Serving Up the Housing Inventory, with a Side Order of Financial Markets and the Economy

In this week’s continuing festival of new housing data, the Commerce Department released information today that showed new home sales fell last month.

However, the government did offer some good news. And, of course, there also was a bit of bad news in the report:

  • Yes, new home sales fell month-to-month: 1.8 percent last month, hitting a low points not seen since 1995.
  • And yes, home purchases fell in the past year: A total of 30 percent from February 2007.

But–here’s the good news–they didn’t fall as far as some had forecasted.

New home sales dropped to a 590,000 annual pace–but that’s less than some economists had expected, according to Bloomberg, which said new
home sales would decline to a 578,000 annual pace.

And the Commerce Department report held even bigger news: A promising drop in the huge home inventory. It is still large–currently the U.S. has a 9.8 month supply, which is the biggest since 1981–but it’s a little less so than last month.

The number of new homes for sale at the end of
February dropped to 471,000, which indicated that builder incentives and other programs are starting to chip away at the housing supply.

Which is, of course, also chipping away at housing prices–the
median home price fell 2.7 percent last month to $244,100, compared to February 2007. And that, according to some–including Treasury Secretary Henry Paulson–is a good thing.

"A correction was inevitable and the sooner we work through it, with a
minimum of disorder, the sooner we will see home values stabilize, more
buyers return to the housing market, and housing will again contribute
to economic growth," Paulson said in a speech this week. "Having stability in housing markets will in turn
contribute to better conditions in credit markets for mortgage-backed

For months, economists have speculated that buyers are waiting for prices to drop lower before splurging on a new home; which would indicate that prices continuing to lower would be great for sales.

But lower prices also means lower home values–which has caused panic among many homeowners, and is causing lower consumer spending and slowing down the economy. Which begs the question: Even if lower home prices move more properties off the market, is it worth the cost to the overall economy?

It’s a tricky balance–but one Paulson feels is possible.

"As we work our way through this turbulence, our highest priority is
limiting its impact on the real economy," he said. "We must maintain stable,
orderly and liquid financial markets and our banks must continue to
play their vital role of supporting the economy by making credit
available to consumers and businesses. And we must of course focus on
housing, which precipitated the turmoil in the capital markets, and is
today the biggest downside risk to our economy."

Do you feel lower prices–as part of an overall price correction–will help readjust the housing and the financial markets? Or will lower home prices wreak havoc on the economy?

Tell us what you think by posting your opinion below …