimated to be underwater it is this negative equity, according to Khater, that is keeping potential sellers on the sideline while high unemployment keeps buyers at bay even though mortgage rates are at an all time low.
Latest figures from the National Association of Realtors paint a similar picture, showing that sales are down 19% from last year. ‘The housing market is trying to recover on its own power without the homebuyer tax credit. Despite very attractive affordability conditions, a housing market recovery will likely be slow and gradual because of lingering economic uncertainty,’ said NAR chief economist Lawrence Yun.
‘Home values have shown stabilizing trends over the past year, even as the economy shed millions of jobs, because of the homebuyer tax credit stimulus. Now that the economy is adding some jobs, the housing market needs to steadily improve and eventually stand on its own,’ Yun explained.
The NAR figures also shows that first time buyers made 31% of purchases in August, down from 38% in July. And investors accounted for 21% of sales in August, up from 19% the prior month.
Quinn Eddins, director of research at Radar Logic, said he believes that property prices will follow depleted demand and reach a new bottom either by the end of 2010 or the start of 2011. He doesn’t make too much from the Core Logic figures. ‘This shows weak demand, which is as much a result of the slow economic recovery and jobs recovery as it is from the pull through of the tax credit. Despite the uptick, we’re still pretty bearish on overlying housing demand, and we think that’s going to bring prices down over the next few months,’ he said.
Eddins added that there are two paths the market can take moving forward. Each depends on how the government sponsored enterprises Fannie Mae and Freddie Mac, and other financial institutions will manage the flow of Real Estate Owned properties onto the market.
He said that if they flood the market, prices could drop 10% to 15% below the trough seen in 2009, dragging not only house prices but the entire economy back into a recession. If these companies continue to manage REO to a trickle, Eddins expects flattened prices for years to come.