Economist's Commentary: May 23, 2008
April Existing Home Sales
By Lawrence Yun, Chief Economist
Existing home sales fell by one percent in April nationally. Like the weather, there continues to be large local market variations. Sales rose 6 percent in the West and fell 6 percent in the Midwest.
Today's data also reflects something I have not seen over the past two years: several markets seeing a substantial rise - to the tune of 20 percent or better - in home sales on a year-over-year basis. The notables include Detroit, Ft. Myers, Las Vegas, Orange County, Riverside, San Diego, and Sacramento. These are also the markets that have experience substantial price declines - to the tune of 20 percent of more. Improved affordability conditions have enticed buyers to pick up properties on the cheap.
Measurable sales declines were in the regions where things were holding up well just last year. Seattle and Portland in the Pacific Northwest, Charlotte and Raleigh in the Carolinas, Salt Lake City, and the Texas markets have seen sales decline. Home prices in these regions are still moving up.
Inventory rose to the second highest level ever with 4.55 million homes listed for sale - which is an increase of 10.5 percent from the prior month (or by 434,000 units). In the latest month, the inventory represents 11.2 months supply at the current sales pace. Part of the rise is due to the normal seasonal increase from March to April. More new inventory reached the market over these two months than during any other month. Irrespective, the high inventory levels are uncomfortable. It is also a signal to many home sellers to be more realistic about pricing to attract buyers. Unless you have immaculate, unique home features, don't even bother listing if you are not going to concede on prices in today's market.
Because of high inventory, home prices continue to fall in most parts of the country. The national median existing home price in March was $202,300, which is a decline of 8.0% from one year ago - the second largest price decline in the NAR data series going back to 1968. Regionally price decline was the sharpest in the West region, falling 16.7% … which again explains the sales increase in the region. As we should know by now, some of the price declines are not genuine housing value declines but just the fact that more smaller-sized and lower-priced homes are being sold. The share of transaction requiring jumbo loans have been low while there has been a substantial activity related to the subprime loan fall out. In the neighborhoods with very little exposures to subprime loans, they are holding on very well. In neighborhoods with extensive subprime loans, price declines have been sharp and severe.
Let's also review more broadly and from a historical perspective. Today's sales are at 4.89 million or essentially 5 million unit sales pace. In fact the average sales pace following the credit crunch in August 2007 is 5 million. Sales were running at about 6 million before the credit crunch. Sales at peak reached 7.1 million in 2005.
The current soft sales pace reflects an overnight disappearance of subprime loan originations. Also we have clearly removed excessive speculative/investment home purchase activity. I estimate that about 1 million home sales were speculative home buying during the boom. Well, sales are not 1 million below the peak, but over 2 million. The current soft -though stable - sales also do not match up with the fundamentals of population, jobs, low rates, and affordability. Sales are trending at 1998 levels. Today compared to 10 years ago, we have 25 million people living in the country with over 10 million more jobs. Home prices are higher compared to 10 years ago, but so is income. And at today's historically low mortgage rates, the affordability conditions essentially match that of 10 years ago. In short, today's sales activity is far below what can be expected based on fundamentals. We are overshooting downward due to excessive market pessimism today following several years of wild excessive optimism during the boom years.
We also have to be mindful that we are looking in the rear view mirror. Today's data reflect activity in April. Today is towards the end of May. One terrific development in the past two weeks has been the improving conditions on mortgage availability. Fannie Mae and Freddie Mac have both done away with a "declining market policy" which had imposed a surcharge and higher down payment to get a loan. Interest rates on conforming jumbo loans have come down significantly after Fannie and Freddie began to purchase these loans.
Given these developments, I forecast improving sales conditions in the second half of the year.
The detailed data tables are here.
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