Some have declared that a housing bottom has been reached. What is not often discussed is that a bottom in housing is a very complex issue, much more complicated, for example, than a bottom in stocks. One complexity is the possible lack of correlation between a low in sales volume and a low in price. Another complexity is the variation among local real estate markets in different parts of the country. Let us look at these factors individually.
In fact, the new home median price had all-time record declines in August, shown in the following table.
PricesThere are two markets that are tracked by different surveys. The new-home market is tracked by the U.S. Census Bureau. The existing-home market is tracked by the NAR (National Association of Realtors) and the Case-Shiller Housing Index. Prices have risen in all of these surveys for several months through July. Some cracks in this trend have appeared with new data out in the past week. Going into the weak seasonality of the fall and winter, it is definitely not the time to declare that home prices have bottomed.
VolumesThis year, sales volumes of existing homes have shown an even stronger seasonal rise than normally experienced in the spring and into the summer. However, the August 2009 existing-home sales were only 2% higher than the same month a year ago and showed an unexpected drop from July. Sales volumes have been aided by the soon-to-expire, new-home buyer's federal tax credit. Barring a double-dip recession, the sales-volume low near 250,000 units in January may prove to be the bottom for that metric. But the current volumes near 500,000 per month are far below what can be considered necessary for a recovering market.
InventoryInventories are down over the past six months. This is one of the most frequently cited data points for housing-market bulls. However, inventories remain at much higher levels than are considered reasonable for a normally functioning housing market. The big question is whether the inventory improvement can be continued in the face of a potential supply increase from future foreclosures.
- New Homes: For June, July and August, sales have averaged 35,000 per month, while the number remaining for sale at the end of each month has averaged about 270,000. That is a 20/1 ratio! In August, a new-cycle high in median time on the market was reached (12.9 months). The number of building permits issued averaged 39,000 for the last three months. This is 11.4% more than sales. New homes are clearly in excess supply.
- Existing Homes: Much has been made of the NAR report of the decline in inventory from more than 11 months several months ago to 7.3 months in August. This is still 50% greater than considered normal. However, the supply problem is not the existing inventory, but the "phantom" supply that may arise from further accumulation of foreclosures. This market overhang has been estimated to be from 5 million to 10 million homes, which is an additional 10 to 20 months of inventory at current sales rates. Existing homes are in a current supply excess of 50% above normal inventory levels for a healthy market at current sales levels. If even only 25% of the foreclosure overhang comes to market, the excess supply of existing-home inventory will go from 95% to more than 200% oversupply. That would be 9.8 months inventory and 12.3 months inventory, respectively.
Demand IssuesAny increases in unemployment will not help demand. There are many indicators in the employment data indicating that persistently high unemployment may be with us for an extended period. There is little hope for demand to pick up because of improved employment in the next year or more.
If we have any significant numbers of foreclosures in the coming one to two years, every one of them removes another potential home purchaser. Not only do foreclosures add supply, they simultaneously diminish demand. Also, demographics are not helping demand. As baby boomers enter retirement with diminished retirement assets, the likelihood of moving to a new home in retirement is less than it was before the crash. New household formation, which has been on the order of 1.2 million to 1.4 million per year (net), is probably going to continue. But not many new households have rushed out to buy a home in the past, and the number will be depressed even further by economic conditions. That will probably not have a significant effect on demand.