Only a few months after the subprime lending market’s meltdown, the toll on the economy is becoming increasingly severe, with sales of existing homes in September dropping 19 percent from the same month a year ago.
The numbers were bad across the country, including in the Chicago area, in what was both a dispiriting development Wednesday for anxious home sellers and an ominous sign for the economy.
The National Association of Realtors said total existing-home sales fell 8 percent from August, a worse performance than expected, according to analysts. Existing-home median prices also fell nationally, down 4.2 percent, to $211,700, from the same period a year ago, the association said.
Home sales are a key sector of the economy, and many consumers are believed to have spent generously based on the once-rising value of their residences. If that spending weakens it could hurt the nation’s economic vitality.
“I think things are going to get worse,” said Tim Rogers, chief economist for Briefing.com, which performs market and economic analysis. “We are in for more declines.”
Rogers said the rising rate of mortgage foreclosures is focused on existing homes and will add to the inventory of residences for sale. Lenders often sell foreclosed homes at low prices, further depressing the housing market.
“Foreclosures are probably going to increase over the next half year,” Rogers said.
Economists generally are not predicting a recession, as many aspects of the economy remain strong. Exports are rising, for example, and the unemployment rate has, at least so far, remained at a comfortable level.
The home sales situation in the Chicago area was in some ways better than in the rest of the nation, and in some ways worse.
The average price paid for an existing home in this area rose 5.9 percent in September, according to the Illinois Association of Realtors.
That was the limit of the good news.
The Realtors said local home sales in September were 27 percent off last year’s pace, and in some Chicago-area counties they were off as much as 33 percent.
Banks under pressure
Many of the nation’s banks and financial houses are struggling under the burden of subprime mortgages made to weak borrowers in recent years. Those mortgages are the most likely to default.
On Wednesday, for example, Merrill Lynch & Co. said it wrote down $7.9 billion in debt it holds, including subprime mortgages. Some analysts say it is almost a given that to preserve economic growth the Federal Reserve will cut a key interest rate at its meeting next week, and most likely reduce it further in 2008.
“The Fed is in an easing mood,” said Gary Wolfer, chief economist of Univest Corp. of Pennsylvania, a diversified bank holding company. Wolfer said he expects the federal funds rate to drop to 3.75 percent from the current 4.75 percent in the months ahead.
While that would in general lower short-term interest rates, it may not help homeowners with adjustable mortgages that reset to higher interest rates in the near future. Often as mortgage payments rise, so do the number of foreclosures.
“I don’t see a classical recession,” Wolfer said. But he said concerns about subprime mortgages and foreclosures will continue through mid-2008, and that will weigh on the economy in general.
While home sales are important on the national level, they can be of critical importance to individuals.
Slow sales breed slow sales, as would-be buyers cannot sell their existing homes and are frozen out of the market.
Last week, for example, Bob Deppisch (this name as published has been corrected in this text) decided to try again to sell his ranch home in north suburban Lake Forest. It’s the fourth time in two years. He is asking a little over $1 million.
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He suspects his home is caught in a gridlock.
“A woman came through and said she would buy this house in a minute if they could sell their own house,” he said. “But the person who was going to buy their house, that fell through.
“We’ve heard this all along — they say, ‘We would buy the house if we could sell ours.'”
Borrowers squeezed
Lenders have tightened their standards for making mortgages, and that is squeezing some buyers with weaker credit out of the market.
That’s what Jason Ugent says is bedeviling his efforts to sell a $95,000 frame home in Hammond that he fixed up and put on the market about 10 months ago. He has cut the price by $10,000 and says he’ll throw in a flat-screen TV for the buyer.
Ugent, a graduate student in real estate at DePaul University in Chicago, says he has been successful at flipping houses in the past two years, but this one is wearing him down.
“Now it’s definitely people’s credit,” he said. “With the banks tightening up, you have to have a decent credit score now. And even that isn’t going to get you 100 percent financing, which it did six months ago.”
One academic sees the same phenomenon. “Clearly, the absence of financing for home buyers with less-than-stellar credit records … is gripping the housing market and driving prices down,” said Peter Morici, a professor at the University of Maryland School of Business.
But there are those who see the housing situation as uncomfortable, but not dire.
Economist Ken Goldstein of The Conference Board sees relief on the horizon for those who would buy or sell a home. “No matter what goes on with the economy, people need a place to stay at night,” Goldstein said.
He said if creation of new jobs continues at an acceptable pace the housing market will stabilize. “At some point housing will … hit a bottom and not move lower,” he said. “I suspect we are not far from there.”
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