This is just a follow up from Thursday's report on new single-family home sales for July. Asha told you that new single-family homes sold in July were down 22.2% from year-ago. As sales of new homes cratered, new homes for sale in July skyrocketed up 22.44% from year-ago (see Chart 1). Subtracting the change in new single-family homes for sale from the change in homes sold yields the data contained in Chart 2, which is not pretty for July. The difference for July 2006 is minus 44.66% -- the most negative reading since July 1972. By this measure, then, the supply - demand situation for new single-family homes is the worst since the early 1970s. This suggests that "effective" prices - i.e., prices adjusted for free granite kitchen countertops - will be falling in the coming quarters and that residential construction activity will continue to contract. Falling new home prices will put downward pressure on existing home prices. Downward pressure on existing home prices will have a negative impact on consumer spending in that home equity available to extract will be growing at a slower pace or even declining. Downward pressure on exiting home prices also could lead to increased mortgage defaults as home-"owners?" wanting to term out their adjustable rate mortgages may find the amount needed to be refinanced is more than the new lower appraised value of their home. Today H&R Block announced that it setting aside $102.1 million as a result of increasing mortgage delinquencies being experienced by its mortgage-originating subsidiaries. Folks, the bursting of one of the biggest U.S. housing market bubbles, if not the biggest, are going to have a significant negative effect on the rest of the economy.

Chart 1

Chart 2