It's been a while since I've sensed quite this much doom among the folks obsessed with housing (one told me simply, "You're going to be very busy!"), but July existing home sales are unquestionably the product of a perfect storm:

1. The home buyer tax credit expired April 30th, and originally you had to close by June 30th.  Yes, that closing deadline was extended, but the bulk of tax credit-inspired sales likely closed by the end of June; hence, the July hangover.
2. Renewed concerns about a double-dip recession and lackluster job growth have pushed confidence in the housing market lower.
3. Rock-bottom mortgage interest rates have done nothing to boost mortgage purchase applications in the past few months.
4. Foreclosures are taking a turn for the worse yet again.

I've said over and over that the anticipated drop of anywhere from 12 to 25 percent in July sales is not wholly a result of the end of the tax credit. But then I got to thinking about prices. Obviously a far slower sales pace pushes inventories, and specifically months supply of inventories, way up. Dan Oppenheim, over at Credit Suisse says, "We think months’ supply will jump sharply based on the lower sales pace, with total and single-family months' supply likely nearing or surpassing 11 months, which was the prior record level seen in summer ‘08. This will create further near-term pricing pressure."

But what about the fact that the first time buyers are out (mostly) of July's numbers?  "Their share is likely to drop into the mid or low 30's in July, dragging existing home sales down to their lowest level since the present data series begins in 1999," say the folks over at IHS Global Insight.

So if their share of total sales is so much lower, and first time buyers generally buy lower-priced homes, wouldn't it be possible that, with a higher share of higher-priced homes selling, that would skew the median home price higher?  Again, this would be an artificial skewing, not a real improvement in home prices, but some might not see the distinction.

I asked a few experts if my theory holds water:

From Mark Zandi at Economy.com: 
I expect median house prices to fall back closer to 170K, seasonally adjusted; the lowest since April 2009. This is based in part on the experience of the median house price decline in the wake of the last tax credit last fall. The much higher share of sales that are distressed during the month will trump the other mix effects. As you know, however, projecting month to month changes in the median price is an intrepid affair.

From Dan Oppenheim at Credit Suisse:

1. The mix may cause that. 2.  Price pressure just started in May, so it would have only had a slight negative impact on the closings for July. Price pressure has intensified in more recent months. 3.  Seasonal trend for July is slightly positive +0.4% over time, so that is another factor going in that direction.

In other words, stay tuned...

Questions?  Comments?