What a difference six months make. Just a half year ago, the world as we knew it was coming to an end. The U.S. financial system was on the brink of collapse; the economy was headed towards a Depression; and the housing sector was in disrepair. Today, everything seems to be nervously falling into place-fingers and toes crossed.
Positive reports continue to roll in: the Index of Leading Indicators rose for the third consecutive month in June; weekly jobless claims have trended down in recent weeks, hovering around 550,000; retail sales were up 0.6 percent in June; all major stock indexes are on the rise; most of the large financial institutions have reported earnings that have surpassed expectations; and the three major housing measures- existing home sales, new home sales and housing starts- all advanced in June.
The economy’s trajectory points to a recovery in the final quarter of this year. Similarly, the housing sector’s trajectory suggests that home sales have stabilized and are in recovery mode, while home prices remain depressed. A closer look at recent housing indicators offers a glimmer of hope for the housing sector.
New residential construction rose 3.6 percent in June to 582,000 annualized units. The larger than expected increase in housing starts was welcome news. Moreover, the Census Bureau revised upward the May figure by almost 6 percent. Increases in both single family starts and building permits give some credence that housing construction activity hit bottom several months ago.
New home sales rose 11 percent in June to an annualized 384,000 units compared to 346,000 units posted in May. The increase in new home sales in June was surprisingly strong and the annualized pace was the strongest since November 2008. The months’ supply of new homes available for sale was 8.8 in June, compared to 10.2 in May. The level of inventories is now at 281,000 which are close to a reasonable level of new homes available for sale under normal housing conditions. The median home price for new homes sold was down 11.9 percent from a year earlier. However looking forward, new home sales advances are likely to be modest, at best. The West region’s robust gains were primarily due to California households who were enticed by the state’s tax credit for purchases of new homes. Unfortunately, the California tax credit is out of funds and is unlikely, given the state’s financial difficulties, that additional funds will be raised.
Existing home sales rose 3.6 percent in June to an annualized pace of 4.84 million units. Sales rose for the third consecutive month and have been steadily drifting upward from its cyclical low of 4.49 million units in January. Foreclosure sales made up 31 percent of total existing sales in June. The months’ supply of existing homes available for sale declined to 9.4 compared to 9.8 in May. The median home price declined 15.4 percent from a year ago.
It is likely that we have seen the worst in the housing marketplace. It appears, from a sales perspective, that a housing recovery is under way. There are some positive influences for the housing sector. Mortgage rates continue to hover near historic lows and are expected to remain at these levels for the remainder of the year. Affordability measures remain at high levels and the Obama administration’s foreclosure mitigation programs are beginning to show promise.
On the down side, the economy remains in recession, shedding a meaningful number of jobs on a monthly basis. Credit conditions also remain tight, keeping households who want to purchase homes out of the marketplace. And home values continue to fall as evidenced by the 15.4 percent drop in the existing home median price from a year ago.
On balance, we continue to believe that the housing sector is poised to experience a very modest recovery in home sales by the end of the year with the exception of home values which may continue to fall well into 2010.