Reasons why home sales are up, prices down

Question: Early this week in the news, it said that home sales were up, but then there was news later in the week that home prices were down. I don’t understand why home prices are falling if home sales are up. Please explain what is going on.

C.H., Everett

Answer: The statistics can be a little confusing, but there is actually a logical explanation for the seemingly contradictory results.

First of all, we are entering the spring home-buying season. Home sales always increase in the spring as people come out of their winter hibernation and start looking for homes as the weather warms up. Also, many families like to move during the summer at the end of the school year, so that’s why many homes are purchased during the spring.

Here in the Puget Sound housing region, the strongest home sales months are traditionally March and April, with February and May also having a lot of home sales activity.

The statistics for sales of existing homes released on Monday by the National Association of Realtors was for the month of February, which is just the very beginning of the spring homebuying season. You can expect to see stories in the news about increasing home sales for the months of March, April and May as well.

Keep in mind that the real estate association wants to put a positive spin on the housing market, which is why it focuses on the increasing number of home sales rather than on the decreasing home sales prices.

So how can home prices be falling when home sales are up?

It’s simply a matter of supply and demand.

There are many more homes for sale this spring than were available during the housing boom earlier in this decade. Any time that you have a large supply of something for sale with a relatively limited amount of demand, prices will fall. That’s what is happening to the housing market. There are many more home sellers than buyers right now, which makes this a buyer’s market.

So even though there are more home sales taking place, home sellers are having to drop their prices to attract buyers, which explains why average home prices are falling.

To give you an idea of what is going on, there were 53 percent more homes for sale in Snohomish County in February than during February 2007, while there were 33 percent fewer pending sales (purchase offer accepted by the sellers but not yet closed) during February compared to February 2007.

In simple terms, the number of homes for sale is way up, while the number of buyers is way down. That’s a bad combination if you are a home seller, but a very good situation if you are a homebuyer looking for a bargain.

As I first predicted in this column last fall, I expect home prices throughout the Puget Sound region to fall by an average of 10 percent to 20 percent for their peak housing boom values by the end of this year. The reason for the wide range of my prediction is that some neighborhoods will hold their value better than others. But I think that virtually every neighborhood will experience some amount of home depreciation this year. It’s just a question of how much.

As more and more homes come on the market in April, I expect the downward pressure on home prices to increase. For example, during one 24-hour period this week on the Northwest Multiple Listing Service (which covers about 18 counties in Washington) there were 691 new homes listed for sale and 509 homes already on the market reduced their asking price. During that same 24-hour period, there were only 249 pending sales.

So the trend is clear. More homes coming on the market will force more and more sellers to reduce their asking prices in order to attract buyers.

Once again, the number of home sales will be up, but the average home sales price will be down.

Mail questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206 or e-mail him at economy@heraldnet.com.