The New Year Begins with Uncertain Housing Outlook

Housing data released this past month suggest a more uncertain housing outlook than the month before. There is now a possibility that the housing upturn could falter in the coming months, negating most of the gains of the second half of 2009 and prolonging the housing recovery.

This past month’s releases were a mixed bag of favorable and unfavorable news. The existing home sales report for November gave us a heavy dose of positive news. Existing home sales rose 7.4 percent in November to 6.54 million annualized units from a 6.09 million annualized pace in October. The November home sales pace was the highest since February 2007. Existing home sales in November were 44.1 percent higher than the 4.54 million-unit pace posted in November 2008. November’s strong home sales numbers likely reflected a surge of first-time buyers taking advantage of the homebuyer tax credit.

The home sales report also revealed that home prices may be stabilizing. The median price of existing homes sold in November was $172,600, 4.3 percent less from a year earlier. November’s price drop was an improvement over the year over year 7.1 percent price drop registered in October. In addition, the inventory of existing homes available for sale dropped 1.3 percent to 3.518 million homes compared to a month earlier. As a result, the months’ supply fell to 6.5 in November compared to a 7 months’ supply in October. A 6.5 months’ supply is approaching the 5 to 6 months’ supply range that is generally associated with a favorably balanced home buying/home selling marketplace. The months’ supply measures the number of months it would take to deplete the entire inventory of existing homes at the current sales pace.

The new residential construction report for November also offered some favorable news. Housing starts rose 8.9 percent in November to 574,000 annualized units from the previous month. Both single-family and multi-family starts increased. In addition, total housing permits increased 6 percent to an annualized pace of 584,000 units. Despite the favorable news in the homebuilding report, November’s pace of housing starts remains well below the pace established during the summer months of 2009.

The new home sales report released this past month offered some unfavorable news about the housing markets. Sales of new homes fell 11.3 percent in November to an annualized 355,000 units compared to a month earlier. The pace of new home sales is now at its lowest level since May 2009. The months’ supply of new homes grew to 7.9 months compared to a 7.2 month’s supply in October.

Other news for the month included unfavorable reports on home prices and mortgage applications. The Case-Shiller home price report revealed that the home price situation worsened in October compared to the summer months. The Case-Shiller 20-city home price index increased only 0.4 percent in October and by only 0.2 percent in September. The 0.3 percent monthly gain average during the past two months (October and September) reveals a slowing in home price gains compared to the 1.0 percent monthly gain average posted during the summer months (June, July and August). One possible explanation for the renewed weakening in home prices is that foreclosure sales as a percentage of total home sales has been higher in the fall months than in the summer months, applying downward pressure on median home prices in recent months due to foreclosure price discounts.

Mortgage applications to purchase homes declined over the past month with the mortgage application index to purchase homes falling 11.7 percent to 213.3 in the week ending December 18 compared to a 241.5 index for the week ending December 4. The purchase index is considered a reliable leading indicator of future home sales, excluding distressed sales.

Finally, a Treasury report released this past month disclosed that the government’s mortgage modification program has performed poorly relative to expectations. Banks, in an effort to reduce the number of foreclosures and short sales, have been slow to modify loans. As a result, more foreclosed properties will likely be added to the already excessive supply of homes available for sale throughout 2010, which could prolong the housing market recovery.

Looking forward, it is likely that home sales will steadily climb during the first half of this year due to the positive impact on home buying from the homebuyer tax credit (expiring in June). However, our inability to contain and minimize the foreclosure situation could keep home prices from stabilizing for some time, adding a meaningful amount of uncertainty into the 2010 housing outlook. As we begin the New Year, it is becoming increasingly likely that the housing recovery may falter and take longer to correct itself than previously anticipated.