The housing market is extremely cyclical, with volumes dropping sharply and prices dipping every winter, then picking up again in the spring. The overall trend is no different this year, but volumes were much lower than expected (prices continued to gain year-on-year). As with almost every other piece of disappointing economic data, the unusually harsh winter is being blamed for the depressed sales volume, but the strength of the rebound this spring and summer will tell us if that story holds water.

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Year-on-year volumes still falling despite seasonal bounce

There were 169,000 home sales in DataQuick’s MSA Index (the top 99 out of 100 metropolitan areas in the US, which for some reason excludes Wichita) for the 30 days ending last Thursday. That’s still 14.7% above where the market was three years ago, but it’s also down 6.7% from last year. Year-on-year, 30-day sales volumes have been steadily falling for the last six weeks, while home prices have seen double digit growth. That growth has lost a bit of steam, from more than 13% annual growth to just over 11%, but declining sales aren’t convincing people to lower their prices.

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Falling housing prices could impact the market and public policy

Investors need to keep an eye on the housing market as much as homeowners do, because if sales volumes don’t recover then prices will eventually need to drop as well. A delay isn’t surprising, homeowners can usually hold on a few months or longer to get a deal so prices are sticky, but the correlation should hold in the long-term. The housing market is also facing a potential hit in the form of higher interest rates as early as this time next year, so a lackluster 2014 could set it up for a disastrous 2015. Falling housing prices usually translate to lower consumer spending (the wealth effect in reverse) and lower GDP growth, which could test investors’ bullish sentiment.

There is also speculation about how weak home sales could affect public policy. Federal Reserve chairperson Janet Yellen has already assured investors that accommodative monetary policy will be in effect for as long as it’s needed, walking back some recent comments, but it also puts Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform in a new light. If the housing market is suffering, the public might have a stronger reaction to the prospect of a permanent 50+ basis point increase in mortgages that would likely result from the Crapo-Johnson proposal to replace the GSEs with a new federal agency.