The backlog of foreclosed properties is one of the most troubling obstacles in the way of housing recovery.  Our data feature this week, courtesy of Housing IntelligencePro, provides an update of just how deep the foreclosure hole is; in other words, at current annualized monthly rates of REO sales (foreclosed properties being sold back into the marketplace), how many months will it take to absorb the overhang of distressed properties?  After peaking at 38.4 months in November of 2007, the months of supply steadily decreased until hitting a recent trough of 15.0 in June of 2010.  The figure has since been creeping upward again, reflecting the renewed pace of foreclosure activity over the summer and fall months of 2010.  As we mentioned last week, foreclosures dropped off in recent months due to the temporary freeze by some major banks, but REO sales have subsided as well, which may also have a link to the foreclosure situation based on the hesitancy of banks to proceed with reselling foreclosed properties that may be backed by questionable paperwork.  As a result, the months of supply of foreclosed home has been embarking on a disappointing, upward trend.  Hopefully the spring selling season will help mitigate the recent rise with healthier sales volume, but foreclosures are expected to increase as well, keeping the 2011 outlook for housing a murky picture.

In broader housing news, there are some moderately encouraging signs from recent data releases.  A jump in existing home sales along with the increase in building permit activity shows there is still some life in the housing market.  After falling into a dismal lull following the expiration of the federal homebuyer tax credit, slowly improving economic conditions and low mortgage rates have spurred an incremental dose of activity. 

There was also some moderatey positive news on the labor front this week.  First-time jobless claims reversed an upward trend from the past two weeks to fall by 37,000 to 404,000 last week.  While still elevated, the decline in unemployment claims was a welcome sign following an unexpected jump the week prior.  Leading economic indicators pointed towards stronger economic activity going forward with gains paced by an increase in building permits, rising stock prices, and improving labor market conditions.

The Economy
The Leading Economic Indicator Index increased to a reading of 112.40 in December which is a 1.10 point increase from November levels. The index is up 3.60 points from its levels six months ago when it stood at 108.8 in June. This is the sixth consecutive month that the leading index has increased. This was the second straight month of significant gains for the leading index with momentum driven by sharp declines in initial unemployment claims, rising stock prices and building permit activity, and an increase in consumer sentiment.  Eight out of ten components in the leading index posted monthly gains while six out of then posted increases from its levels six months ago.

After rising for two straight weeks, first-time unemployment claims dropped by 37,000 to 404,000 for the week ended January 15th.  This was welcome news on the labor front as initial claims surged by a combined 50,000 in the previous two weeks.  This quickly dispelled the trend that labor market conditions were again worsening and returned jobless claims back to a downward trend following the two-week spike.  However, we would still have to see first-time job claims average under 400,000 on a steady basis to chip away at higher unemployment figures.

Housing Market
Existing home sales surged 12.3% from the previous month to a seasonally-adjusted annual rate of 5,280,000 units.  This was the second straight month that existing home sales have increased and the highest sales activity has been since May.  However, sales still remain slightly lower than they were this time last year, down 2.9% from December 2009 levels when the seasonally-adjusted annual sales rate stood at 5,440,000 units.   It is important to note that sales activity during this time last year was propped up due to the federal homebuyer tax credit.

Stronger sales activity did not positively impact existing home prices last month.  The median price of an existing home fell slightly to $168,800 from a downwardly revised November figure of $170,200.  Existing home prices have now declined for six straight months and are at their lowest levels since February 2010.  Despite lower prices, existing home affordability declined for the second straight month due to higher mortgage rates in December.  The existing home affordability ratio declined to a reading of 68.3% from 69.2% in November.

Inventory of existing homes declined 4.2% to a preliminary 3,560,000 units from 3,717,000 units in November.  This is the fourth straight month that existing home inventory has declined and the lowest it has been since February.  However, December's inventory level is still 8.4% higher than the 3,283,000 units of inventory on the market during the same year-ago period.  Better sales activity and lower inventory levels helped push months of inventory down to 8.1 months in December which is the lowest it has been since March.  Months of inventory has declined for five straight months now after reaching an all-time record high of 12.5 months in July.  However, months of inventory still remain well above the 5-6 month range which is typical in a healthy housing market.

U.S. housing starts fell 4.3% in December to a seasonally-adjusted annual rate of 529,000 units.  The declined was mainly attributed to weakness in the single-family segment.  Single-family housing starts fell 9.0% from the previous month to a seasonally-adjusted annual rate of 417,000 units while multi-family starts surged almost 18%.

Building permit activity, however, saw significant gains in December which suggests that stronger homebuilding activity going forward.  Total building permits jumped 16.7% from last month to a seasonally-adjusted annual rate of 635,000 units in December.  This was the largest monthly increase for building permits since June 2008 and the highest level of permit activity since March 2010.  Both single and multi-family permit activity contributed to the gains.  Single-family permit issuances increased 5.8% to a seasonally-adjusted annual rate of 440,000 units while multi-family issuances jumped over 52% to seasonally-adjusted annual rate of 195,000 units. 

National average mortgage rates increased from the previous week to 4.74% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on January 20th.  This is the first time rates have increased in the past three weeks.  The average rate on a 30-year fixed mortgage has now averaged under 5.0% for 37 straight weeks.

In the week ending January 14th, the MBA’s seasonally-adjusted purchase index declined 1.87% from the previous week and was down 15.34% compared to the same time last year.  This is the third straight week that the purchase index has declined and the lowest it has been since mid-November.

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