Home Sales Up; Home Prices Down

Written by: David Lereah   Wed, August 26, 2009 Commentary, Market Analysis

It is becoming increasingly clear that a two-headed housing recovery is underway. Unfortunately, unlike Siamese twins, the heads will not be arriving at the same time. Recent reports on housing activity strongly indicate that a home sales recovery is now underway, while a home price recovery continues to be far off; perhaps not until the middle of 2010.

On the sales side, existing home sales rose 7.2 percent in July from the prior month to 5.24 million annualized units, a record rise. Existing home sales has now risen for four consecutive months and is clearly headed in the right direction. Similarly, new home sales surged 9.2 percent in July from a month earlier to 433,000 annualized units. The increase in new home sales was surprisingly strong and welcomed news. The July pace of new home sales was the strongest pace this year and sales have now risen for four consecutive months.

Clearly, home sales have gained some momentum since the beginning of the year. An improving economy, a rise in consumer confidence, a modest rise in wealth (due to a rising stock market), historically low mortgage rates and a first-time home buyer tax credit are the primary reasons for a sales recovery. Better news yet, foreclosure sales were not the reason for July’s record monthly boost in existing home sales. Foreclosure sales in July comprised 31 percent of total sales for the month, the same percentage share that was registered in June.

On the price front, the news was not as cheerful. The Case-Shiller 20 city home price index for June fell 15.4 percent from a year earlier. The good news was that the pace of decline was slower than the 17.1 percent decline posted in May. In addition, 15 out of 20 metros reported monthly increases. However, monthly comparisons are not as reliable as year over year comparisons.  All twenty metros experienced home price declines on a year over year basis. And although the annual pace of decline slowed, a 15.4 percent drop in home prices is still very troubling for the housing sector.

The Federal Housing Finance Agency, FHFA, also released its home price numbers this past week. The FHFA purchase-only index fell 5 percent in June on a year over year basis, compared to a 5.9 percent drop in the index in May. The FHFA index has now posted 3 consecutive monthly increases, suggesting a tentative recovery. However, we are reminded that the FHFA index only covers conforming mortgage loans (Fannie Mae and Freddie Mac).

On a more negative note, the National Association of Realtors, NAR, reported that median home prices for existing homes fell 15.1 percent in July from a year ago. Unfortunately, there are reasons to believe that downward pressure on existing home prices will continue into the foreseeable future. First, the months’ supply for existing homes in July stayed flat at 9.4 compared to a month earlier. Normally, we would expect the months’ supply to drop given that the sales pace surged in July. However, inventories rose 7.3 percent in July compared to June to 4.091 million existing homes available for sale. That number likely reflects an increase in foreclosure properties added to inventory which does not bode well for future home prices. The NAR has estimated that foreclosures sell at prices that are 15 to 20 percent below non-foreclosure existing home sales. It is also likely that there will be more foreclosures entering the pipeline as foreclosure filings are expected to increase during the next two quarters. The Mortgage Bankers Association’s mortgage delinquency survey for the second quarter reported that the 90 days and more delinquent category surged to a record delinquency rate. Historical evidence suggests that a meaningful percentage of households in the 90 days or more delinquent category will eventually experience a foreclosure filing.

In summary, reports on the nation’s housing sector drew mixed reviews this past week. The home sales reports were all positive and there is building evidence (e.g., four consecutive monthly rises) that both new and existing home sales are in a recovery trajectory. However, home values continue to flounder, with most home price releases reporting continued downward pressure on home values. It is clear that we need to get our hands around the unmanageable foreclosure situation before contemplating a home price recovery.

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