Economists' Commentary: EHS for November

December 22, 2009

By Lawrence Yun, Chief Economist

Sales surged by a whopping 44 percent this November compared to November 2008, led by first time home buyers taking advantage of the tax credit. More than half of the buyers in November were first time buyers. The recovery was fairly broad-based, but was particularly strong in the Northeast and Midwest regions. The inventory got trimmed further and at the current sales pace it would take 6.5 months to exhaust the inventory. As a result home values are showing signs of stabilization. The national median existing home price in November was $172,600, which is a decline of 4.3 percent from one year ago. It is the smallest decline in two years. In the Midwest, where there were no house price bubbles to begin with, home values appear to have already stabilized.

As stated, nearly all local markets experienced a solid sales gain from one year ago. There were exceptions, however: San Diego, Riverside, and Sacramento, where reports of severe inventory shortages of lower-priced homes have limited transactions - not because of lack of demand.

Many continue to be drawn to deeply-discounted, foreclosed properties. Distressed sales (i.e. those that are either short sales or foreclosed sales) made up 33 percent of all sales in November. I do expect foreclosures to be just as high in 2010 as we experienced in 2009, so the distressed sales could remain roughly at 30 percent in 2010. All-cash purchases made up 19 percent of sales, which is about double the normal levels.

All detailed data tables can be found here >

One item to be cautious of in interpreting the data is on the inventory front. Inventory supply at 6.5 months would be considered balanced. However, let's keep in mind that the exceptionally higher sales pace in November drove the months' supply down and not from any significant reduction in the number of homes for sale in the market. There are still 3.5 million homes on the market. We could easily re-experience an 8 month or higher supply in the upcoming months when sales are expected to be measurably lower. The perceived ending of the tax credit deadline in November had induced buyers to sprint. But now, with the deadline being extended to the middle of next year (contract signings by the end of April and closings by the end of June) and to many qualifying move-up buyers, there will be another surge in sales in late spring and early summer of next year. The hope is that by then the inventory will have shrunk sufficiently such that home values will show consistent stabilization or even a modest increase. The self-sustaining recovery will then be in place as consumers will no longer postpone purchase decisions based on potential price decline fears.

An estimated 2.0 million first-time buyers have taken advantage of the $8,000 tax credit from February to November. Now with the tax credit extended till the middle of next year and also available to move-up buyers, I anticipate an additional 2.4 million home buyers qualifying for the tax credit. In total 4.4 million American households are expected to have benefited from the home buyer tax credit before the program ends in June 2010.

Be mindful that mortgage rates will no longer be at rock-bottom rates and will be higher in 2010. However, the anticipated turnaround in the job market and rising confidence regarding the housing market outlook will keep the housing recovery momentum intact even as the tax credit is no longer in play from the second half of next year.

My Christmas wish is for the housing market to return to normal, without the exuberance or panic and overcorrection. In short, I want the housing market to be boring again. Boring in terms of housing being a place to live and raise a family and a source of steady long-term wealth accumulation. To get there, the real estate profession should encourage home buyers not to overstretch and stay well-within their budget. Successful homeownership is good for families, communities, and the country. We do not want to ever experience another episode of the unsustainable homeownership growth that eventually leads to foreclosures.

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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