Why Aren’t Lower Prices Translating into Higher Sales?

The hotly-anticipated National Association of Realtors report on home sales was released this morning–and, as expected, it showed that home sales fell last month.

  • Sales of pre-existing homes declined to an annual  pace of
    4.89 million.
  • The good news: That’s only a 1 percent fall from March’s revised 4.94 million reading.
  • The bad news: The existing home sales rate is still almost 18 percent less than April 2007.

That includes single-family homes, townhomes, co-ops and condos; and it suggests the housing slump is dragging on, even as we approach the year’s halfway point.

That news wasn’t encouraging–but it wasn’t the worst NAR had to offer. The real zinger? The housing inventory’s sudden growth from March’s 10-month supply to an 11.2 month supply–an 11.2 month supply!

We’re moving in the wrong direction, folks. For the housing market to see a significant correction, we need sales to increase–and homes to get pulled off of, and not added to, that inventory.

Because there are so many homes for sale, the median home price fell 8 percent compared to 2007–it now stands at $202,300.

In March, NAR predicted that the median home price would drop to $232,200 this year before rising 5.1 percent next year; now, just two months later, the median price has fallen almost $30,000 lower than its forecast.

Consumers may not love lower home prices, but in theory, lower prices should increase home sales. Yet we’re not seeing it. Why?

Well, it may just be too soon to see the results; and according to NAR, the next few months could show a drastic improvement in the housing market.

NAR President Richard F. Gaylord praised the recent easing of Freddie Mac and Fannie Mae restrictions, saying that once the new policies kick in on June 1, consumers will be able to put down lower downpayments and get more financing, which should help spur home sales this summer.

Changes for high-cost areas could also help increase home sales, NAR said.

Lawrence Yun, NAR’s chief economist, said the "recent notable drop in interest rates on conforming jumbo
loans will help consumers in high-cost markets like California and New

That’s true–those changes are likely to have an effect–but will it be enough to increase sales? What do you think?