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| Recap of Week’s News—A Mixed Bag But With Hope of a Bottom for Sales |
| Written by Jonathan Smoke | |
| 06.27.2008 | |
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Discuss this article on the forums. (0 posts) What a week for news on the housing front. In one week we’ve had the Harvard Joint Center for Housing Studies release of their annual State of the Nation’s Housing Report, the release of Standard & Poor’s Case-Shiller Home Price Indices for April, the Commerce Department’s release of New Home Sales data, and the National Association of Realtor’s release of existing home sales data for May. The signals weren’t clear and since the financial markets were very negative this week, it would be easy to frame an opinion that the housing data were overwhelmingly negative. I would suggest that would be a bad interpretation. If anything, the mixed results could be construed as  more positive that perhaps we are seeing signs of a bottom in sales.The Harvard Study cast a pall on housing as journalists tried to digest the 40 page report. I’ve been digesting the report all week. I respect the analysis and most of their conclusions, but it must be understood that this paper is best at explaining what has happened and at looking at the long term trends. Their view of the short-term is cloudy at best. What most others took away from the executive summary were the following two lines: “With credit markets in such disarray, the for-sale housing inventory at record levels, and only small declines in interest rates, emerging from today’s housing slump could take some time….
If the economy slips into a severe recession, the prolonged contraction could drive down the sustainable level of housing demand….” The reality is that it is very hard to read current conditions, especially on an aggregated national scale in the context of such a published work. The most recent data included in the paper were from April. After all, conditions deteriorated last year much faster than last year’s report thought was possible. It is certainly possible for the opposite to occur without academics realizing as much until well after the fact. Furthermore, while I agree with all of the above points made in the paper, the probability that the economy is heading into a “severe recession” is not high. Outside of housing stats, other economic indicators do not suggest a severe recession is remotely possible. Granted, looking at consumer sentiment you’d think this was 1930. There’s much more to the report that deserves our attention in coming weeks, but for now, my recommendation is that it shouldn’t be used as a guide for interpreting the short term. Next up, home prices courtesy of S&P Case-Shiller’s readings. Not surprisingly the data were again headline-grabbing negative numbers. According to their release, steep declines continued in April: “…the prices of existing single family homes across the United States continued to worsen in April 2008, with all 20 MSAs now posting annual declines, 13 of which are posting record low annual declines, and 10 of which are in double-digits.”
We are trying to understand what is happening now. This is about April. And remember my point two months ago that the Case-Shiller indices are likely reflecting a more negative condition in most markets they measure because of overweighting of distressed sales of foreclosed homes. I’m no longer alone in raising this issue—see a nice piece on Inman news. But bottom line, we knew March and April were bad, and it was in April of last year that the credit market started to unravel. So looking at year-over-year price declines, especially if the data used is focused on big bubble markets and may overweight the effect of foreclosures, doesn’t really tell us anything significant about now. By the way, for the first time in months, three of twenty markets posted month-over-month increases in prices. On to the Commerce Department’s report on new home sales. They reported that sales of new homes in May 2008 were at a seasonally adjusted annual rate of 512,000, which was 2.5% below the revised April rate of 525,000. This level of sales is no doubt weak. The pace of sales is one of the lowest on record and as such, we have a relatively high level of supply of new homes still hanging over the market. But have conditions deteriorated? No! The 2.5% decline is well within a very wide margin of error. In other words, May was much like April. It could have even been better than the survey-based report indicates. We can’t be more precise. Also, the actual estimated number of new homes for sales declined, so had the pace not declined as well, the months’ supply wouldn’t have gone up its slight 1.8%. The last report came yesterday from NAR. There we learned that total existing home sales increased 2% to a seasonally adjusted annual rate1 of 4.99 million units in May from a level of 4.89 million in April. I prefer to focus on single family sales since we have longer history to analyze of single family only. This is the read on single family homes from the report: “Single-family home sales rose 1.6 percent to a seasonally adjusted annual rate of 4.41 million in May from 4.34 million in April, but are 14.5 percent below the 5.16 million-unit pace in May 2007. The median existing single-family home price was $206,700 in May, which is 6.8 percent below a year ago.”
So, in May sales improved over April but were still down some 15% compared to last year while existing home prices were down just under 7% nationally from last year. Again, does this indicate that things are getting worse or better? I would argue that it’s probably an indication of treading water but is more positive than negative about the current trend. Look at the month-over-month change chart. We still haven’t had a big jump up, but we certainly aren’t being dragged severely down either. Finally, let’s look at metrics that are more on the pulse of what is happening now. Since April, the average days on market for listings in the 25-city composite in our Sales Trends has been much lower than the first half of this year. Granted, other listing trends across multiple markets don’t indicate a solidly positive picture, but within many of the individual markets we cover, several listings-based market trends do indicate that sales activity is improving. Or at least it’s not getting worse. The patient has to stop bleeding before she can stabilize and eventually recover. 
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