Still a fixer-uper

Analysis |

In a rare splash of good news for the housing market, the supply of new homes for sale dipped in June.

Based on the figures, it will take 10 months for the inventory of homes on the market to be sold. That's down from a multidecade peak of 11.2 months in March.

The glut of homes has pushed prices down, scaring away would-be buyers who don't want an asset that could lose value.

"The new-home market is trying to stabilize," writes Ned Davis Research analysts in a note. But other housing metrics, including a broader measure of inventories, still look grim.

Existing homes

The supply of existing homes for sale is near an all-time high, says Global Insight economist Patrick Newport. Vacancies for new and existing homes clocked in at 2.8 percent in the second quarter of 2008, according to the Census Bureau, compared with a long-term average rate of 1.7 percent. Rising foreclosures and weak home sales mean the "excess could remain stubbornly high — indeed, it could go up — through the rest of this year," Newport says.

Prices

Since peaking in July 2006, the Standard & Poor's/Case-Shiller 20-city Home Price index lost 18.4 percent through May. But the rate of decline is moderating, notes Wachovia analyst Gina Martin Adams. "At least a temporary bottom in housing appears to be forming," she says. "We'll wait another few months before we buy into the idea that this spring marked a true bottom."

Mortgage rates

Though the Federal Reserve cut its funds rate 3.25 percentage points in eight months to 2 percent, the average 30-year fixed-mortgage rate has barely budged. Lenders, desperate for capital amid a credit crunch, are keeping rates high so they can more easily resell the loans to investors.

Freddie Mac said the 30-year fixed rate climbed to 6.63 percent the week ended July 24, the highest level since the credit crisis began a year ago, though it fell back to 6.52 percent a week later.

Wells Fargo economist Scott Anderson says the Fed might increase rates to 3 percent by year-end. That could "push 30-year mortgage rates above 7 percent for the first time since April 2002," he says.

"If this doesn't push housing demand even lower, it certainly will work against a robust recovery."