Shock over housing's skid

Americans' long infatuation with owning a home, which even the 2008 economic collapse could not kill, shuddered and stalled last month.

Housing sales last month plunged 25.5 percent below July 2009, the National Association of Realtors said Tuesday, as buyers lost the spur of a government tax credit.

The steep drop surprised analysts and put the volume of single-family dwellings at the lowest level since 1995.

The financial markets took the news badly, with the Dow Jones industrial average skidding 134 points to a six-month low. As investors sought security, the yield on the two-year Treasury note fell to a record low.

Mortgage rates are the lowest in modern memory, hovering around 4 percent, while affordability, because of price declines of 30 percent in many areas, is the highest in at least a decade.

The government is allowing buyers to put only a token amount down, guarantees lenders against default and regularly issues proclamations that the worst is over.

Apparently, all of that is not enough to put a floor under housing. With U.S. unemployment stuck at more than 9 percent, and with millions more people heavily in debt or simply skittish, many potential buyers are lost to the market.

No region was immune in July, with sales in the Northeast dropping 30 percent, the Midwest falling by a third, the South down 20 percent and the West off 23 percent.

In the Puget Sound region, combined sales of single-family homes and condos in July dropped 17.5 percent in King County, 15.2 percent in Snohomish County, 24 percent in Pierce County and 42.8 percent in Kitsap County compared with a year ago, according to the Northwest Multiple Listing Service.

Growing drag

Real estate sparked this recession, and no one expects it to be a help getting out. Instead, the urgent question is how much it will drag down other parts of the fragile recovery.

The turmoil in housing, which is likely to lead to further price declines this winter, could send growth in the second half of the year below 1 percent, said Joel L. Naroff, an economist.

"It won't be a double-dip recession, but it might feel like it," he said.

Analysts had been expecting a drop in July home sales because the month was the first time in a year that buyers were ineligible for the government housing tax credit. But the consensus was for a 13 percent decline.

The $8,000 tax credit increased sales and stabilized prices last year, which led Congress to expand and extend the incentive through this spring. The cost was about $30 billion.

Economists said that just as the credit had artificially buoyed the market, the end of the credit was artificially depressing it.

"If you pay them, they will come. But when ya stop paying them, they leave in droves," the economist Tom Lawler wrote in an e-mail.

His conclusion: "People shouldn't panic."

Those on the front lines of real estate describe an unusual standoff between buyers, who can afford to be fickle as rarely before, and sellers, who feel they cannot go lower. For many sellers, agents say, an additional 5 percent drop would mean taking a loss.

"What few buyers are out there circle a listing like a vulture, waiting from the day of its debut until it's left for dead," said Glenn Kelman, chief executive of the online brokerage Redfin. Then, he said, they might make a lowball bid.

Kelman said that what made the sales drop "even more breathtaking" was that it was in July, typically when demand peaks. Sales were down 27.2 percent from the rate in June.

Over the last 20 years, sales of existing homes have averaged about 4.9 million a year. The sales volume in July equates to an annual rate of 3.83 million.

"Truly gut-wrenching," said Jennifer H. Lee, senior economist for BMO Capital Markets.

Key is jobs

Lawler, whose forecast for July was much more accurate than his colleagues' estimates, said housing would truly be healthy only when there was enough employment growth to spur the creation of new households.

For instance, adult children who are living at home will have to get places of their own.

Few think that will happen any time soon. In the meantime, there will be too many homes on the market, which tends to push down prices as sellers compete.

A normal market has an inventory of less than six months. While relatively few new sellers put their home on the market in July, the drop in sales was sufficient to push inventory levels up to 12.5 months.

That exceeds any level since records were first collected in 1999.

Prices have been stable for much of the last year, a trend largely due to the tax credit. The Realtors' group said Tuesday the median existing-home price for all housing types was $182,600 in July, up 0.7 percent from a year ago.

Median prices of all housing types in King County rose 7.1 percent to $375,000 in July, the Northwest Multiple Listing Service reported. In Kitsap County, the median rose 5.3 percent to $265,000. Median prices in Snohomish County fell 7.5 percent to $270,000, and 3.7 percent to $219,970 in Pierce County.

Most housing experts think prices will fall 5 to 10 percent more this winter. That makes this a miserable time for those who want to sell, not to mention those who do not want to be reminded that the walls sheltering them are worth a tiny bit less each day.

But it is quite a hopeful moment for buyers who have waited patiently through the bust and have a bit of nerve.

Material from Seattle Times business staff was included

in this report.