Thursday, June 5, 2008

Prices Of Resale Homes Still Have Further To Drop

Price Drop SignEveryone knows that home prices have been taking a beating, but one thing that people might not realize is that the balance between new and resale home prices is out of whack. As one might suspect, new homes typically sell at a premium to resale homes, but in many areas today new home values have dropped so much that they are actually selling for a steep discount compared to resale homes.

The following is an excerpt pulled from an article on Minyanville

“Richard Dugas, PHM [Pulte Homes] CEO, said he believes it is a mistake to believe the new housing market can correct without the resale market also correcting. This is an important point of distinction. New homes are now selling at a 10% to 15% discount to resale in most areas of the country. Historically, that ratio has been reversed.

‘We clearly need resale pricing to correct, and correct dramatically,' Dugas said. He cited the most recent data from the S&P/Case-Shiller index showing a 14% decline in prices year-over-year, by far the largest on record, but noted that even that kind of decline is not enough.

‘We view that [price decline] as a good thing,’ Dugas said, ‘and frankly we think resale pricing needs to continue to move down, because existing buyers are telling us they would like to buy our homes, but need to sell their existing homes, but they've obviously got to get realistic about price before they have a chance to sell those homes.’”

What Dugas is saying is that the builders have responded to market conditions by dropping their prices, but that isn’t enough. Homeowners looking to sell their homes also need a dose of reality in many cases as well. Assuming homebuilders are pricing their homes at the true market prices now, then resale homes would need to drop another 20 to 30 percent in order to regain the balance.

The article also points out that if this adjustment were to happen, Fannie Mae and Freddie Mac would have greatly underestimated the remaining correction due in the housing market. This obviously could have major implications not only to Fannie Mae and Freddie Mac, but also for the entire economy. Fannie and Freddie have a much larger stake in the housing game now than they did a few years back and any disruptions to these two companies would pretty much kill what’s left of the mortgage market and/or create a huge burden on the government and the taxpayers. For more information on what would happen and the costs involved in a Fannie and Freddie bailout, read my previous post: Fannie Mae and Freddie Mac: Will they need a Bailout, and at What Cost?

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