July 31, 2006 — All the economists who missed the stock bubble—this is almost all economists—are just about to be embarrassed again. Several reports released this week provide the strongest evidence yet that the housing bubble may finally be deflating.

Sales of new and existing homes are both down more than 10 percent from their peaks last year. Mortgage applications are down 20 percent. Sale prices have barely risen from the level of last year, and are actually down after adjusting for inflation. Inventories of new and existing homes both stand at record levels, and the vacancy rate for ownership units has also hit a new high.

This is a very different picture from a year ago, when housing was considered the best investment around. At that time, homes in the hottest markets would routinely sell the day they came on the market for more than the asking price. The result of this frenzy was an unprecedented run-up in house prices.

The exact course going forward will depend to a large extent on how rapidly interest rates rise, but the basic plot is easy to see. With housing construction still far outpacing the growth in households, there will be a further build-up of inventories. In addition, many people who had been holding homes in anticipation of price rises will rush to sell, now that the market is headed downward. The supply of housing will be increased further by duress sales by people who cannot afford the jump in monthly payments on their adjustable rate mortgages. In addition, the rapidly rising foreclosure rate means that many financial institutions will be auctioning off repossessed homes.

–Dean Baker

The Coming Housing Crash [Tom Paine]