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July 26, 2007

Today's Housing Bubble Post - New Home Sales Plunge - Prices Update Added

-- by Dave Johnson

New Home Sales Down Substantially,

Sales of new homes fell in June by the largest amount in five months as the housing industry continued to struggle with its worst downturn in 16 years. The median home price also fell.

... Sales are now 22.3 percent below the level of a year ago.

The median price of a new home sold last month dropped to $237,900, down by 2.2 percent from a year ago.

An important note about that median price - we have a bifurcated economy where the rich are richer. So houses at the top of the market are selling well. This means that the median price reflects that high price point at the top. REGULAR housing prices are falling much more than this indicates.

Prices Update - I want to emphasize what I said about prices. If the only houses selling at all are at the top, this will raise the median price.

Another factor that distorts prices is "incentives." If a homebuilder is selling a house for $400K but throws in a new $60,000 Mercedes as and "incentive" to buy the house, the sales is reported as a $400K sale. And all across the country homebuilders are offering these incentives.

Prices are falling, it's just that the reporting methods do not reflect what is happening. We are just coming out of a bubble -- just like stocks did. Do not think about the price of a house in relation to where it was priced during the bubble. If you did that with Enron stock, you thought you were getting a bargain. Think about where the price will be, not where it was.

Look at it this way. We have house prices way higher than anyone can afford. We have the highest inventory of unsold houses in a long time - ever? We have the lenders tightening credit so fewer people can buy houses. We know prices are falling. We have a huge number of people falling behind on their payments and huge numbers of houses going into foreclosure. And it is just starting.

Anyone buying a house right now is an idiot. Prices are probably about double where they should be. Like I said earlier, remember Enron stock and think about where the price will be, not where it was.

Posted by Dave Johnson at July 26, 2007 9:12 AM

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