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New-Home Sales Slide Downward

Bill McBride can spin this all he wants, with a very vague promise about after-the-fact revisions, but the facts are that June home sales fell, days after an existing-home sale measure fell as well.

Sales of new single-family houses in June 2012 were at a seasonally adjusted annual rate of 350,000 … This is 8.4 percent below the revised May rate of 382,000, but is 15.1 percent above the June 2011 estimate of 304,000.

Home sales are rising year-over-year, then, but falling over the last month. Maybe that data is noisy and we’ll see some revisions, but I think you cannot just say that it will automatically happen, as McBride does. What’s more, new home months-of-supply increased, suggesting that the inventory is starting to sit.

It’s somewhat axiomatic that when you have a slowdown in the economy, it will eventually get reflected in the sales of the largest consumer good. Low mortgage rates, which have boosted refinancing, can counteract this a bit, but if people don’t have the money, they’re not going to buy the homes. On the existing-home front, the slowdown in sales could be attributable to the nagging second-lien problem:

Tough bargaining by second-lien holders is delaying deals and killing some short sales, even as banks embrace the practice to avoid costly foreclosures and help clear the market of homes that are worth less than the loans on them, said Vicki Been, a New York University law professor who has studied mortgages.

“It’s an opportunity for the second-lien holder to charge a price for their cooperation, because it’s needed for a short sale,” Been, a director at NYU’s Furman Center for Real Estate & Urban Policy, said in a telephone interview. “If they’re too greedy, it may squelch the whole deal.”

The issues here are that most second liens are owned by banks, and they’ve marked them at an absurdly high level on their balance sheets. So they’re reluctant to sell them for a market rate because they would then have to reflect that at a loss. And that has gummed up a lot of the system, in both principal reductions and short sales. Therefore, homes with second liens aren’t engaging in short sales, keeping them in limbo.

So while we see hints of good news in the housing market – low foreclosure starts in California, a price rise in some markets according to Zillow, the slowing of new and existing-home sales should be troubling. And since the massive shadow REO artificially keeps supplies short, and that can account for much of the good news, especially on prices, I still see a sick housing market. There are solutions to be had, but so far they have not been enacted. I’ll have more on that later.

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David Dayen

David Dayen