The well-chronicled woes of the housing market have remained a huge weight around the U.S. economy's neck for well over a year now. In fact, given the evolution of financial markets and the explosion of mortgage loan securitization, the effects of housing bubbles bursting in south Florida, California, and Arizona, among other locales, are being felt in European and Asian financial companies. Rapidly-rising foreclosures of subprime loans have caused the availability of credit to all but dry up as banks tighten standards so they avoid getting burned again. Meanwhile, wary investors are steering clear of even the highest quality mortgage-backed securities.
Whether this implosion has pushed the economy into recession or not is debatable, but what is clear is the ongoing housing market slump is huge by historic standards-even approaching the lows observed during the early 1980s bust. After some initial signs last week that a bottom might be forming in the housing market, we were served a grim reminder this week of how far away real improvement might actually be. Of all the indicators, perhaps the worst news came from new home sales, which showed sales tumbling 43 percent on an annualized basis during the quarter.
The report also revealed the inventory situation continues to worsen as sales plummet more quickly than construction activity. With available inventories soaring to 11 months cover, home prices will remain under serious pressure. The situation is only aggravated by the fact that significant financial barriers are crimping demand, namely rising mortgage rates and the aforementioned return to saner lending practices. Indeed, even with the dramatic decline in prices and foreclosure/short sales flooding the market, mortgage purchase applications have trended lower as of late. As a result, inventories could very well climb even further and test levels not seen in nearly 30 years, pushing the housing market recovery further into the future.