The result of a foreclosure typically leads to a bank-owned sale of a property which in most cases will be for considerably less than what the original buyer paid for it before it was seized.  Millions of these instances are taking place across the country which will surely have an adverse effect on home prices in their respective locales.  So in this week’s data feature, we look at how REO activity affects the price of regular resale properties that are not bank-owned.  The areas with the largest nominal number of REO sales and the regions that experienced the largest annual increases in REO activity all saw median existing home prices lag the national average during the first quarter.  According to Housing IntelligencePro, Phoenix and Miami had the most REO sales nominally out of all the MSA’s in the country.  Median existing home prices, when excluding the price of bank-owned properties, fell 5.8% and 6.2% respectively.  Coincidentally, Miami also recorded the second largest year-over-year increase in REO sales for the first quarter behind only Tampa.  Home prices in Tampa declined 2.6% from the first quarter of last year.

In these figures, we learn that foreclosures that ultimately lead to REO sales will continue to weigh on home prices.  Until the wave of defaults subside, do not expect any marked improvement in overall price performance.  Current estimates suggest that will likely not happen until at least the middle part of next year.

In broader data news, housing data released this week continued to show sluggish demand despite rates falling back down to near record-lows.  Home sales in both the new and existing home markets declined in May.  Although declining inventory levels and stronger pricing for both housing markets in the midst of weaker demand are positive takeaways, it remains quite discouraging that better labor market conditions, steady economic growth, and low mortgage rates cannot spark buyer enthusiasm.

The Federal Reserve concluded a two-day meeting earlier this week with no real surprising news.  The Fed kept their target Fed Funds rate unchanged at an all-time low range of 0-0.25%.  They also lowered growth forecasts through next year and increased forecasts on unemployment into 2013.  They also reiterated that some of the slowdown in growth is short-term and economic expansion should pick up going forward.  Falling oil prices this week have also helped ease some concerns regarding inflation which the Fed also stated will likely be short-term and will dissipate in the months ahead.

Weaker economic data overshadowed a potential resolution in the Eurozone debt crisis and sent U.S. equity prices back to their losing ways this week.  After snapping a 6-week losing streak last week, the broader S&P 500 index is on pace to post another weekly decline with an hour left in the trading day on Friday.  The index is down 1.1% in trading so far today and will end the week down 0.2% if it remains at current levels.  This will be the seventh weekly decline in eight weeks if losses hold.  The current weakness on Wall St. further shows the lack of confidence in the U.S. economy right now.

The Economy
Final estimates for first quarter gross domestic product came in slightly higher than preliminary estimates.  The data still showed that economic growth slowed to begin the year.  The U.S. economy grew 1.9% during the first quarter which is stronger than the 1.8% pace in the preliminary first quarter report but noticeably weaker than the 3.1% growth during the previous quarter.  This is the slowest pace of growth since the second quarter of last year.  However, this marks the seventh straight quarter that the U.S. economy has expanded.  Improvements in trade activity and business spending offset declines in government spending to push economic growth slightly higher.

First-time unemployment claims increased by 9,000 to a seasonally-adjusted figure of 429,000 in the week ended June 18th from an upwardly revised figure of 420,000 last week.  Jobless claims bucked the downward trend this past week and reverted back to reflect sluggish labor market conditions.  Although initial jobless claims have drifted lower since hitting their recent highs in April, they remain at stubbornly elevated levels that will make it difficult for any noticeable improvement in the labor market.

Housing Market
Housing demand remains sluggish despite mortgage rates falling back down to near all-time record lows over the past several weeks.  Both new and existing home sales in May recorded declines from the previous month.  However, home prices in both housing markets were able to hold steady in spite of weaker demand.

New home sales in May declined 2.1% from the previous month to a seasonally-adjusted annual rate of 319,000 units.  However, new home sales in the previous three months were revised higher by 11,000 units.  New home sales are still up 13.5% from the 281,000 units in May 2010 but are 15.2% lower than the May 2009 figure of 376,000 units.  It is important to keep in mind that sales activity this time last year fell to near record-lows after housing demand dried up following the expiration of the federal homebuyer tax credit at the end of April.

New home prices held steady despite weaker demand last month.  In May, median new home prices increased to $222,600 from an April figure of $217,000.  Although this is the highest median new home prices have been since January, they remain at historically low levels.  Median new home prices had declined for the first four consecutive months to begin the year before rebounding in May.  New home prices are down 3.4% from this time last year but 0.1% higher than they were this time two years ago.

Due to higher median new home prices, the new home affordability ratio recorded its first monthly decline of the year in May.  The new home affordability ratio fell to a reading of 58.7% in May compared to a figure of 59.1% in April.  However, affordability in the new homes market remains at historically high levels.

New home inventory levels reached another new all-time record low last month.  In May, new home inventories declined from the previous month to 167,000 units on a non-seasonally adjusted basis compared to 171,000 units in April.  New home inventory has now recorded 45 straight months of declines and has not recorded a monthly increase since May 2007.  New home inventory on a seasonally-adjusted basis declined to 166,000 units in May from an April figure of 172,000 units.  Months of inventory declined slightly in May due to the continued drawdown in new home inventory levels which offset a slowdown in sales activity.  Seasonally adjusted months of new home inventory fell to 6.2 months in May from 6.3 months in April.  This is the least months of new home inventory on the market since May 2006.

Existing home sales declined for the second straight month in May.  Resale activity fell 3.8% from the previous month to a seasonally-adjusted annual rate of 4.81 million units.  Existing home sales were down 15.3% from May of last year which marks the fourth straight month that resales have recorded year-over-year declines.  This is the lowest seasonally-adjusted annual sales rate for existing homes since November.  Existing single-family home sales declined 3.2% from last month to 4,240,000 units while condo and co-op sales fell 8.1% from April levels to 570,000 units.

Median existing home prices in May increased to $166,500 from $161,100 in April.  This is the third consecutive month that home prices have increased.  Existing home prices had reached their lowest levels in nine years in February before rebounding in the past three months.  The median price for an existing home is down 4.6% from May of last year which marks the sixth consecutive month that existing home prices have recorded year-over-year declines.

Higher home prices continued to push affordability lower in May.  The existing home affordability ratio declined for the fourth straight month after reaching all-time record highs in January.  The existing home affordability currently stands at 69.8% in May compared to 70.4% in April and 66.5% in the same year-ago period.

Existing home inventory in May declined 1.04% from last month to a preliminary 3.72 million units.  This is the first time since January that the stock of existing homes on the market for sale has declined.  A slowdown in sales activity caused months of existing home supply to increase to 9.3 months in May compared to 9.0 months in April.  This is the most months of existing home inventory on the market since November.

National average mortgage remained unchanged from the previous week at 4.50% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on June 23rd.  Rates remain at their highest levels since the beginning of the month although they are still at historically low levels and have now averaged below 5.0% for 18 consecutive weeks.

In the week ending June 17th, the MBA’s seasonally-adjusted purchase index declined 2.77% from the previous week but increased 4.44% compared to this same time last year.  The purchase index has been teetering around the same range for the past nine weeks.  This marks the fifth straight week that the purchase index has recorded an increase from the same time last year.

For additional market-level data and analysis please visit our website at http://www.housingintelligence.com.  For more detailed information on New Home Sales and other indicators, please visit the following links: