Lower prices boost sales of existing homes

By David M. Dickson (Contact) | Tuesday, August 26, 2008

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Bargain hunters took advantage of falling home prices in July, boosting sales of existing homes, especially in the West, where foreclosures soared and home prices plunged in the past year.

But worsening prospects for mortgage giants Fannie Mae and Freddie Mac are pushing interest rates higher and could drive buyers away at a crucial point in the nation's housing cycle, analysts say.

After falling to their lowest rate in 10 years during June, sales of previously owned homes rebounded 3.1 percent last month as distressed properties flooded the market, raising the inventory of unsold homes to a record high, the National Association of Realtors reported Monday.

Buttressed by a 9.7 percent sales increase in the West, home resales across the nation rose to an annual rate of 5 million homes in July. The improved sales number in the West came at a heavy cost to home sellers, as the median price for a home there declined 22.2 percent, or $78,000, compared with a year ago.

The national median sales price of $212,400 was 7.1 percent lower than it was the previous year. Half the homes sell for more than the median price, and half sell for less.

Foreclosure filings increased 55 percent in July compared with a year ago, RealtyTrac reported earlier this month. Bank repossessions alone were 184 percent higher in July than a year ago.

Lawrence Yun, the Realtors' chief economist, estimated as many as 40 percent of July's total sales were distressed properties, which include foreclosures.

"Even if the bottom in sales has been reached, the downward pressure on price is still very intense," said Stu Hoffman, chief economist of PNC Financial Services in Pittsburgh.

Mr. Hoffman cited the record 4.67 million existing homes on the market, which represent an 11.2-month supply based on the current sales pace. That's more than double the normal inventory level, he said.

"Credit-market problems could put more downward pressure on prices," Mr. Hoffman said. Not only have banks tightened their lending standards in recent months, but the troubles facing Freddie Mac and Fannie Mae are also reducing the availability of loans and pushing mortgage interest rates higher.

During the past year, as the credit crunch squeezed bank balance sheets and forced other mortgage lenders out of business, Freddie Mac and Fannie Mae have significantly increased the share of new mortgages that they buy or guarantee. Fannie and Freddie have bought or guaranteed about 70 percent of the mortgages that have been issued in recent months. Together they own or guarantee more than $5 trillion of the nation's $12 trillion in residential-mortgage debt outstanding.

As Fannie and Freddie suffered nearly $15 billion in combined losses during the past four quarters, their stock prices have plunged by more than 90 percent. Last week, Moody's Investors Service reduced its rating on their preferred stock to the lowest investment-grade level.

Last month, Congress passed legislation authorizing the Treasury Department to use taxpayer funds if a government bailout becomes necessary.

As their financial troubles have intensified, Freddie and Fannie have been forced to pay higher interest rates to borrow funds to buy additional mortgages. This has forced mortgage interest rates up.

"Mortgage rates are abnormally high compared to the yield on 10-year Treasury notes," said Mike Montgomery, a research analyst at Global Insight. For the past decade, 30-year fixed mortgage interest rates have normally been 1.6 percentage points above the 10-year Treasury rate. Now, they are 2.6 points higher.

"Unfortunately, the system isn't working smoothly because of the troubles at Fannie and Freddie," Mr. Montgomery said.

Joshua Shapiro, an economist at MFR Inc., said he was "very bearish" on home prices and predicted that annual housing sales will decline by another 10 percent to 4.5 million homes before the market bottoms out - sometime over the next 12 to 18 months.

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