Home Prices Fall 9.7%: An Explanation

Rather than paraphrase the explanations and pretend I’m intelligent, I’ll just paste them below.

These were taken from today’s Wall Street Journal.

U.S. new-home sales jumped unexpectedly in September by 5.3%, but prices were lower. The average price of a new home decreased to $293,200 in September, from $314,000 in August and $299,600 in September 2005, according to Commerce. The median price fell 9.7% last month, to $217,100 from $240,400 a year earlier, representing the sharpest drop since December 1970. The August 2006 median sales price was $239,300. Meanwhile, new-home inventories receded in September. Economists comment on the drop in price and what it means for the future of the market.
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The newspaper headlines will blare that new-home prices fell by 9.7% year over year, the largest drop since 1970. Admittedly, this is a shocking headline, but do not make too much of it. First, as we have noted many times, the mix changes every month so that these price numbers do not pertain to a comparable mix of homes over time. If people are scaling back their desires, if the regional mix changes, etc., then the numbers get skewed. Moreover, the new-home side of the equation should be the most volatile, because the inventories of new homes all have to get sold quickly (whereas homeowners can simply take their existing homes off the market for a while when market conditions ease). It is easy to imagine a world in which new-home prices fall by 5% or 10% and the average of all home prices are steady or even somewhat higher. We will wait for the Ofheo figures to get a better read on overall home prices. In any case, the faster new-home prices fall, the quicker those inventories are going to get sold and the faster we can get past this housing correction. –Stephen Stanley, RBS Greenwich Capital

The median new home price fell by 1.7% [in the third quarter] across the nation. However, the median sales price rose in each of the major geographic regions (Northeast +19.3%, Midwest +4.0%, South +0.7%, West +1.6%), which suggests that some of the home price decline is due to a shift in the regional pattern of sales toward lower-priced regions. –Bear Stearns Economics
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The really startling number in this report is the 9.7% plunge in median prices compared to a year ago. No doubt a good part of this drop reflects an increase in the number of smaller homes in the sample, which is not adjusted to take account of changes in the mix of homes sold from month-to-month. Still, mean prices also slumped, to -2.1% from +6.4% in August, so we think there probably has been a serious drop in prices per square foot. –Ian Shepherson, High Frequency Economics

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