(Greenwich, 9/25/2006) The median sales prices of existing homes fell 1.7% in August from year-ago levels, the first full year decline in 11 years. This is the second largest decline in the 38 year history of the National Association of Realtors survey. You can read the press release by clicking here here.or review the data by clicking clicking here.
Sales of existing homes fell 0.5% in August to 6.30 million (annual rate), the fifth straight month of falling sales but were 12.6% below year ago levels.
You ain’t seen nothing yet. Home sellers are stubborn; they don’t like to admit their home is declining in value. So when demand drops the first thing we see is a drop in transactions. Only later do prices fall under the weight of rising inventories of unsold homes.
Inventories are building up like thunderheads on a summer afternoon. In August there were 3.92 million homes (7.5 months supply) for sale, up 1.5% over July. Inventories are 76% higher today than they were in 2004 (2.2 million units, 4.1 months supply) at the peak of the property boom.
The eye of the storm is condos and coops, with 8.6 months supply (568,000 units) homes listed for sale, more than twice the 274,000 units listed for sale in 2004, and a gusher of new supply still under construction, especially in the west where units sold have dropped 24.8% and prices have declined 6.5% from year ago levels.
Single-family home prices fell by 2.2% in August and were 1.7% lower than a year ago. The biggest damage was in the Northeast (Wall Street bonuses?) where prices fell 2.9% in august ands were 5.5% lower than a year earlier.
The growth-haters on Wall Street, of course, loved the report. They reason that falling home prices will convince the Fed to back off. They are right. I am sticking by what I told you 6 months ago. The 10 year Treasury will finish the year below–it looks like well below–5%. And the yield curve will revert to its normal upward slope early next year when the Fed is forced to lower the Fed funds rate to less than 5% to protect growth.
What does this mean for stocks? The duration (the weighted average maturity of the present value of the free cash flows) of the S&P 400 Industrial companies is about 25 years. That means each 100 basis point drop in the 10 year Treasury adds 25% to the intrinsic value of the index. Profits are at an all-time high as a percentage of GDP, still rising at more than 15% per year.
This is a great time to own equities.
JR
Dr. Rutledge,
I am not far removed from college and, therefore, pretty new to the real world of investing. I was wondering if you could elaborate a little on how the duration being 25 years means that each 100 bp drop on the 10 year will add 25% of value to the index? I enjoyed the post. It was very insightful.
Elliott
Elliott,
That’s a great question that requires a careful answer. I will write about it in the blog, hopefully later today.
John