New home sales are slowly working down the inventory.
New home sales have been essentially flat for the
first five months of 2009. I had highlighted a stabilization
level of 350,000 homes but revisions to prior months'
numbers put that level closer to an annualized rate of
340,000.
With revisions, the last three months of data are 335,000
(March), 344,000 (April), and 342,000 (May). For all intents
and purposes, this is flat – no falling off a cliff – no
recovery.
The only positive trend is that inventories of new homes are slowly being worked down, both in absolute terms and in terms of months of supply.
The only positive trend is that inventories of new homes are slowly being worked down, both in absolute terms and in terms of months of supply.
Existing home sales have stabilized but calling an
upward trend is premature. Quite a lot was made in
the press last week regarding the sales of existing homes
(more than 90% of the market), as it showed an increase for
the second consecutive month.
This is something that has not happened since the crisis
hit. While this is by no means a negative for the market, it
is hard to call this the beginning of an upward trend. We
know that banks are clearing their backlog of foreclosed
properties.
That backlog is finite and sales could drop back some once
the major banks have cleared these properties off their
books. The positive that I saw in the existing home data was
that the April uptick in inventory was not the beginning of
a trend.
Inventory ticked back down in May. To be sure,
four million homes on the market is a big number but the
inventory levels are in a downward trend.
The concern I voiced last month on the April uptick looks more like month to month noise in the data than anything else.
The concern I voiced last month on the April uptick looks more like month to month noise in the data than anything else.
Foreclosures and defaults remain at elevated
levels. I
attempted to call a peak in
foreclosure activity earlier this year looking at the
December ’08 through February ’09 data.
This proved to be wrong, not nearly as well timed as the
call on the bottom in new home sales. Since then both
defaults and foreclosure sales have surged. May data is
down from April but it remains unclear if the worst is
over.
Mortgage rates back above 5% but still cheap.
The other worrisome sign I spoke of last month was
that the yield on 10-year U.S. Treasuries had been
climbing since May 21st. With a few days' lag, this was
beginning to drive up mortgage rates.
As expected, mortgage rates quickly moved from below 5% to above 5.5%. In mid June, as markets began to internalize that a “V” shaped recovery is not around the corner for the economy, interest rates began to settle back down.
The true test of whether the move to 5.5% mortgage rates can be found in mortgage applications.
Mortgage rate increases have cooled the
refinancing but not purchase applications. The
mortgages refinance market is a highly volatile one. As
interest rates for mortgages are driven down (by the
markets or by the Federal Reserve) homeowners run the
numbers for themselves to see if decreased monthly
payments offset the effort and transaction costs of
refinancing their mortgage.
At each new lower interest rate level a new group of homeowners (those that have equity left in their home) come forward to refinance, lowering their monthly payments.
This is positive for consumer spending (more cash to spend on other things) and good for the overall economy but there is not much about the transaction that improves the dynamics of the housing market.
In the wake of the Federal Reserve's actions in March to drive down interest rates, a flood of homeowners came forward to refinance. This was reflected in the MBA’s refinance index (above), which more than doubled from early March to mid-April.
As holding rates below 5% proved elusive for the Fed, refinancing has slid back since mid-May. The MBA purchase index has continued to hold up well even increasing in June.
These purchases are what have a true effect on the dynamics of the housing market, allowing unsold homes (foreclosures, new homes, and simple resales alike) to be cleared from the market. Only then can prices stabilize
There are a number of reasons to believe the healing process in the housing market is now underway. Prices as measured by the Case-Shiller Index will continue to decline, maybe into next year. Yet home sales levels are no longer dropping and inventories are declining. The recent rise in interest rates does not appear to have deterred would-be home buyers from purchasing homes at these low prices. Again, no recovery is appearing in the data but stabilization has appeared.
Disclosure: No positions
Blog
Housing Data: The Slow Healing Process Begins
June 2
With a new month of housing data behind us, it is becoming clear that housing market has started a slow, almost boring, process of healing. Much of the “housing crisis” headlines are abating but this process continues to wreak havoc on homeowners and investors. In last month’s assessment of the housing market, it was already clear that the drops in home prices were bringing buyers to the market.
I highlighted two worrisome signs, increasing interest rates
and rising existing home inventories. The latest monthly
data shows these two trends subsiding. While there is no
clear sign of recovery, there are indications that
stabilization and healing in the market is underway. This
includes housing starts, home sales, mortgage applications
rates, and default rates. Home prices will continue to drop
which is bad news or good news depending on your
perspective.
