Weak demand and a large surplus of homes for sale pushed home prices lower in July, according to the July 2010 RPX Monthly Housing Market Report released by Radar Logic Inc. The RPX Composite price, which covers 25 metropolitan statistical areas (MSAs) across the country, declined in July on both a month-on-month and a year-on-year basis.
Radar Logic also reported that home sales declined sharply in July as a faltering economic recovery, high unemployment and the end of the first-time homebuyer tax credits reduced demand. The 25-MSA RPX transaction count posted the largest month-to-month decline for the month of July since the beginning of Radar Logic's data records in 2000. The 25-MSA transaction count also declined relative to the prior year period, making July the first month in which the 25-MSA transaction count has declined on a year-over-year basis since July 2009.
The National Association of Realtors (NAR) has reported that existing home sales increased 7.6 percent in August, but despite the upturn, existing home sales remained 21.5 percent lower than June levels and 28.7 percent lower than their year-to-date peak in April. Radar Logic expects home sales to decline further over the next several months as slow growth in employment, household incomes and household formation, as well as uncertainty over future housing values, further dampen demand.
The large inventory of homes for sale far outstrips current demand. According to the figures released by the NAR, 3.98 million existing homes were on the market in August, equivalent to an 11.6 months' supply at the current rate of sales. A well-balanced housing market has a supply of about five or six months.
The excess inventory weakens housing demand, further exacerbating the imbalance between demand and supply. Homebuilding and manufacturing typically lead the economy out of recession, but the excess housing supply provides a strong disincentive for homebuilders to start new construction projects. Moreover, much of the current inventory is real estate-owned (REO) by financial firms and government-sponsored enterprises (GSEs), which is sold at substantial discounts to the overall market. Homebuilders are finding it hard to compete, and so are choosing not to start new housing developments. As a result, homebuilding has lagged, hampering employment growth, prolonging the current economic recovery and restricting household formation, all of which limits demand for housing.
"We believe that 2010 will prove to be a transition from government support for housing to further price declines fueled by a huge supply overhang and weak housing demand," said Michael Feder, president and chief executive officer of Radar Logic. "A decline in prices could increase the number of underwater borrowers, which in turn could lead to increases in the number of defaults and foreclosures and ultimately add to the housing supply, prolonging price declines and pushing prices to new and possibly severe lows."
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