| Sales Recovery Is What Most Markets Need |
| Written by Jonathan Smoke | |
| 11.25.2008 | |
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Discuss this article on the forums. (0 posts) With the broad financial market and consumer sentiment extremely negative in October, existing home sales reversed the September uptick to deliver month-over-month and year-over-year declines. In a report released yesterday, the National Association of Realtors reported that total existing-home sales fell 3.1% to a seasonally adjusted annual rate of 4.98 million units in October from a downwardly revised pace of 5.14 million in September. The October level was 1.6% below the 5.06 million-unit level in October 2007. The same report revealed that the total existing home supply at the end of October fell less than 1% to 4.23 million existing homes available for sale, or a 10.2-month supply. October median prices fell 11.3% from a year ago to $183,300. The NAR chief economist, Lawrence Yun, used the latest sales readings to reinforce the need for government stimulus for housing: “Many potential home buyers appear to have withdrawn from the market due to the stock market collapse and deteriorating economic conditions,” he said. “We have favorable affordability conditions, but we need more than that to give buyers with jobs the confidence they need. This is why a housing stimulus is so critical now to encourage more buyers to draw down the inventory and stabilize home prices. Without home price stabilization, there will not be an economic recovery.”
I agree with Yun’s premise that we need improved demand for homes in order to stabilize prices. While the month’s supply continues to bob around at above average rates, the elevated supply is a factor of dramatically decreased demand. When normal demand reemerges we will see stabilized pricing. Declining home prices began the crisis in bubble markets as speculators dumped (or tried to dump) investments thus simultaneously decreasing demand and increasing supply. The resulting home price declines started the subprime meltdown, which in turn sapped credit and confidence. Diminished credit and confidence have impacted every market, causing severe downturns in sales in many markets. Our research suggests that for markets with high relative sales risk, the downturn in sales is harder to recover than pricing. The above market risk matrix of the largest 100 MSAs (by households) shows the relative historic volatility of home sales on the vertical axis and volatility of home prices on the horizontal axis. The whole market has been fixated on markets that experience extreme price volatility. The MSAs labeled in red are the 10 cities covered by Case-Shiller that are traded on the CME. Notice than only one, Chicago, has relatively lower home price risk. The rest like Las Vegas, Los Angeles, San Diego and Miami are the poster children for home price risk. But it’s the markets in the upper half of this matrix that will have the toughest time recovering as these markets are most susceptible to huge swings in sales. Most of the markets outside of Texas have indeed seen dramatic declines in sales. Based on a review of individual market recovery periods, we’ve found that sales take longer to recover on average than prices. So it is ironic that I agree that we need increased demand to stabilize prices as prices normally recover more quickly. But this is not a normal period we are living through. 
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