Um. . . About That Soft Landing. . .

Empasis added to the original AP text via bolded type:

Existing Home Sales Drop in July

By JEANNINE AVERSA
The Associated Press
Wednesday, August 23, 2006; 10:35 AM

WASHINGTON -- Sales of previously owned homes plunged in July to the lowest level in 2 1/2 years and the inventory of unsold homes climbed to a new record high, fresh signs that the housing market has lost steam.

The National Association of Realtors reported Wednesday that sales of existing homes and condominiums dropped by 4.1 percent in July from June to a seasonally adjusted annual rate of 6.33 million. That was the lowest level since January 2004.

The latest snapshot of housing activity was weaker than analysts anticipated. Economists were forecasting the pace of sales to fall to 6.55 million.

"The housing sector is fragile," said David Lereah, the association's chief economist.

The median price of a home sold last month was $230,000. That was up just 0.9 percent from the same month last year and marked the smallest year-over-year increase since May 1995. The median price is the middle point, where half sell for more and half sell for less.

The inventory of unsold homes in July rose to a record high of 3.86 million. At the current sales pace, it would take 7.3 months to exhaust that overhang. That is the longest period to exhaust the supply of home since the spring of 1993.

On Wall Street, the weak housing report dragged stocks down. The Dow Jones were down 8 points in morning trading.

By region, sales dropped by 5.4 percent in the Northeast. They fell by 5.9 percent in the Midwest and 1.2 percent in the South. Sales declined by 6.4 percent in the West.

Wednesday's report shows that the bloom is off the rose.

For five years running, home sales had hit record highs as low mortgage rates lured buyers. But the housing sector has lost steam this year as mortgage rates have gone up and would-be buyers have grown cautious amid high energy prices and a slowing economy.

Against that backdrop, the Federal Reserve earlier this month decided to halt a rate-raising campaign that had pushed interest rates steadily higher over the last two-plus years to fend off inflation.

The Fed's goal is to raise rates sufficiently to thwart inflation but not enough to hurt the economy.

One of the things that Federal Reserve Board Chairman Ben Bernanke and his colleagues are watching closely is the housing slowdown. If home prices and sales were to crash, that could spell big trouble for the overall economy. Thus far, Bernanke has said the market's slowdown has been fairly orderly and smooth.

Lereah said he still expects a "soft landing" for the once high-flying housing sector. But he urged the Fed to leave interest rates alone and refrain from bumping them up again _ as some analysts have said is a possibility.

The housing sector's transition from a red-hot market to a cool one has important implications for the overall economy.

Consumers who watched their homes rise rapidly in value over the last several years felt wealthy and more inclined to spend. They also borrowed against their homes _ treating them like ATMs _ to support their spending ways.

Two words to the Fed: good luck. Spit on the end of that thread all you want: stuffing it through that needle won't be easy. Soft landing? All the inside analysts are already acknowledging there will be no such thing. This talk about a "soft landing" is moving beyond the wishful thinking stage to the level of propagandistic confidence building. I don't think it's going to work.

One other thing: those median home sales statistics hide a reality of this market: the high end of the real estate market is not feeling the pinch the way the middle band is. The weight of this bursting bubble is being borne by the middle class and working people. Luxury spending is healthier than mass market spending. Since real wages have been stagnant over the recent (ahem) "recovery," and set to remain so, consumer confidence has been bouyed entirely by the real estate market wealth effect. Now with that mirage evaporating, the middle class and just-making-it working families are feeling the pinch the most. Luxury home sales are actually distorting the numbers through that median home sales figure. In other words, this AP article is painting a rosier picture of what's happening out there than is really the case.