New home prices plunge nearly 10%, biggest drop since 70s

[Human Torch]

New home prices plunge
Builders slash prices nearly 10 percent, the biggest drop since '70, to move out record glut of completed homes; price cuts spark sales increase.
By Chris Isidore, CNNMoney.com senior writer
October 26 2006: 11:08 AM EDT

http://money.cnn.com/2006/10/26/news/economy/newhomes/index.htm?postversion=2006102610

NEW YORK (CNNMoney.com) -- New home prices took their biggest hit in more than 35 years in September, according to a government report Thursday that was a further sign of builders struggling to move homes under a glut of unsold homes. The lower prices may have worked, as the annual pace of new home sales increased to 1.08 million last month, according to the Census Bureau report, up 5.3 percent from the August reading of a 1.02 million annual rate, which was revised lower. Economists surveyed by Briefing.com had forecast a reading of 1.05 million, which would have been flat with the initial August reading.

But the median price of a new home tumbled 9.7 percent from a year earlier to $217,100. It was the sharpest drop since December 1970, when prices posted an 11.2 percent decline, and was the fourth largest year-over-year decline on record.

The September price slump also marked a 9.3 percent decline from August and a 15.5 percent drop from the record high price of $257,700 posted in April of this year.

In addition, the government's measure of prices doesn't capture all the incentives such as free closing costs that many builders have been offering to boost sales.

[originalpckelly]

1. Talk about a bubble bursting...

10% in a month!

[the other one]

2. That can't be good for homeowners.

Why should I buy a used house when I can get a brand new one for less? The should lower the value of existing homes, which will hurt those who have refinanced their houses at higher values. Equity is disappearing.

[Human Torch]

5. Some insight from a realtor friend, about a month ago:

Background: ALL of the homes on my street are townhomes, with the exception of a couple of duplexes at the end of the street...NO "houses."

Me: "There are five for sale signs on my street, and it's a SMALL street."

Realtor: "That's because there are twice as many homes for sale as there were a year ago."

Me: "The place two doors down from me sold for $450K last summer."

Realtor: "That means it's worth about $350K right now."

SO...adding this recent story to the mix, yeah...the value of existing homes can't be good news for people who own them.

:patriot:

[Demit]

7. The value of my existing home is intact, thanks.

Because I didn't refinance it for more than it was worth last time, I still have equity in it. And because I also consider it a roof over my head, not as something I'm going to flip. So all the speculation/collapse of speculation doesn't affect me.

[Human Torch]

10. I hear you, and whether I should or shouldn't feel this way...

...I applaud the fall of the flippers. I'm not a homeowner...I rent. But I do understand the concept of home equity and homeowners using it for repairs, to put their kids through college, etc.

I'm talking strictly about the home flippers...the ones who priced many people out of home ownership. To hell with them all.

:patriot:

[2Design]

3. the median price is still about 100 thousand too high for current

salaries - they need to tumble about 50% to get to affordability - the percent is the wrong answer to the wrong question

15 years ago I made $40,000 - 15 years later I am making $33,000 - at that time housing was a lot lower and it seemed unaffordable - people are not making the salaries to pay for these homes anywhere - they are buying based on taking the equity out of already overpriced homes - it is a false economy built on dominos.

[The Anti-Neo Con]

9. There is no incentive for builders to build "affordable" housing.

If you look at all the new construction going up, it's all huge & over the top, mostly McMansions and such. The builders make boatloads of cash building homes like this. They don't build homes in the $90-$120K range because they aren't profitable. What we really need are federal subsidies for low to moderate income people to buy housing.

[Warpy]

14. The only affordable housing out there

is the lowly mobile home. Put on a permanent foundation on a little piece of land, it's not a bad deal. It is cramped living for families, though.

Alas, builders have manage to get them zoned out of most cities and towns. If you want to live in one, you've got to choose between a crowded mobile home park (no foundations, the trailer depreciates quickly, and the monthly rent goes nowhere but up) or the boonies.

Too many people sneer at families for "wanting" twice the square footage their parents had. The sad truth is that there are few alternatives to those oversized white elephants in cities and towns.

[twilight_sailing]

13. Looks that way to me too. n/t

[dipsydoodle]

4. Same happened in the UK early '90's

In reality house price inflation is against everyone's interest - especially first time buyers who simply get priced out of the market.

[no_hypocrisy]

6. And the local property taxes remain at the higher value of the

property. It's the crunch of a combination of an ARM mortgage (higher mortgage payments) with a high property tax to pay for a house that is not worth what the mortgage said it was if you sold it (if you're lucky) today.

[bluerum]

8. Stand aside - booming economy coming through. nt

[cobalt1999]

11. There is still room to drop.

I bought a rental house 6 years ago for $125K. Eight months ago I had people offering $300K (and it wasn't even for sale). The couple renting it have offered me close to $250K now. I could look at that as a $50K drop, but that is still TWICE what I paid for it a mere 6 years ago.

Instead of focusing on short term drops, they need to look at multi year values.

[Demit]

15. Good article in this week's New Yorker on misleading home stats, along

the lines of what you say. Sample:

"...Because nominal median prices compare completely different groups of homes (all those sold in August, 2005, say, and all those sold in August, 2006), they can overstate how much prices go up during booms and understate how much they go down during busts. Luckily, there are other measures we can use. For example, the government compiles one index that tracks the repeat sales of homes that have mortgages with Fannie Mae and Freddie Mac, and another index that measures new-home sales while controlling for quality. The economist Robert Shiller, meanwhile, has created an index that controls for quality by tracking repeated sales of the same houses over more than a century. Together, these numbers give us a better picture of what happens to housing prices over time. And though they show that housing prices have risen sharply in the past decade, they also show that, over the longer haul, investing in a home is far from a sure thing; if you control for inflation and quality, Shiller found, real home prices barely budged between the eighteen-nineties and the nineteen-nineties. The idea that housing prices have nowhere to go but up is, in other words, a statistical illusion. ..."
http://www.newyorker.com/talk/content/articles/061030ta_talk_surowiecki

[KharmaTrain]

12. There's A Glut Of Housing...

I drive into areas around Chicago that 10 years ago were farms and today they're large tracts of single family homes. I wonder where the people come from to live in these places...especially when many of these developments are a 30 to 60 minute comute to the nearest major population center. A lot of these home were built on the speculation of the continued rising property values in the more populated areas that drove up those land values and opened the doors to the builders and other speculators to try to cash in on the housing boom. It all worked well when people were making enough to afford the commute and other costs with owning a home.

In our area we've seen people downsizing their lifestyles...moving from large houses into smaller ones...going from single family homes into townhouses as the crunch of rising gas, utilities and property taxes put many in a squeeze. Add to that those hwo got locked into ARMs and other adjustable rate loans that saw their interest rates soar over the past couple years. Something had to give.

[whistle]

16. Fed interest rates unchanged for the third straight month, another

....recession being engineered by the Federal Reserve Bank to allow Bush to conduct another war.

[Parisle]

17. American home-building is ripe for innovation, anyway,...

---- As someone who has been a residential building contractor, and actually built over 50 new homes of varying cost and complexity,.. let me say that I HATE the state of the building and real estate (finance) industry nowadays. With our myriad energy and financial and resources problems, why in the hell are we building average 2,400 square foot homes for average families? This is insane. And why aren't more "simple-though-high-tech" energy technologies being built into our average new homes? In my view, it is a combination of avaricious finance practices and disingenuous building objectives which have led to the huge wave of foreclosures and the rise of the class known as "house-poor.."

---- I am in the process now of beginning construction of a 1,750 sq ft home of passive solar and geo-thermal design,... 3 BR, 2 BATH, all the amenities (including some you wouldn't expect),.. and the house is aimed at lopping off $1500 from annual average utility bills. Between the temperature extremes of 35 degrees to 90 degrees, it will require no additional heating or A/C. It heats its own hot water, and has a modest photovoltaic back-up system for lights and electronics, should the power go off. And at a cost of around $150K, it is still well under the average cost-per-sq ft of today's average new home. Energy savings will be like $125 off each and every mortgage payment,.. and getting better each successive year of increasing energy costs. And the house isn't "weird-looking," ... which has been the greatest barrier to the widespread introduction of these technologies.

---- And yes, I know this will work, because I built virtually the exact same house fifteen years ago. It is my own design. The technology is not new,.... it is just not welcome among the people who want to sell and finance new residences. It seems to me that making new homes that are not only more affordable for ordinary Americans, but also far more capable of saving them money and alleviating a portion of our energy woes, is a worthwhile thing to shoot for. This will be the prevailing home-building practice at some point in the not-too-distant future. The sooner, the better.