September 1, 2010

Ken Fears
Manager, Regional Economics

Home sales accelerated in the second quarter of 2010—relative to the same period in 2009—driven by a stampede of home buyers clambering to buy a home before the expiration of the Federal tax credit. The nation-wide surge in sales drove up prices and confidence, both of which helped mitigate the pipeline of new foreclosures. However, more current economic data suggests that a slowdown in the economy and a slump in home sales could curtail this early pattern of growth.

As expected, sales jumped in the second quarter compared to a year earlier as home buyers rushed to capitalize on the home buyer tax credit prior to its expiration. Sales were higher in the second quarter of 2010 in 43 states and the District of Columbia. Sales slipped in California and Arizona, but sales in these markets surged in 2009 and remained elevated, so despite the decline, sales were at a strong level. Michigan experienced only a slight decline at 0.4 percent. The Northwest saw the largest increase as a region, followed by the Northeast and Middle Atlantic, but North Dakota experienced the strongest jump for any state at 51.9 percent—a reflection of uniquely strong economic conditions there.

The $8,000 tax credit was not the lone driver of home sales this spring. A modest economic recovery helped to create jobs in markets spread across several section of the country including the Northeast, Southeast, Southwest and parts of the Midwest. Several markets in Western New York and Pennsylvania also added jobs. Roughly a third of the 160 metro areas tracked by NAR Research experienced an increase in employment over the 12-month period ending in June. However, most of these markets saw gains of less than 1.0 percent. Many of the markets that experienced an expansion of their employed work force were in areas that had been slow to recover from the 2001 recession including Lansing, Saginaw, Ft. Wayne and Elmira as well as several markets in Texas, including Austin, Dallas, and El Paso. Though small in scale, the national turnaround in employment is important as it helps with both consumer confidence and home sales.

The robust pace of sales in the second quarter extended and expanded the pattern of price stabilization from the first quarter. The fourth-quarter change in the median home price rose in 100 of the 155 markets reporting data in the second quarter up from 91 in the first quarter. This trend of growth was clustered with many markets in the Midwest, New England, and California reporting price stabilization. Four markets in California reported double digit gains including San Jose-Sunnyvale-Santa Clara, San Diego-Carlsbad-San Marcos, San Francisco-Oakland-Fremont, and Riverside-San Bernardino-Ontario, while Phoenix-Mesa-Scottsdale also reported a double-digit gain. Several market in Michigan and Ohio including Akron and Lansing reported strong gains from weak median prices in the second quarter of 2009. Price appreciation was relatively widespread, but markets hardest hit in recent years experienced the strongest price appreciation, along with markets where the $8,000 tax credit is a high percentage of the median price.

The widespread stabilization of prices, coupled with the modest improvement in employment growth, paid dividends elsewhere in the real estate arena. The 90-day delinquency rate on prime mortgages fell in 67 of the 160 markets monitored by NAR Research over the 6-month period ending in May. A total of 97 of the 160 markets covered experienced a decline in their 60-day delinquency rate. Many of the markets with declining delinquencies in May (pictured above) were concentrated across the Midwest and Texas where foreclosure rates are some of the lowest in the country (pictured below). The Northeast, Mid-Atlantic, and Northwest regions have also enjoyed relatively low foreclosure rates, but delinquency rates are either rising or giving mixed signals in those areas. On a positive note, delinquency rates in a few of the hardest hit markets like Phoenix-Mesa-Glendale, Sacramento-Arden-Arcade-Roseville, and Riverside-San Bernardino-Ontario eased in May. Foreclosure rates across Florida are among the highest in the country and delinquencies continue to rise statewide with the exception of Cape Coral-Fort Myers, which also eased in May.

This pattern of falling delinquencies suggests that the foreclosure rate will likely begin to stabilize and possibly dip for these markets in the future. The total inventory of homes on the market is large in most markets, but a decline in the flow of new foreclosures is the first step in the process of capping this source of new inventories and solidifying a price bottom. However, continued improvement in employment and prices are necessary to sustain this trend, or it could easily turn around.

The second quarter brought many positive signs for the national housing market. However, a substantial Federal stimulus was necessary to ignite this fledgling recovery. Continued job creation, consumer spending, and improved consumer confidence are necessary to foster an expansion. A potential stabilization in foreclosures in the near future could help confidence, but a drop off in demand for housing in the third quarter could roll back the process of price stabilization and economic growth. The housing market is likely to stumble in the early third quarter, while sales in September and the fall will determine the direction of the recovery. For more information of how a particular market is doing, see the new Local Market Reports for the second quarter.

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