New home sales have
hit a bottom at a 350,000 annual rate. New home
sales have been essentially flat for the first four months
of 2009. There has been some recovery off the January low of
329,000 to the rates of 362,000, 351,000 and 352,000 in
February through April respectively. On a month to month
basis, a clear case can be made that the new home market has
hit equilibrium and inventories are being worked off slowly.
Historically you would have to go back to 1982 to find a
period when home sales rates stayed below 400,000 for any
sustained period of time. In fact, there are only two months
on record with the Census Bureau (records date back to 1963)
that have been below 350,000 and no month as low as January
2009.
Existing home sales appear to be stabilizing at a 4.65
million annual rate. On the surface the existing
home sales have much of the same stabilization trend as the
new home sales. While the April numbers (4.68 million) were
up over March (4.55 million), the trend has basically been
flat since late last year.
Even the price data that the National Association of
Realtors puts out along with this data shows a flat trend.
Given last year’s precipitous declines, flat is not so bad.
The one worrisome sign is in inventory which is increasing
rather than decreasing:
Inventory increase may or may not be seasonal.
It is common for would-be sellers to put their homes on the
market come April of a given year. The uptick this past
month is no larger than that of April 2008 and inventories
are lower than back then.
However, there is no way to tell how much ‘potential
inventory’ might come to market as owners believe the period
of distressed sales is ending.
We know that, in the worst hit areas, upwards of 50% of
sales are from foreclosure, short sales, bank owned
properties or otherwise distressed.
This is a necessary process to clear the market and the
sooner it is over the better off we are. However, patient
sellers will wait until this period is over before accepting
a low price offer. The incremental seller coming off the
sidelines can put downward pressure on the market throughout
the year. With no way to gauge how many of these folks there
are, it is hard to estimate the trend of inventory for
existing homes.
Foreclosures and defaults have yet to abate,
holding at 340,000 per month level. Recent
monthly activity published by RealtyTrac is showing
foreclosure activity elevated for the second month in a
row consistent with the expiration of foreclosure
moratoria by banks and government agencies early this
year.
The composition between categories implies acceleration
towards resolving the lingering problematic properties.
Through most of 2008 defaults remained well ahead of
foreclosure sales causing bank owned properties to build
slowly throughout the year. Foreclosure sales began to
rise in December and took a sizable step up in March,
causing the number of repossessed or bank owned
properties to begin to decline. While painful, it is
necessary to bring an end to the crisis.
Bond market driving mortgage rates back above 5%.
Not to make light of the defaults and
foreclosures but the biggest negative development for
housing in the month of May was the interest rate in the
last week and a half. The yield of the 10-year Treasury
bond had been trading just above 3% for the first three
weeks of May. Then on May 21st it made a move higher
that has since led the bond yield 50 basis points (half
a percent) higher and closed last week at 3.46%.
May 21st was the day that Standard & Poor’s announced
that the debt of the United Kingdom was being put on
credit watch for a possible downgrade from AAA. This led
to comments in the media that such a downgrade for the
U.S., while a long way off, may be inevitable.
Regardless of your view on this possibility, the episode
sparked concerns that increasing federal budget deficits
will lead to run away inflation. Additionally, some
speculated that economic recovery will cause the Fed to
tighten monetary policy sooner rather than later.
This is important for housing because the 10-year is the
bond most closely tied to 30-year fixed mortgage rates.
Historically, mortgage rates trade at about 150 basis
points (about 1.5%) above the 10-year bond. A 10-year
bond yield of 3.0% and a mortgage rate of 4.5% appeared
to be the levels the Fed was targeting with their
quantitative easing (purchase of debt from the market)
policy. Increases in the 10-year bond and thus mortgage
rates would threaten home affordability.
With a day or two lag, 30 year fixed rate mortgages
began climbing in response to the 10-year bond move.
This climb has yet to show up in the Freddie Mac weekly
mortgage rate survey but will by this Thursday. Mortgage
rates moved from 4.8% to 5.27% in less than two weeks.
While mortgage rates are not the most
important piece to housing recovery, they are an
ingredient in the recipe for recovery, a critical one at
that. The bond market did settle down some by the end of
last week. However, if this upward trend in bond yields
continues in the coming months, the sales of houses may
continue to bump along the bottom.
Either way, prices will continue to fall for many months
to come, at least as measured by Case-Shiller.
The housing sales numbers for both new homes
and existing homes are showing a flat trend consistent
with a bottom. Prices as measured by the Case-Shiller
Index continue to decline as foreclosures continue at a
high rate given that moratoria by banks have ended.
While no recovery has shown up in the data, these facts
would support a bottom that could lead to a recovery.
That recovery is threatened by a rising unemployment
trend and more recently rising interest rates sparked by
the federal deficit and inflation fears.
Disclosure: No positions
Blog
Housing Data Indicates Bottom, Not Recovery
June 2
Another month of housing data has come and gone. Mine is a mixed assessment with the worrisome data outweighing the positive data. My first assessment of the U.S. housing market was that the decline in monthly home sales had to be hitting a floor this spring or summer to form a bottom in the market.
This, however, did not mean that home price declines would stop, which I expect to continue for another year or so. With three more months of data available, the assessment remains the same. I would only qualify it in one way: a bottom does not imply a robust recovery.
Sometimes markets bounce off a bottom and other times they
simply stop falling. The recent monthly data implies the
latter for housing. In the same way that the U.S. stock
market traded sideways (S&P500 in a range from 866 to 930)
in the month of May, the housing market may bump along in a
narrow range for some time as inventory is worked off and
the labor market stabilizes.
