Home Prices Are Falling
-- July 25, 2003

On the surface, today's housing report doesn't look too bad. Sales of new homes unexpectedly rose 4.7% to a record 1.16 million annual rate in June, and existing homes sales held near a record pace in the month. But dig a little deeper, and things aren't quite so pretty. First, existing home sales slipped 0.3% to a 5.83 million annual pace.

Second, the average price of new homes sold fell a whopping 10% in just the last month, to $187,000. So many people have been counting on selling their homes at higher and higher prices to finance their extravagant lifestyles, that this price plunge is going to make a major dent in household finances.

Moreover, the inventory of new homes for sale is at a nine-year high of 345,000. So not only are many people unable to sell their homes for the amount of money they expected, but many aren't able to sell them at all! And the picture is even worse on the existing-home side, where inventories of homes for sale are at the highest level in 12 years -- 2.5 million.

There's a panoply of negative factors at work: Interest rates are rising, making homes less affordable. Many people are losing their jobs or are being forced to take lower-paid jobs, forcing them to take on more debt to finance their excessive spending. And finally, the bounty homeowners are counting on to pay back that debt, a rising price for their homes, is disappearing.

The housing sector has held the economy up for two years almost by itself. Now the foundation is starting crack, and that could bring the whole structure -- the economy and the stock market -- tumbling down.

related article: U.S. Existing Home Sales Edge Down