After warm weather temporarily boosted home sales in January, reality has returned. According to a CNN Money article, today, home sales dipped in February. More importantly, home prices receded—to an average $230,400, or decline of $6,900 (3 percent)—compared to February 2005.
I am no economist, but I expect an acceleration of the trend. Many U.S. consumers had been using home equity like bank accounts, greatly contributing to overall spending and GDP growth. Trouble signs are everywhere—and well beyond the housing sector. With the exception of some very profitable oil companies, last quarter’s earnings announcements hinted of troubles with consumer spending. When companies like Intel, even Wal-Mart, lower earnings estimate (as they did for first quarter), something’s amiss. And it is.
The nightmare scenario remains: People who took interest-only loans and variable-rate mortgages. In the Washington area, home prices are just too high for many people to afford. Many new buyers take risky loans, hoping they can refinance later off of rising equity. These buyers are most vulnerable if equity stalls or prices decline. And what happens if—well, when—the home’s market value drops below the price paid by the buyer?
Washington is an unusual market, because of the federal government. But even here, signs are foreboding. And if trouble here, what about everywhere else?
Photo Credit: Jeff Turner