Home sales declined further in October signaling that the housing recession has not yet reached bottom. Combined new and existing home sales fell 48,000 (annual rate) but the drop was 90,000 compared to the initial September estimates before they were revised lower. The now reported month to month decline was at a 10% annual pace. While this is a slowdown from earlier in the year, it is far too high to indicate a turnabout to sustained sales increases in the next few months.

However, the sales decline in the last three months for existing homes may be overstated since the decline in the West region where jumbo mortgages (over $417,000) were briefly unavailability depressed sales of existing homes. Existing home sales fell twice as fast in the West as in the rest of the country. But even a 7-8% pace of sales decline does not signal an imminent turnabout.

We still believe that most of the housing market decline is over with only marginal declines yet to come. The previous sentence describes the “national” housing market. Substantial sales declines are still expected in the most distressed markets in Florida and the Southwest. Nationally, there are likely to be some reports of month to month sales increases through the spring but sales will be marginally lower by mid-2008.

Not surprisingly, the tail end of the housing recession is characterized by sales being boosted with heavy discounting. So the decline in home prices in distressed markets will continue unabated for many months even if the decline in home sales is marginal.

While the economic environment for housing will continue weakening into next year, it remains mildly positive. But it is not positive enough to offset the virtual shutdown of the speculative and subprime financed entry level markets and the heightened fear in the prime rate, conforming mortgage size core of the market that trading homes could leave you trapped for an extended period with two mortgages.

The bad news about energy and home prices has dropped consumer confidence enough to offset the rising home affordability index which is now about the level during the beginning of the housing boom in 2004. Affordability is irrelevant without the confidence to spend. Confidence is very sensitive to gasoline prices and consumer perceptions about how easy jobs are to get and likelihood of layoffs. Good news soon is possible but not probable in both areas in the next few months.

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