Builders are finally seeing some stabilization in sales activity, sparked by higher affordability and the federal government’s homebuyer tax credit. Many are pushing for the tax credit to be extended past the current November deadline, with fewer eligibility requirements on top of it, but Congress has yet to act on the issue. August home sales data to be released at the end of the week will likely reflect an increase in purchase activity as the expiration of the tax credit draws near.

A number of industry groups support extending the tax credit, noting that it has been successful in reigniting home purchase activity as well as improving buyer confidence. Conversely, others suggest that a broadened and extended tax credit program would become too expensive, and that the artificial demand it creates is not sustainable. From a data perspective, tax credits and other programs designed to boost purchase activity make it difficult to determine how much of the improvement in the housing market is a result of the incentive, and how much is a natural result of rebound from historically poor conditions.

As we saw with the “Cash for Clunkers” program, incentive programs can indeed generate sales activity, but since that program ended, auto sales have slowed back down to a crawl. Some creative legislation that phases out the homebuyer tax credit over time instead of a strict cut-off may assist with such a hangover, but realistically the housing market needs to eventually find a new equilibrium based upon a solid foundation of demand that is not dependent upon government subsidy.

Major stock indices all finished roughly flat to start the week on Monday. The broader S&P 500 index declined a slight 0.34% to 1,065. The Conference Board reported another increase in its leading economic index in August. Leading economic indicators have now reported increases for five consecutive months which suggests that economic conditions will continue to improve going forward. Lower mortgage rates also continued to boost builder confidence over the past month with the NAHB Housing Market Index increasing to its highest levels in September since May 2008.

Leading economic indicators posted gains for the fifth straight month in August. The leading index is now at its highest levels since December 2007. The leading index recorded a reading of 102.5 in August which is a 0.60 point gain from July levels. This month's increase was driven by a jump in vendor performance, rising stock prices, and increases in both the index for consumer expectations and building permits.

The consumer price index in August showed consumer prices increasing due to higher energy and transportation costs. However, inflation on the consumer level remains well-contained and below the historical rate. The consumer price index jumped 0.4% from the previous month on a seasonally adjusted basis while the core CPI, which excludes food and energy, increased 0.1%. On an unadjusted basis, headline CPI fell 1.5% from its year ago levels while core CPI increased 1.4% year-over-year in August. This is the sixth straight month that headline consumer prices have recorded a year-over-year decline. Consumer prices had fallen at their quickest annual rate since 1950 last month in July. Core prices recorded its tamest annual increase since February 2004.

The Housing Market
National average mortgage rates dropped slightly from the previous week to 5.04% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on September 17th. This is the third straight week that rates have declined and the lowest they have been since the end of May. In the week ending September 11th, the MBA’s seasonally-adjusted purchase index plunged 10.3 from the previous week and was down 28.29% compared to the same time last year. This was the largest weekly drop for the purchase index since mid-April and the largest annual drop since early May. Even lower mortgage rates were not able to spark purchase mortgage application activity last week.

New home sales increased for the fourth consecutive month in July which further suggests that conditions in the housing market may finally be stabilizing. Seasonally-adjusted new home sales jumped 9.6% from the previous month to an annual rate of 433,000 units. This followed a 9.1% increase in new home sales just last month in June. New home sales for the previous three months were also revised higher by 34,000 units. The annual pace of new home sales is now at their highest levels since September.

In July, median new home prices declined slightly to $210,100 from an upwardly revised price of $210,400 in June. Median new home prices are down 0.1% from last month and are 11.5% lower than the same year-ago period. Increased competition from the existing homes market, especially foreclosures and short sales, has caused median new home prices to fall back to their lowest levels since March. Median new home prices have now recorded seven straight months of year-over-year declines.

In July, new home inventories declined to 272,000 from a June figure of 281,000 on a non-seasonally adjusted basis. The number of new homes for sale continues to decline and have not recorded a monthly increase since May 2007. New home inventory, on a non-seasonally adjusted basis, is at its lowest levels in over 14 years. Seasonally-adjusted inventory of unsold homes have declined for 27 straight months to 271,000 units which is the lowest it has been since March 1993. Declining inventory levels pushed months of inventory back to its lowest levels since April 2007. Seasonally-adjusted months of inventory declined from last month to 7.5 months of supply on a seasonally-adjusted basis which is down from 8.5 months of inventory in June.

Existing home sales continued to rise in July buoyed by increased affordability and the homebuyer tax credit. Annualized sales of total existing homes in July jumped 7.2% from June levels to 5.24 million units. This was the first time since 2004 that existing home sales have posted four consecutive months of increases. Sales of existing homes are also up 5.0% from their year-ago levels of 4.99 million units which is the first time since February 2006 that existing home sales have not recorded an annual decline. Existing single-family home sales increased 6.5% from last month to 4,610,000 units while condo and co-op sales were up 12.5% from June to 630,000 units.

Median existing home prices in July declined to $178,400 from $182,000 in June. Existing home inventory increased from the previous month probably due to homes being relisted as activity has picked up with the expiration of the homebuyer tax credit approaching. Inventory of existing homes jumped 7.35 percent to a preliminary 4,091,000 units from 3,811,000 units in June. These are the highest levels of existing home inventory on the market since November. Months of existing home inventory remained unchanged from the previous month as the increase in inventory levels were offset by higher sales activity. At the current sales pace, there are 9.4 months of supply of existing homes on the market. Months of existing home inventory are now at their lowest levels since December.

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