The U.S. housing market has taken a sharp turn for the worse, threatening to undermine an increasingly fragile economic recovery.
In July, the number of existing single-family homes that changed hands slowed to a pace not seen in 15 years, plunging a record 27 per cent from a month earlier, the National Association of Realtors said. The drop was much worse than economists had predicted, with one describing the data as "eye-wateringly weak."
The figures confirm what experts have long feared: that once government incentives to spur home buying expired this spring, housing sales would fall with a thud. Some had hoped that increased confidence and hiring would help mitigate the blow. Instead, economic uncertainty is on the rise, keeping buyers on the sidelines despite record-low mortgage rates and attractive prices.
The grim data sent investors scurrying for the protection of safer assets, hurting stocks and pumping up government bonds. In the United States, the price for a 10-year Treasury bond briefly touched its highest point since March of last year, a sign that investors see slower growth ahead.
Renewed weakness in housing will set off alarm bells for those who fear the U.S. economy could be heading into a double-dip recession, though most economists still believe that's unlikely.
Both the housing market and the economy at large have benefited from significant government support, whether in the form of stimulus spending or tax credits. Now those measures are on the wane or are already gone, revealing an unvarnished portrait that is far from pretty.
In the broader economy, the recovery is rapidly shifting into a lower gear, weighed down by moribund levels of consumer demand and stubbornly high unemployment, currently at 9.5 per cent. In housing, a vast supply paired with very little demand is depressing sales activity. Earlier this year, the market had experienced an upsurge, thanks partly to an $8,000 (U.S.) credit for first-time home buyers.
"The ending of the tax credit may have been responsible for the bulk of this drop, but it seems that other buyers are also holding back because they're becoming more concerned about their job prospects," said Mark Vitner, an economist at Wells Fargo & Co. in North Carolina. "We're not going to see strength return to the housing market any time soon."
Sales of single-family homes slowed to an adjusted annual pace of 3.37 million properties in July, down from 4.62 million in June. The inventory of houses on the market remains enormous: at the current rate of sales, it would take more than a year to sell them all, up from about 9 months in June.
Historically, a seven-month backlog is what has been consistent with stable prices, noted Paul Dales, an economist at Capital Economics. "With the increasingly inevitable double-dip in prices yet to come, things could yet get a lot worse," he wrote in a note to clients.
The feeble demand for housing comes even as mortgage rates continue to plumb new lows. Last week, the average rate for a 30-year fixed-rate mortgage fell to 4.42 per cent, the lowest in the history of the 39-year weekly survey by U.S. housing giant Freddie Mac.
Yet buyers aren't biting. Cities across the United States - among them San Francisco, Dallas, Chicago, and Omaha - saw double-digit percentage declines in home sales in July from a year earlier. In Milwaukee, Wis., sales dropped a gut-wrenching 45 per cent.
Mike Ruzicka, president of the Greater Milwaukee Association of Realtors, said he's been telling agents and brokers that with business so slow, it's a good time to take a vacation.
The tax credits "really did a good job and we needed them, they ate up a lot of inventory and stabilized prices," he said. Mr. Ruzicka expected sales to fall after the government incentive ended, but "actually living through it is a different matter," he said.
The rest of this year doesn't provide much cause for optimism, especially since economists don't foresee any meaningful decline in unemployment in the coming months.
"From here on out, home sales are really going to match the increase in jobs," Mr. Ruzicka said. "As [unemployment]starts to drop, we'll see an increase in sales."