Earlier today, the longest tennis match in the history of the sport finally came to an end after an unprecedented 11 hour slog that played out over 3 days at Wimbledon.  Comparing an epic tennis match to the housing market may be a stretch, but seeing updates on the exhausting marathon was reminiscent of the seemingly never-ending challenges the real estate industry has endured over the past several years.  And similar to the roller coaster of match points and held serves, just when it appears the housing market is on the brink of emerging victoriously from the downturn we wind up back at deuce.  Most recently, both new and existing home sales posted disappointing declines in May following the expiration of the federal homebuyer tax credit at the end of April.

Activity in the existing home market remained somewhat elevated while new home sales plunged to all-time lows.  The primary difference between the two measures is that existing home sales reflect settled transactions, while the Census new home sales information reflects sales contracts.  The existing home figures are a likely result of some of April’s tax credit sales closing during the month, but we can expect a larger increase of settlements in June.  Meanwhile, the Census new home sales is a more foreboding picture, as the substantial drop-off would suggest the demand in April was largely pulled forward from subsequent months. 

Normally, the plunge in new home sales would be setting off alarms, but due to the expiring tax credit it was already largely expected.  Also, Census new home figures are often subject to large revisions.  In May, there was a plus/minus 9.9% standard error which means we could see some significant revisions in coming months.

Despite the dismal sales activity, there were some positives to take out of last month’s new homes report.  Lower mortgage rates and a slight decline in new home prices pushed new home affordability to a new record-high which will make it more competitive with existing homes in the future.  The new home affordability ratio is now only a little more than four percentage points higher than the existing home affordability ratio.  This is the smallest gap in affordability between the two since August 2008.  It is also a positive sign that new home inventory also improved last month despite slower sales activity.  The number of new homes for sale is now sitting at an all-time low which will help stabilize new home prices going forward.

Generally speaking, the new homes market is on firmer ground than it was this time last year even though both sales and prices are both down.  With inventory at more manageable levels, builders are able to respond more acutely to market trends.  Even though new home prices are still experiencing some pressure, land values have stabilized which also puts builders on more solid footing than a year ago.

The Economy
Initial unemployment claims declined from the previous week to a six-week low in the week ending June 19.  First-time jobless claims fell by 19,000 from the previous week to a seasonally-adjusted figure of 457,000.  The four-week moving average for initial jobless claims fell 1,500 from last week to a figure of 462,750.  The drop in unemployment claims is a positive sign leading up to next week’s employment situation report.

Following upward revisions for April, leading economic indicators in May increased again and have not posted a monthly decline since April 2009 which suggests that economic growth can be expected to continue in the coming months. The leading index increased to a reading of 109.9 in May which is a 0.40 point gain from April levels.  Declines in building permits, stocks and vendor performance were offset by gains in the index for consumer expectations, money supply and average workweek.  Although the leading index continues to increase suggesting further growth, slower housing activity coupled with concerns in the Euro-zone may pressure the U.S. economy in the coming months.

Housing Market
Home sales in both the new and existing home markets posted declines in May as the expiration of the federal homebuyer tax credit at the end of April caused a significant drop in demand.

New home sales plunged 32.7% in May to a seasonally-adjusted annual pace of 300,000 units.  New home sales are now at their slowest annual pace on record.  New home sales for the previous three months were also revised lower by 99,000 units.  New home sales experienced a surge in activity in the past couple of months because of the federal homebuyer tax credit but fell off precipitously in May following its expiration.  Median new home prices in May declined slightly to $200,900 from an upwardly revised price of $202,900 in April.  Prices are down 1.0% from the previous month and are 9.6% lower than they were this time last year.  Median new home prices are now at their lowest levels since December 2003.

In May, new home inventories declined from the previous month to 213,000 units on a non-seasonally adjusted basis.  New home inventory has now recorded 33 straight months of declines and has not recorded a monthly increase in inventory levels since May 2007.  Seasonally-adjusted inventory of unsold homes also declined in May to 213,000 units.  New home inventory levels are currently sitting at new all-time lows.  However, months of inventory jumped last month due to a significant drop in sales activity.  Seasonally-adjusted months of inventory jumped to 8.5 months in May from 5.8 months in April.  Months of inventory are now back to its highest levels since June of last year.

Existing home sales eased 2.2% from April levels to 5,660,000 units.  Existing single-family home sales declined 1.6% from last month to 4,980,000 units while existing condo and co-op sales fell 6.8% from April levels to 680,000 units.  Existing home sales are still up 19.2% from the same year-ago period and have now recorded year-over-year increases in 11 consecutive months.

Median existing home prices in May increased again to their highest level since July 2009.  The median sales price for an existing home increased to $179,600 from a revised $172,300 in April.  Median existing home prices are up 2.75% from May of last year.  This is the second straight month that existing home prices have recorded a year-over-year increase.

Existing home inventory dropped in May following the expiration of the federal homebuyer tax credit which helped boost sales and reduce the supply of existing homes on the market.  Existing home inventory declined 3.4% from the previous month to 3,892,000 units.  This was the first time in four months that existing home inventory posted a monthly decline.  Existing home inventory levels are still 1.1% higher than they were this time last year.

National average mortgage rates declined from the previous week to a new all-time low of 4.69% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on June 24th.  Rates have recorded declines in two out of the past three weeks and have been steadily drifting lower since the end of April.

In the week ending June 18th, the MBA’s seasonally-adjusted purchase index declined 1.17% from the previous week and was down 36.53% compared to the same time last year.  The purchase index has recorded declines in six out of the past seven weeks and continues to suggest weaker demand in the housing market following the expiration of the federal homebuyer tax credit at the end of April.

For market-level data and analysis please visit our website at http://www.hwmarketintelligence.com.  For more detailed information on the indicators discussed in this key indicator alert, please visit the following links: