New Home Prices Plunge the Worst EVER (in One Ugly Chart)

The Commerce Department reported another miracle on Friday. Or rather a mirage. In September, new home sales edged up 0.2% from August to a seasonally adjusted annual rate of 467,000 units. This isn’t a huge number, compared to the crazy days of Housing Bubble 1, but it was a 6-year high! And the media went gaga over it.

So, new home sales in August were initially reported to have been 504,000. Also a 6-year high or something. But these numbers have elephantine margins of error. Big revisions are common. And on Friday, the Commerce Department chopped that number down to 466,000 – which September beat by a barely visible 1,000 units.

In raw, not-seasonally adjusted numbers, 38,000 new homes were sold in September. That was well above September 2013 but still puny compared to the historical sales range of 40,000 to 80,000 units per month, which soared to over 110,000 per month during Housing Bubble 1 (great multi-decade chart by The Wall Street Examiner).

There was another number in this report, the median price at which new homes sold in September: $259,000. And it’s one heck of an ugly dude.

Normally the median new home price rises from August to September. Over the last 7 years through 2013, it fell only once: in September 2011, it inched down $2,600 from August to $217,000. During the remaining 6 years, median prices rose in September – even in 2008, the year when everything related to home sales was swooning. And last year in September, the median home price jumped $14,500 to $269,800.

So that’s sort of what should have happened this September … some kind of uptick. Even a small one would have done. But no. The median price plummeted 9.4% from August. A one-month trip from $286,000 to $259,000. It crashed $27,000 in one fell swoop.

Here is what that plunge looks like (courtesy of the St. Louis Fed). I called it “one heck of an ugly dude” for a reason:

US-new-homes-median-price-2004_2014-09

That median price of $259,000 was $10,800 below September a year ago. It was the first year-over-year decline since 2011!

Median home prices peaked in June at $287,000 and in August at $286,800. And that peak in prices, dropping sales volume, and rising inventories coagulated into a toxic mix that finally jarred homebuilders into discount mode. And what industry promoters spend their lives telling everyone that it won’t happen, happened again: after nearly three years of wild year-over-year price run-ups, prices suddenly dropped.

That $27,000 plunge is nothing to sneeze at. In dollar terms, it’s the worst month-to-month plunge EVER.

By comparison, the erstwhile record dollar plunge – and now the second worst – occurred in October 2010. It knocked the median price down by $23,800 to $204,100. In percentage terms, it was a 10.4% hit. The final paroxysm of a housing crash that had lasted over three years.

But this time, the plunge came off the peak. In that respect, it resembles what happened after the median price for new homes had peaked last time, at the phenomenal level of $262,600. That was in March 2007. In April, it crashed $20,100. It was the beginning of the great housing bust.

But not even during the worst month of the housing crash did the median price of new homes plunge $27,000. And that plunge doesn’t even include the costs of the incentives – the granite countertops and Jacuzzi bathtubs – that homebuilders throw in for free in order to close a deal without having to cut the price any further.

Homebuilders know that the market has curdled and that they have to do whatever it takes to make a deal. Homeowners are little slower. When they need to sell, they like to hang on to their illusory gains from prior years. But buyers cannot afford to buy at these prices, or they refuse to, and sales stall. That’s what we have seen for the past year.

All major indices have for months shown that, as sales of existing homes dropped, prices slowed their rise, but they were still rising, if more slowly, and industry promoters spoke of “more sustainable gains,” because they can never imagine an actual drop in prices. But Housing Bubble 2 has been running out of steam [US Home Prices Are Rolling Over (in one Chart)].

We’re seeing the next step in the process. New homes have already been hit. Now it’s spreading to existing homes. On Monday, nationwide real estate broker Redfin released the results of a survey conducted in early October. It starts like this:

Over the past few months, sellers have gotten the message that the market is no longer skewed in their favor…. [T]he belief that now is a good time to sell dropped by 17 percentage points from last quarter. Sellers last quarter told us they planned to price their homes aggressively, but it turned out that most buyers were unwilling to pay above market price. And Redfin agents across the nation started reporting surges in price drops in the first portion of the third quarter.

“Surges in price drops!” Not very promising.

There will be noise, ups and downs, confusion, denials. The industry has been through this before. And the median price of new homes will bounce. Just looking at the chart, I know it will. Because nothing goes to heck in a straight line. But bubbles do only one thing when they end: they pop.

In the US more than in most other countries, it all boils down to consumers because the economy is so dependent on them. Read… The High Price of Free Money: Now US Bankers Fear Financial, Social, or Political ‘Instability’

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  7 comments for “New Home Prices Plunge the Worst EVER (in One Ugly Chart)

  1. Petunia
    Oct 28, 2014 at 9:02 am

    House prices in Florida are not sustainable for the average working buyer. The income is not there and the credit is not there. The taxes and insurance are out of control. Families are doubling and tripling up. I see it in my area. Young people can’t get jobs here, not even low wage jobs. Many retirees are underwater and can’t sell. Most owners are stuck.

    I would advise most young people to stay mobile because the job market is insecure. If the current trends continue, job insecurity, low wages, high taxes and insurance, the future is low house prices.

    • Allan
      Oct 28, 2014 at 1:40 pm

      “I would advise most young people to stay mobile because the job market is insecure.” Good advice.

  2. Vespa P200E
    Oct 28, 2014 at 9:56 am

    IMHO – new home price is the canary in the mine for the housing market and signal the end of cyclical bubble where supply & demand curve force the builders to reduce price.

    Home builders buy the land well in advance and go thru the permit process which can take years with the hope of buyers camping outside for next phase release. Caveat is that they cannot lower the base price of home no matter how bad the housing demand gets so as not to upset the buyers who bought earlier. Besides most of the profit is made on the exorbitantly priced upgrades. Home builders burdened with unsold standing inventory initially resorts to upgrade credit, landscaping, free appliances, etc. and the very last resort is price below 1st phase. Standing inventories suck the wind out of profit since the builders must pay for the rather sizable interest payment on the construction loan. This was the info I used to get better pricing on 2 new homes I bought.

    I know the game as bought 3 new houses in 5 year period and gamed it on my 1st house in Irvine in 1995 ($275k house sold for $1.3 mil last year per Redfin) and 3rd house in Seattle area in 2000. We did pay heck of premium on the 2nd new house as it was highly coveted model home my wife just had to have.

    Anyway no doubt the builders gorged themselves to build when the market improved and now stuck with lot of standing inventories…

  3. Michael Gorback
    Oct 28, 2014 at 11:31 am

    It’s a “sub-prime lender deficiency”. ;-)

    “Of the reasons for not closing a sale, about 15 percent of Realtors® in September reported having clients who could not obtain financing as the reason for not closing. ”

    http://www.realtor.org/news-releases/2014/10/pending-home-sales-hold-steady-in-september

  4. williamwilliam
    Oct 28, 2014 at 12:21 pm

    I just got pre-qualified to buy a fourth property, SFH. Am I crazy?

  5. Julian the Apostate
    Oct 28, 2014 at 6:17 pm

    It’s been my experience that they only offer you credit when you don’t need it.
    I was in the truck stop one day listening to a 30-something with a laptop complain that his ‘friend’ had been a victim of the wicked predatory lenders and they had the AUDACITY to raise his interest rate when the market collapsed.
    At this point I asked him why his ‘friend’ had been stupid enough to sign a mortgage with an adjustable rate and expect it NOT to go up?
    He snarled, “they’re nothing but loan sharks. And I said no, a loan shark would send a very large sweaty man named Vinnie to break his ‘friend’s’ legs. He snapped the laptop shut and left in a huff.

    • Janet
      Nov 2, 2014 at 6:43 am

      The financial industry used their money and political clout to get much of the regulation removed from the industry. Rates used to be capped at much lower rates. With the historically low rate that lenders are borrowing at, the rates that most lenders charge is ridiculous. Have some bad luck or get busy and miss a payment? All your rates go up not just the one that you were a few days late on. It used to be if you were current consistently you could negotiate down to more reasonable rate. Not any more. I disagree because it is usury. Money and political clout have made it legal. For example, States are loosening the rules on payday and sub- prime lenders for heaven’s sake at a time when most people’s income are stagnant. Housing lenders have in many cases foreclosed on the wrong house because of poor record keeping and robo-signing. What was done to make the home owner whole? Little if anything. This is sign that something is wrong in the political system

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