In February, existing home sales ran at a seasonally adjusted annual rate of 4.88 million. That pace is 9.6% lower than in December, and 2.8% below the year-ago rate. The February sales rate was below consensus expectations of a 5.05 million annual rate.
On the other hand, January was revised up from an initial read of 5.36 million to 5.40 million, so relative to where we thought we were, the month-to-month decrease was “just” 9.0%.
The history of existing home sales is shown in the first graph (from http://www.calculatedriskblog.com/). The recent spikes at the end of 2009 and in the spring of 2010 were from the homebuyer tax credit, which everyone thought was going to expire in November 2009 and then was unexpectedly extended until April of 2010.
Results by Housing Type
Sales of single family homes fell by 9.6% on the month to a rate of 4.25 million, and are off 2.7% year over year. The median price of a single-family home nationwide slipped 4.2% from a year ago to $157,000.
Condo and co-op sales plunged 10.0% on the month, and are down 3.1% year over year. The median condo price fell 11.1% from a year ago to $150,400. For all existing homes, the median price was down 5.2% to $156,100.
Results by Region
Regionally, sales were down on the month in all four Census regions. The Midwest was the hardest hit, with a 12.2% decline for the month and a 9.0% decline from a year ago. The South, by far the biggest of the four regions, had a month-to-month decline or 10.2%, but it fared the best year over year by being unchanged.
The West posted a drop of 8.0% on the month, and are up 8.0% from a year ago. In the Midwest, sales rose 1.8% for the month and are down 2.4% year over year. The Northeast was down “only” 7.2% for the month and is off 8.3% year over year.
We also saw lower median prices in all four regions. Those ranged from a 3.9% decline in the South to a 9.2% fall in the Northeast, relative to a year ago. While the median price is not the best measure of housing prices over time (changes in the mix of houses being sold can be a significant influence), the price declines are in line with the data we have seen from better home price series like the Case-Schiller index (see “Case-Schiller: Home Prices Fall Again”).
The level of activity in used home sales really is not that important in isolation. It is just the transfer of an existing asset, and does not add a lot to economic growth. The exception to that are realtor commissions.
Indirectly, it can help as people will often remodel and redecorate a “new for them” house. That can stimulate some sales for paint companies like Sherwin Williams (SHW) and perhaps it is good for furniture firms like La-Z-Boy (LZB), but it pales compared to the economic activity generated by a new home sale.
New homes not only need new paint on the walls, but they need the walls. That means lots of business for wallboard firms like USG (USG), timber firms like Weyerhaeuser (WY) and roofing and insulation firms like the Johns Manville division of Berkshire Hathaway (BRK.B). It also means that those firms have to hire more workers, so the employment effect of new home sales goes well beyond the roofers and carpenters actually on the jobsite.
Housing Inventory
Where used home sales are important is in relation to the inventory of houses for sale. That will influence the future direction of housing prices. Used home prices are extremely important. As used home prices fall, more and more people find themselves underwater on their mortgages.
As long as a homeowner has positive equity in their house, the foreclosure rate should be zero. After all, it is better to simply sell the house and get something for it, rather than simply let the bank take it and get nothing for it. The more people underwater, and the deeper they are, the higher foreclosures and strategic defaults are going to be.
A strategic default is when someone has the cash flow available to continue to make his mortgage payment, but simply decides not to, since paying is a just plain stupid thing to do from a financial perspective. If you have a house that could only sell for $150,000 n the current environment, and you owe $200,000 on the mortgage, in effect you have the option of “selling” the house to the bank for $200,000 simply by stopping writing the checks.
Of course that will be a hit to your credit rating, but $50,000 is probably worth a bit of tarnish on your Fico score. If the difference is only $5000, then the hit to your credit score makes less sense, and there are lots of non-economic factors (a house is, after all, a home, not just an investment) that come into play.
In February, inventories rose by 3.5% to 3.59 million for the month and are essentially unchanged from a year ago. That puts the months of supply at 8.6 months, up from 7.5 months in January. It also reverses a promising trend in the months supply metric, it was as high as 12.5 months in June. A “normal” months of supply is about six months, and during the housing bubble four months was the norm.
Also, the inventory numbers are not seasonally adjusted, even thought here is a seasonal pattern when they tend to decline in the winter (especially around the holidays) and then increase in the spring. In other words, unless we have a gangbuster spring selling season, the months of supply are poised to increase further over the next few months and put further downward pressure on housing prices.
The second graph (also from http://www.calculatedriskblog.com/) traces the months of supply and the year-over-year change in inventories. The level still suggests downward pressure on existing home prices over the next few months.
Fortunately, relative to incomes and rents, home prices are not as absurdly overvalued as they were then, so the magnitude of the coming price declines is likely to be a lot less over the next year than the 30% plunge in 2008 and early 2009. I suspect they will fall by about 5% from here.
Still, that could do a lot of damage, since the equity cushions are a lot smaller now than they were in 2007 or early 2008. If housing prices fall more than 5%, then all of them will also be underwater, and lots of homes that are only slightly underwater (where non-financial considerations tend to dominate) will become deeply underwater.
There are some very well respected housing economists, including Robert Schiller (creator of the Case-Schiller index), who are far more pessimistic than I about the future of housing prices, thinking prices could drop 20% or more from current levels. While that is possible, especially if the current unrest in the Middle East results in a prolonged period of higher energy prices that substantially slows the overall economy, I do not see that as the most likely case.
The next two graphs (also from http://www.calculatedriskblog.com/) track housing prices relative to the two most important drivers of housing prices: rents and incomes. My forecast of a further 5% decline would put prices roughly in the middle of the range where they were in the 1990’s. Dr. Schiller’s would put housing prices at the very low end of that range. I would say the risk is more that Dr. Schiller has it right, rather than we are both wrong (and him very wrong) and housing prices start to rebound in the near term.
However, with falling home prices it is likely that the pace of foreclosures will pick up again. Even with the slowdown in foreclosures, the number of homes that are now owned by Fannie, Freddie and the FHA is mounting as can be seen in the final graph (although it only goes through the end of 2010). Those institutions have no use for those homes and they will go on the market, often at very aggressive prices, putting downward pressure on the market.
Most of those who are being foreclosed on have indeed fallen far behind in their mortgage payments, and so in that sense the foreclosures are legitimate, even if the paperwork is a mess. The combination of underwater homes and reduced cash flow from one or both of the breadwinners in a family being out of work is a toxic mixture for the health of not just the housing market, but the economy as a whole.
An Ugly Report
This was an ugly report, and it was worse than expectations. Not only were sales down, but inventories were up, and that is not a welcome combination. It is a reversal of a promising downward trend in the inventory to sales ratio, or months supply.
Seasonally, inventories are about to rise, so the problem is likely to get worse in the near future. The huge glut of existing homes on the market, and the shadow inventory of homes that are likely to be foreclosed upon and thus come to market in the near future, means that we really have very little need to build new homes.
Thus residential investment, the historical prime locomotive in pulling the economy out of recessions will stay derailed. The jobs not created by a rebound in housing construction will mean that household formation will stay depressed, thus further depressing the demand for housing. To put that in more concrete terms, young adults will not be able to get a job and form a family, instead, they will continue living in mom and Dad’s basement, rather than soak up the existing housing inventory. A nasty “chicken and the egg” situation.
Remember also that home equity is the primary store of wealth for millions of Americans. As a highly leveraged asset, a 5.2% year-over-year decline in prices implies a far larger decline in the value of the home equity. Housing wealth is far more “democratically” distributed than is stock market wealth.
Even before the Great Recession, the wealth of the top 1% in this country exceeded the total wealth of the bottom 80% as is shown in the tables below (from this source). Note how much larger the disparity is when only financial wealth, which excludes home equity is considered.
Since 2007, the stock market has largely recovered, but the housing market has gone south in a very big way. That housing wealth is wealth that was by and large intended to be used for future consumption, say funding a child’s college education or retirement. Provided that people still intend to send their kids to college or retire, they will have to save more out of current income. That will serve as a big drag on overall demand, and thus tend to slow the economy.
Distribution of net worth and financial wealth in the United States, 1983-2007
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