PrintIn the past, housing contractions and recoveries were measured by a drop or rise in home sales and housing construction activity. It was uncommon for home values to drop in a housing contraction, at least on a national scale. But today’s housing recession is an exception-both home sales/construction and home prices have fallen precipitously during the past 3 years. Thus, for us to proclaim a complete recovery in the today’s housing sector, both home sales/construction and home prices must stabilize and begin their ascent.
One of the heads of this two headed recovery has already stabilized-home sales and residential housing construction. Existing home sales, new home sales and housing starts are all meaningfully above their cyclical lows posted in January of this year. And it is reasonable to assume that all three measures of residential housing activity will continue to hover above their lows and likely post modest gains in the coming year due to historically low mortgage rates and an economy that is expected to recover in the second half of this year.
However, the other head-home prices-are expected to continue their descent due to excess inventories, exerting downward pressure on home values. And an expected steady flow of foreclosures are likely to keep inventories in excess into the foreseeable future.
In June, 3.823 million existing homes were available for sale, representing a 9.4 months supply. Similarly, there were 281,000 new homes available for sale, representing an 8.8 months supply. The months’ supply represents the number of months it would take to completely deplete the inventory of homes at the current sales pace. Under more normal market conditions (where demand roughly equals supply), the months’ supply is expected to hover in the 5 to 7 month range. Within this range, there can be some excess demand or some excess supply because the marketplace is almost never in equilibrium. Until the months’ supply for both new and existing homes fall back into a more normal range of inventories, there will continue to be some downward pressure on home prices.
However, there is some good news for the inventory picture. First, the months’ supply for both existing and new homes is now meaningfully below their peaks. The months supply for existing homes peaked in April 2008 at 11.2 and is now down to 9.4. Similarly, the months’ supply for new homes peaked at 11.4 months in August 2008 and is now 8.8. Second, the expected modest pickup in existing and new home sales should continue to reduce the supply. And third, the government’s foreclosure mitigation programs are expected to slow future foreclosure filings, favorably affecting the supply picture.
Today’s excess inventories are improving because of improvements in both demand and supply conditions which must continue for further improvement. On the demand side, some households are responding to historical low mortgage rates and improved mortgage credit conditions; hopefully this trend will continue. In addition, home price depreciation is slowing which may bring some households back into the purchase marketplace. On the supply side, the over building during the boom years is beginning to be worked out. Vacancies remain historically high, but are falling; and foreclosure activity is leveling.
In the near term, we expect the months’ supply to hover near current levels. However, the longer term (3 to 6 months), we expect the pace of foreclosure activity to slow a bit, the economy to pick up, and the credit markets to further loosen.
The months’ supply numbers promise to be a reliable indicator for anticipating an improvement in home price movements. We look for the months’ supply numbers to dip below 8 months sometime over the next two quarters. When months’ supply begins to display a steady decline over several months, it is likely that home value stabilization is underway.
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