By Vanessa Saunders – June 24, 2011

In May 2011 home sales sank 3.8 percent to a seasonally adjusted annual rate of 4.81 million homes, the National Association of Realtors announced this week. That's far below the roughly 6 million annual sales rate typical in a healthy housing market.

Since the housing boom went bust in 2006, sales have fallen steadily in four of the past five years. Analysts say they expect sales to level off at about 5 million a year. That's not much better than the 4.91 million homes sold in 2010, the worst result in 13 years.

The depressed housing market has weighed heavily on the broader economy. Declining home prices have kept people from selling their houses and moving to find jobs in growing areas. The elderly struggle with high assisted living costs they once dreamed they could afford and more and more are moving in with their children.  People are less wealthy. That has reduced consumer spending, which drives about 70 percent of economic activity. Therein lies a major problem with the U.S. economy. It is excessively dependent on the housing industry, and on consumer spending. A sad state of affairs...an economy driven by housing and consumption.

One of the major signs of the housing industry’s struggle is that we are seeing fewer first-time buyers entering the market. The number of first-time buyers last month was a mere 35 percent of sales. In healthy times, they account for about half of sales.

First-time buyers are essential to a healthy market because they tend to improve their properties and invest in their communities and over time that’s a combination which raises home values. Typically after 3-5 years first time buyers move up to pricier homes.

Instead, the market has been saturated with foreclosures, which force prices down. Sales of homes at risk of foreclosure (Short sales) fell in May. But they still made up 31 percent of all purchases. Many pending foreclosures are backlogged in the courts or held up by state and federal probes into questionable foreclosure practices by lenders.

Steven Wood, chief economist at Insight Economics said "It is unlikely that home prices will recover on a sustained basis". At least that is, until the glut of foreclosures are cleared and people think it's a safe time to buy.

Bigger required down payments, tougher lending rules, heavy credit-card and student-loan debt and a shortage of desirable starter homes are keeping many would-be buyers away. Even some who do have enough money for a down payment and a solid credit history are holding off, worried that home prices will keep falling.

Investors are filling some of the void. They are spending cash to scoop up deeply discounted homes in many areas around the country. Last month, investors accounted for 19 percent of all sales, the most interesting aspect of which is that of the 19 percent over 10 percent of purchases were by global investors who see America as being “On Sale” to the rest of the world. So far this year $88 Billion dollars have been invested by overseas buyers up drastically from last year’s $66 Billion and we are only at June.

Re-sold homes are a bargain compared with new homes. The national median sales price for a previously occupied home in May was $166,500. The median price of a new home is nearly 31 percent higher than the price for a re-sale; around twice the normal markup. All the while, previously occupied homes are cheap and in great supply.

The gap is largely due to the flood of foreclosures and short sales. (Short sales occur when lenders accept less than what's owed on the mortgage.) A record 1 million homes were lost to foreclosures last year. And foreclosure tracker RealtyTrac Inc. expects 1.2 million more will be lost this year. In nearby Westchester County 1 in 3 of all homes currently on the market are short sales, a frightening statistic given the high incomes of most home owners in that county.

Another problem for the housing market is the glut of unsold homes. In May, the supply fell slightly to 3.72 million homes. At last month's sales pace, it would take more than a year to clear those homes with more and more coming on the market each day.

Homes priced for less than $100,000 and good condition are selling briskly, but more expensive homes are having trouble finding buyers. Sellers are allowing their homes to fall into disrepair. Why bother? They won’t make it back by selling.  The situation gets even worse when taking into account the "shadow inventory" of homes, economists say. These are homes that are in the early stages of the foreclosure process but, because of backlogged courts or the government probes, haven't hit the market for re-sale.

Yet another factor is holding many would be buyers from jumping into arguably the best time to buy a home EVER! So why aren’t more taking advantage of historic low interest rates and low house prices? Fear of failure. Poorly marketed properties and confused listing agents not competent in negotiating short sales have given rise to a growing fear of short sales. Months of negotiations, money held in escrow, only to by stymied by the lenders because the marketing of the property wasn’t handled correctly, has given rise to an apathy among both buyer agents and buyers alike, thus allowing many great bargains go untouched and adding to the ever increasing inventory of bank owned properties.

Sales fell across most regions in May. Sales dropped 6.4 percent in the Midwest, 5.1 percent in the South and 2.5 percent in the Northeast. There was no change in the West.

So once again sellers are faced with two options. Sell at a much reduced price than they ever deemed possible or stay for the long haul. I wish I had a dollar for the time I’ve been asked when things will return to normal. What’s normal I ask? In the 10 years I’ve been a Realtor not one year has been consistent with the year before or after…No I don’t have a crystal ball, but I can do the math. And one thing’s for sure, next time I come back as a banker, as they are the ONLY ones coming home with million dollar bonuses after putting the rest of us into the poor house.

So what in this article is the good news you may ask? Well that really depends on your outlook on life. I’m quick these day’s to say, what will be will be. Because, if you are meant to move, you will. It may not be to the palace or castle you were planning on buying next, but to a more modest, affordable abode without 3 garages, a huge pool, and an astronomically expensive kitchen that you’ll never cook in anyway. Less and less I am hearing “But I HAVE to get X to move to Y”. Because the reality is beginning to set in. Maybe Y is no longer possible. Why is this good? Because maybe, just maybe, we will all be forced to live within our means, not up to our eyes in debt, and ultimately that will lead to happier, less stressful times, without the fear of not keeping up with the Jones’s. A time when family instead of money will come first once again a time when bigger isn’t necessarily better and a time when value and values are of equal importance.

One of my older clients had this to say about the current market:  “Back in the 50s and 60s a house was a place to live, not an investment. New houses in those days were worth more than the older ones. A new house was worth the most it was ever going to be worth at the time it was a new house. Like a car it was worth less as it got older. The only increase was the rate of inflation. Then someone got the idea that houses were a savings plan. Hey if I can get mortgage and somehow hang on, I'll be rich! I can sell and move to some nice beach property, sit on the beach with my Corona. Too bad the dream turned into a nightmare!”