Now that the distorting effects of the federal homebuyer tax credits have worked their way through the system, demand is deteriorating and the market appears to be retrograding toward an eventual equilibrium at a lower price level. Sales of existing single-family homes fell by more than 27 percent during July, reaching their lowest level since May 1995. For new single-family homes, the month-to-month decline was appreciably smaller in percentage terms at 12.4 percent, but this drop caused this series to hit a new record low (data start in 1963). Although the housing market could stage a quick turnaround, such a scenario seems unlikely—even with 30-year fixed mortgage rates hovering near 4.5%. Indeed, new housing demand is going to be held back as the weak labor market continues to limit the rate of household formations. Meanwhile, trade-up demand (i.e. households moving into larger homes) will be hampered by household debt deleveraging, persistent house price declines and damaged consumer confidence.

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