Why Is Anyone Surprised at Plummeting Home Sales?

Apparently some people were taken aback by the announcement this morning of abysmal housing sales ; sales of existing homes dropped 27 percent for July, to 3.83 million units. This, the Washington Post notes , was “about twice as much as analysts surveyed by Bloomberg expected.” Really? Who are these analysts, and how could they be so wrong? I suppose if all you looked at were low mortgage-interest rates, you might think sales would go up. But honestly, as the ever-subtle Barry Ritholtz puts it: “Everyone knew that Existing Home Sales were going to stink the joint up today.”

The signs have been pointing this way for months. For starters, there’s the planned expiration of the home-mortgage tax credit. But there are bigger, more permanent forces that are suppressing home sales. One is the unusually large number of homes on the market. In its release today, the National Association of Realtors declared : “Total housing inventory at the end of July increased 2.5 percent to 3.98 million existing homes available for sale, which represents a 12.5-month supply at the current sales pace.” That’s a very high supply number; a normal supply is considered to be six months, and 12.5 months is the highest since October 1982.

Now you might think: More houses on the market means lower prices, which should lead to increased sales. And in other circumstances, you might be right. But with housing, something far more insidious takes place: Homeowners don’t want to sell at the prices they are able to get, which means fewer families are in the market for a house, which is part of overall weak demand, which leads to fewer sales. (Felix Salmon uses the economist’s term of art here : “the market isn’t clearing.”)

There is, however, another very dark cloud hovering over all of this, and that is the huge number of Americans who still can’t pay their mortgages. Despite government offers of help, despite four quarters of overall economic growth, the mortgage delinquency rate remains stubbornly high. For many key categories, it is in fact on the rise . As was neatly and presciently explained back in April by my former colleague Mark Gimein , this has the doubly nasty effect of hurting the housing market while giving it the appearance of improvement.

I’ll give Gimein the final word:

“Thanks to some combination of government pressure, genuine efforts at loan modifications, and reluctance to seize houses and try to sell them in a dismal market, banks are simply letting more debtors fall behind without foreclosing. Think of this as the foreclosure relief paradox: A small drop in foreclosures keeps some people in their homes and helps prop up the housing market, hiding the fact that borrowers are in worse shape than ever.”