Sunday, March 23, 2008
Home Sales Plunge in Fourth Quarter
Happy Easter to anyone celebrating this holiday today. I thought the data above released by the NAR was a great way to show how dramatic the drop in home sales has been.(Click to enlarge)
I have discussed previously how tighter lending standards and affordability issues have grinded home sales almost to a halt. This is finally starting to show up in the data. Demand for housing is there and will always be there as our population grows. The problem is people can no longer qualify for the loans. The early data in the 1st quarter shows that these trends are continuing and the spring season has already been a bust.
As these large banks like Bear Stearns start to go under it will only make lending standards tighter as the remaining banks continue to get hit by foreclosures which eats away at their capital ratio's. They will need to hoard cash in order to keep these capital ratio's within their guidelines.
The Fed is now spending like a drunken sailor and is attempting to bailout everyone and offer unlimited liquidity to Wall St. Rumors like this one seen on Bloomberg continue to swirl that the government is now talking about buying bad loans. This would be a huge mistake because it would send the wrong message and reinforce bad behaviours. We should allow capitalism to run its course and take down the companies that went too far and made housing so unaffordable. It remains to be seen on how the government will react as this housing crisis deepens. More on this tonight.
The housing time bomb keeps ticking and if sales remain this low you will start seeing prices move to the downside. As builders keep building and home sales drop dramtically, inventories will continue to rise. The sellers will need to start increasing sales and whats the best way to do that? LOWER PRICES!!