Housing Data: Moving Up But Is It Helping the Economy?

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New homes sales continue to work off the inventory. New home sales, which had been essentially flat for the first five months of 2009 at an annual rate of 340,000, jumped 11% to 384,000. Inventory continues to decline in terms of both months of inventory (now stands at 8.8 months, down from 12.4 months) and in terms of the absolute number. The total number of units of 281,000 has almost been cut in half from the high of 548,000 in spring of 2007. This inventory decline has triggered an uptick in housing permits and starts for residential construction which are 13% and 22% respectively off their lows hit this spring. It is likely going to be many years before new home construction gets anywhere close to the 1 million units per year level that it exceeded in the housing boom era but the improvement off depressed levels is unmistakable.

Existing home sales are returning to pre-Lehman levels. Sales of existing homes increased for the third straight month in June to 4.9 million units on a seasonally adjusted, annualized rate. While this only brings sales back to the early 2008 level, it does signal that the market is beginning to clear. Inventory in this area has dropped as well. The inventory of existing homes for sale stands at 3.8 million units (down from 4.6 million last summer), representing 9.4 months of inventory (down from 11.2 months). The often mentioned criticism is that most of this is fueled by foreclosure sales which, according to RealtyTrac, reached 141,000 in the month of June.

Existing Home Sales are increasing even without foreclosure sales. The above chart shows actual monthly sales of existing homes (neither seasonally adjusted nor annualized). It is true that at the market lows of January more than 4 out of every 10 sales were derived from foreclosed properties. In June, that ratio was less than 3 in 10. The increase in foreclosure sales has put June data ahead of the same month in 2008. Without foreclosures, sales of June ’09 sales would be 11% off last year’s pace. Yet, returning to last year’s levels is a step in the right direction, regardless of the mechanism to get there.

Foreclosures and defaults remain at elevated levels. Total foreclosures have hovered above the 300,000 properties per month level since March. Defaults, the first step in the foreclosure process, have been heading in the right direction for the last two months but there is little to suggest that foreclosures won’t remain at this elevated level as the economy continues to shed jobs.

Prices rise for the first time in three years. In recent months, I have not bothered to wait for the release of the S&P/Case-Shiller Index (often the last of the major data to be released each month). A handful of cities like Charlotte and Dallas might show month to month increases but the readings for the 10-city and 20-city composite have shown nothing but a steady decline for 33 straight months.

The Case-Shiller Index data differs quite a bit from the U.S. government data in that it is a three month moving average and it has an additional month lag. This makes it less volatile and more of a lagging indicator. It also captures the upper end of the housing market well. The most recent reading for May 2009 came in roughly 17% lower than the same month in the prior year. It is also not seasonally adjusted which is why the year-over-year declines are most often referenced. Prices often show the most strength in the summer.

The May reading showed the first month-over-month increase prices since the peak back in 2006. In addition to the 0.3% increase in both composite indices, there were price increases in 14 of the 20 cities. Not being seasonally adjusted, the Case-Shiller Index is likely later in the year to give back any summer prices gains. Yet, the fact that there is any price strength in the three months ending May is a positive given the high level of foreclosure sales that occurred in those three months.

Housing is still a drag on the economy.

Probably the biggest positive we hope for from stabilization in housing is that the industry stops being a drag on the economy. “Private investment in the residential” sector is a key contributor to the GDP calculation. The GDP reading just released on Friday showed that the housing market contributed negatively to the U.S. economy for the 14th consecutive quarter. This sector shaved almost a whole percentage point off of economic growth; in a quarter where the reading was a negative 1.0%. Thus, while numbers from the housing sectors are beginning to improve, the net effect is still a drag on the economy.

The recovery in the housing market has finally arrived. It is more likely we are seeing a bounce off the bottom than a V-shaped recovery. Either way, home sales figures are moving up, inventories down, and even prices had the first good month in almost three years. Unfortunately, the improvement hasn’t made our economic woes of unemployment and negative GDP go away. The housing market, as it tends to do in most recessions, will continue to heal despite our unemployment and debt troubles but don’t expect that healing to bring a return to strong economic growth.