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The plunge in new home prices follows a record plunge in existing home prices. As MoneyNews told readers yesterday, the 2.5 percent year-over-year decline in existing home prices was the biggest in the National Association of Realtor’s nearly 40-year record.
When homebuilders need to slash prices to lure a somewhat larger percentage of buyers than the month before, it really means they’ll need to slash prices even more next month to get that many more buyers to bite. In other words, when prices start falling, most people wait to see if prices will keep falling before they rush in.
The freefall in home prices is far from over.
Breaking News From MoneyNews.com
Largest Home Price Tumble in 35 Years
The median price of a new home plunged 9.7 percent in September from a year ago, the largest drop in more than 35 years, reports the Commerce Department.
The median home price dropped to $217,000 in September from $239,300 in August. That was the lowest median price since September 2004. The 9.7 percent plunge was the sharpest year-over-year decline since December 1970.
The plunge in new home prices follows a record plunge in existing home prices. As MoneyNews told readers yesterday, the 2.5 percent year-over-year decline in existing home prices was the biggest in the National Association of Realtor’s nearly 40-year record.
Clearly home prices across the board are in the midst of a serious correction, one which our sister publication, Financial Intelligence Report, told readers about months ago. Both Sir John Templeton and Yale professor and real estate expert Robert Shiller told FIR readers that they expected the housing market correction to result in prices plunging downwards of 40 percent. And, unfortunately, it looks like their predictions will be spot on.
Former Federal Reserve Chairman Alan Greenspan doesn’t agree. The chief architect of the housing bubble said Thursday that the housing market isn’t in dire straits.
"Most of the negatives in housing are probably behind us," Greenspan told a conference sponsored by the Commercial Finance Association. "The fourth quarter should be reasonably good, certainly better than the third quarter."
Greenspan retired as Fed chairman in February of this year. He slashed interest rates from 6 percent in January 2001 to 1 percent in June 2003 to avoid a recession following the bursting tech bubble. In that low interest rate environment, the housing sector surged.
"There are early signs of stabilization [in housing]," Greenspan tells his audience. But he did concede that, "It’s [the housing slump] not over."
"The evidence is that we’re beginning to see a flattening in statistics for sales of new homes," he continued. "The rate of construction is well below the rate of purchases."
He added that buyers were "beginning to dig into the inventories of unsold homes."
Greenspan’s remarks run counter to current Fed Chairman Ben Bernanke, who said on Oct. 5 that the housing slump is "one of the major drags causing the economy to slow now." Bernanke estimates that the "substantial correction" in housing will shave 1 percent off the nation’s economic growth in the second half of 2006.
To “dig into” those inventories, homebuilders are slashing prices on homes and boosting incentives such as free pools, wood floors, and other upgrades to attract buyers. And to some extent, buyers did come trickling in this month.
New home sales rose for the second consecutive month in September, increasing 5.3 percent. However, that follows three months of sales declines from May to July. And sales are still down 14.2 percent from a year ago. New homes on the market fell to 557,000 from 568,000 in August. That represents a still higher-than-average 6.4 months worth of inventory at the current sales pace.
Though Alan Greenspan may present the higher sales and shrinking inventories as a sign that the housing slump is stabilizing, the plunge in prices is proof that that’s not the case.
When homebuilders need to slash prices to lure a somewhat larger percentage of buyers than the month before, it really means they’ll need to slash prices even more next month to get that many more buyers to bite. In other words, when prices start falling, most people wait to see if prices will keep falling before they rush in.
The freefall in home prices is far from over.
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