Housing Data Crush the Pollyannas

This week's numbers, particularly new-home inventories, have squashed the optimists' hopes.
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It was a set piece: real estate "expert" Barbara Corcoran counseling Americans on NBC's "Today" show Thursday morning that the time is right to buy their dream home.

Why?

The worst of the housing slide, she said brightly, is over, and housing's dismal data will soon be showing a rosier outlook.

What else would someone who made her fortune selling homes in Manhattan say? Corcoran's allegiance is to the home seller and agent, who desperately want trigger-pulling buyers. But you can't simply wish markets back on track, and the pixie dust that Corcoran has deployed so effectively over the course of her long career on individual home buyers is harder to dispense -- and to receive -- through a television screen than in person.

The encouraging vignette was initially belied by the June existing-home sales report issued July 25 by the Commerce Dept., then viciously undercut by new-home sales figures the agency released the following day. Those sales figures, which many pundits had predicted would show a modest month-to-month rise, showed a steep 6.6% decline to 834,000 from May's annual rate of 893,000 sales. Year-over-year, the fall was a dramatic (but nonetheless unsurprising) 22.3% against 2006 June figures. This June's level marks the second-slowest sales month in eight years; the slowest was this past March.

But the real drama was in the beleaguered western U.S., where housing is rapidly sinking under water: the region showed a 22.5% sales falloff. (Three of the four regions that Commerce divides the country into for tracking purposes lost ground in June; only the South posted a gain.)

Lost in the welter of data pouring out was one sign I see as especially troubling. Inventories of new homes, which the homebuilder sector has been managing to eat away at so far this year, cutting by 5% from last year's levels, remained unchanged in June and may even have grown a bit. That means programs meant to hold the line on pricing while introducing graduated concessions for buyers are stalling out.

This is bad news for

D.R. Horton

(DHI) - Get Report

,

Beazer Homes

(BZH) - Get Report

,

Ryland

(RYL)

and

Pulte

(PHM) - Get Report

, four companies that have seen their recent earnings

beset by land charges.

In essence, prices are poised for a fall far steeper than the 2.2% year-over-year drop in the median home price reported Thursday.

And price frustrations were clearly evident in the existing-home numbers released July 25. Existing-home sales were also off starkly, dropping 3.5% to their slowest level in almost five years, or an annual rate of 5.75 million homes.

Home-sellers are clearly not happy with the offers they are receiving -- if they are receiving offers at all -- and the disconnect between presumed valuations on the parts of buyers and sellers remains fundamentally hung up.

In case there is any question in investors' minds about the impact of numbers like these on markets, the Dow's

Thursday tumble , combined with a whimsical move by

Wells Fargo

(WFC) - Get Report

, which suspended its wholesale subprime-lending division, paint an appropriate picture of a booby-trapped (or is it just booby-rich?) horizon.

While there are certainly those who will point fingers at allegedly doom-saying media outlets as the primary cause of the housing and subprime malaise, the reverse of that stance is pushing this inevitable slide even harder. The bubble disbelievers (aka cycle deniers), soft-landing lubbers and those who talk confidently of "containment" as if subprime lending was a virus that could be quarantined (or, perhaps, a rogue government meant to be invaded and toppled), all share a shocking blind spot: they refuse to acknowledge that all lending, as

Countrywide

(CFC)

itself conceded earlier this week, is interdependent.

Debt itself is no longer "contained," but has actually been unfettered to allow the freer flow of investment dollars. Actions aimed at minimizing the perception of risk levels for investors and borrowers have created the unintended consequence of enabling those unprepared for bad news to walk right into it.

What the current situation calls for is a clear-eyed explication of what current data suggest about future direction. Recent reassessments by the National Association of Realtors predict that housing won't recover until at least 2009 are welcome, if a little late.

Meanwhile, much as I was disheartened by watching the perversely Pollyanna-ish Corcoran ignore reality on national television, I realize she can be forgiven. After all, her home base of Manhattan remains one of the true bright spots in the nation, with condo sales prices continuing to rise.

However, all that's needed to put a stop to that is the first announcement of retrenching in the financial services industry, which drives Manhattan luxury home prices. What might cause such an announcement? A down day on Wall Street is the most likely candidate.

At the time of publication, Peter Slatin had no positions in stocks mentioned.

Slatin publishes the independent real estate newsletter theslatinreport.com. He has written extensively about real estate and architecture for publications ranging from Barron's to The New York Times, and is on the editorial board of Real Estate Portfolio, published by the National Association of Real Estate Investment Trusts. He was the founder and editor of Grid, an award-winning real estate business magazine.