Monday, September 25, 2006

I'll Huff and I'll Puff

Housing prices are falling. I'll say it again. Housing prices are falling.

Just to be clear, I don't mean to say that the rate of growth in housing prices is falling. It is the actual prices that are falling. This is the first time existing home prices have fallen on a year-over-year basis since 1995. I guess we can say the housing boom is officially over.

Yet investors cheered the news because existing homes sales came in a little better than expected. They fell 12.6% from a year ago instead of 14%. For some reason, investors concluded this was good news, so they reacted by bidding up shares of homebuilders.

That doesn't seem rational. After all, existing home inventories are up 38% from a year ago to a 7.5 months supply. On Wednesday, we'll learn more when new home sales figures are released.

Speaking of new home sales, I had the pleasure of dining with a major New Jersey homebuilder on Friday night who expressed concern about the weakening housing market. He also said something very interesting. Instead of building the same 3,000 square foot homes, but selling them at lower prices, he is now building smaller houses. He said he has to do this, otherwise his previous buyers would get very upset. This may make price comparisons more difficult, but it doesn't hide the fact that prices are falling.

The housing market represents a major portion of GDP. As the market weakens, so will GDP growth. I'm not yet predicting a recession, but there is no doubt that what is happening to housing right now will have a negative impact on consumer spending.