Business Update with Mark Lacter |

Why the big drop in home sales is a big deal

This is what many economists had been dreading - the end of federal homebuyer tax credits made mincemeat of the housing market in July. Home sales in L.A., Riverside, San Diego, Ventura, San Bernardino and Orange counties fell 20.6 percent from June and 21.4 percent from July 2009, according to DataQuick. The message is loud and clear: Given the unsettled economy, American consumers are unlikely to make any large purchases without some sort of government assistance. It's a little like what happened to car sales immediately after the end of the Cash for Clunkers program. From Dataquick:

"It appears some of the sales that normally would have occurred in July were instead tugged into June or even May as buyers tried to take advantage of the expiring tax credits. Some of last month's underlying technical numbers were largely flat, indicating that the market is treading water," said John Walsh, MDA DataQuick president. "We do expect some sideways buying and selling to kick in, especially among homeowners who have owned for more than seven years and didn't take out equity during the frenzy. You may have to 'discount' your self-perceived home value, but if the person you're buying from has to do the same thing, it doesn't matter. And you may get a spectacularly low mortgage rate."

The obvious question is what happens this month and next? There's certainly no sign that consumers are in any mood to start buying homes again. That probably means a drop in prices, though to what degree is unclear. Optimistically, lower prices could encourage buyers over the next few months. Pessimistally, all it spells is a further decline in property values, leaving more folks with mortgages that are higher than the value of their homes. That's right, underwater. I know we don't spend much time listening to Alan Greenspan anymore, but for what it's worth the former Fed chairman says that a drop in home prices could result in the economy contracting again. From Bloomberg:

“If home prices stay stable, then I think we will skirt the worst of the housing problem,” Greenspan said. “But right under this current price level, mainly 5, 7 or 8 percent below, is a very large block of mortgages, which are under water, so to speak, or could be under water. And that would induce a major increase in foreclosures, foreclosures would feed on the weakness in prices, and it would create a problem.”

JULY HOME SALES (% change from July 2009)
Los Angeles 6,515 -19.4%
Orange 2,527 -19.2%
Riverside 3,529 -24.9%
San Bernardino 2,556 -28.0%
Ventura 749 -10.5%

JULY MEDIAN HOME PRICES (% change from July 2009)
Los Angeles $339,000 5.6%
Orange $450,000 7.1%
Riverside $200,000 8.1%
San Bernardino $155,000 10.7%
Ventura $370,000 -1.3%
Source: MDA DataQuick,