AP / AP Home prices continuing to drop.

Existing home sales in May were essentially flat, down just 0.3% from April and down 10.3% from a year ago. Prices also continue to drop for the tenth straight month, down 2.1% and inventories continue to rise, now to an 8.9-month supply. A pretty bland housing report all in all, except for a strange new number slipped into the middle of the report by that crafty NAR Senior Economist, Lawrence Yun. This mention, to me at least, is the real nugget that the 94 talking heads we’ll see on TV today will inevitably miss.

Household Formation. What’s that? It’s first time homebuyers. Whether it’s young professionals, new families, or new investors, none of these people, well, a lot less than usual, are jumping into the market. Household formation is down 70% (!) in the first quarter of this year from last year. On an annualized basis, it’s less than 500,000, which Yun calls, “rare.” You only see that in a real economic recession.

“The market is underperforming when you consider positive fundamentals, such as the strength in job creation, economic growth, favorable mortgage interest rates and flat home prices,” says Yun. “It appears some buyers are simply waiting for more signs of stability before they get serious about getting into the market.”

Some of the drop could be related to tightening in the mortgage market, especially as many first-time homebuyers might fall into the subprime borrower category, but the real reason is confidence, more to the point, lack of confidence. Whatever the economist projections, Americans clearly don’t think housing has reached a bottom in any way shape or form. Buyers don’t consider a home a good investment right now, and so they’re holding onto their hard-earned cash, moving in with their folks, or staying in rental units. Yun calls the number baffling, especially given the type of market these first-time buyers are facing.

“No question it’s a buyer’s market out there,” says Jim Gillespie, CEO of Coldwell Banker. “The good news for the buyers is there’s a lot of inventory out there and a lot of selection.”

Which again flies in the face of this household formation number. Inventories of homes for sale haven’t been this high in 15 years. There’s plenty to choose from, and sellers are as flexible as they’ve ever been. Gillespie says it’s the echo-boomers choosing to pass on housing. The trouble is, if the reason they’re staying out is all emotional, then how to we reconcile all these economic forecasts for recovery that are based on hard numbers?

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