March 23, 2009

By Lawrence Yun, Chief Economist

Existing home sales increased 5.1 percent in February to a seasonally adjusted annual rate of 4.72 million units. But the increase should be interpreted as a rebound in sales from a very weak January activity of 4.49 million sales pace. Compared to the same month one year ago, existing home sales were down by 4.6 percent.

Regionally, home sales rose in all four major regions over the month:
• In the Northeast, existing home sales increased 15.6 percent
• In the Midwest, sales rose 1.0 percent
• in the South, sales increased 6.1 percent
• in the West, sales increased 2.6 percent

Month-to-month changes are volatile. A trend is better assessed from changes from one year ago. Consistently the West region has been shining and it is the only region with a year-over-year increase in sales, which in the latest month showed a 30.4 percent gain. Sales in Southern California and Las Vegas have been essentially doubling from one year ago. It marks the eighth straight months of year-over-year increase in sales in the West region. The latest sales activity of 1.20 million in the West region is well above the cyclical low point of 870,000 set in October 2007. But the current sales still fall short of the peak level of 1.68 million in summer of 2005. Perhaps, that is a good thing in terms of not permitting unqualified buyers from entering the market. Buyers are coming back enticed by the big price cuts in the region. The median price of transacted homes in the West was 30 percent below one year ago.

The areas with strong buying activity, there have been frequent occurrences of multi-bidding. For the first time in the current down cycle, the median listing home prices are beginning to rise in some of these markets. Does it mean that median transaction prices will also begin rising soon?

The national median home price in February was $165,400, which is a decline of 15.5 percent from one year ago. January home price was revised lower to $164,800 (from $170,300 that was reported previously). The latest month price decline is the second largest price decline after January’s 17.5 percent price decline since NAR data tracking in 1968. The current price would be comparable to the level in 2003.

Regionally, the West experienced the biggest drop but declines were pretty much everywhere across the country. Prices were lower by 4.8 percent in the Northeast, 7.8 percent in the Midwest and 10.0 percent in the South. From other data sources, there have been some markets with price increases including the Dakotas and many markets in Texas, but today’s data do not have new information at this granular level.

Inventories at the end of February rose 5.2 percent to 3.798 million home available for sale. The past 10-year average in inventory from January to February was 5.1 percent, so the latest rise suggests nothing more than a normal seasonal build up in inventory after the holiday season. Despite more homes on the market, the months supply of inventory remained unchanged at 9.7 months due to higher home sales. Inventory had peaked at 4.6 million and at 11 months supply in the summer of last year. Based on past seasonal patterns, expect inventory to be rising at least through the summer. The question is whether demand will be rising to keep the months supply consistently at under 10 months. The inventory needs to get to 7 to 8 months supply before home prices show sign of stabilization.

Inventory is getting helped as homebuilders have drastically cut back production. Recent months housing starts have been at around 500,000, down significantly from over 2 million new home additions during the housing boom years and also down from the long-run average housing starts of about 1.5 million. In normal years, with the U.S. population growing at 3 million each year, the country needs to add about 1.5 million new housing units. The raw new home inventory count 342,000 for new homes is at its lowest since July of 2003. That right, new home inventory is at the lowest point in over five years and will continue to fall because so few new homes are being built.

Because of much higher difficulty in obtaining mortgages for condominium properties, single-family market has been faring less worse. The latest month data shows single family home sales rose 4.4 percent and condo sales surged 11.4 percent over the month. But if ignoring the month-to-month volatility, a clear pattern emerges. From one-year ago, single-family sales fell by only 3.6 percent, while condo sales fell 13.1 percent. Also single family home prices fell 15.0 percent while condo prices declined 18.7 percent.

We have bifurcated markets. Areas with large concentration of distressed sales have prices tumbling while areas with little foreclosures have seen much less price declines. As in prior months about 45% of all home sales are distressed sale properties involving either foreclosures or short-sales. Orange County, California, where buyers have come back in a strong way, interestingly is reporting reduced distressed sales and distressed inventory for the first time in the current market cycle.

Rising home sales – even if they are due to distressed property sales – is a good news. These distressed homes need to be cleared off the market in order for the housing market to make a sustainable recovery. The housing stimulus of homebuyer tax credit and historically low mortgage rates should further help bring buyers to the marketplace. Still, we’ll need to wait till the early summer to truly assess the impact of the housing stimulus package because the home buying process takes about 3 to 5 months.

Lower prices and historically low mortgage rates have pushed housing affordability conditions to the highest mark since the data creation in 1971. The current affordability index is touching 170 compared to around 130 in the years leading up steadily rising home sales in 2001 to 2005, and 108 in 2006 when home prices were peaking. In other words, buyers never had a better time to enter the market than now. The underwriting standards are much tougher now than before, but those who qualify are in the best position to lock in low rates and have the upper hand in price negotiations.

The affordability index is based on median income and median home price. An individual personal affordability index can be even a lot higher if people stay within budget. The old hard earned way of moving up in America involved people buying a starter home that was not a dream home but the one within the budget. Homeowner then traded up as financial and family circumstances changed.

One statistical technical issue to be mindful of is that seasonal adjustment factors tend to be volatile in the winter months regarding housing data. The presence or absence of extreme cold and substantial precipitation can impact actual sales though they do not get picked up as easily in statistical seasonal factors. Only after few years, we can know for sure the true seasonal adjustment factors. But that adjustment has an equal chance of an upward change as a downward change. In other words, today’s data of rising sales are likely to stand, though it is more susceptible to bigger revisions due to winter months.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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