In June, Existing Home Sales ran at a seasonally-adjusted
annual rate of 4.77 million. That pace is 0.8% lower than in May,
and 8.8% below the year ago rate. The year ago numbers were
somewhat inflated due to the end of the homebuyer tax credit. The
June sales rate was below consensus expectations of a 4.93 million
annual rate. The history of used home sales is shown in the graph
below (from Calculated Risk).
![](http://www.zacks.com/images/upload_dir/1311178524.jpg)
Sales of single family homes were unchanged on the month at a
rate of 4.24 million, and are off 7.4% year over year. The median
price of a single family home nationwide rose 0.6% from a year ago
to $184,600. Condo and co-op sales fell 7.0% on the month, and are
down 18.0% year over year. The median Condo price rose 1.8% from a
year ago to $182,300. For all existing homes, the median price was
up 0.8% to $184,300.
Regionally sales were down on the month in two of the four
Census regions. All four regions were down year over year. The
Northeast fared the worst, with sales down 5.2% for the month and
down 17.0% from a year ago. The West had a month to month decrease,
with sales falling 1.7%, down 2.6% from a year ago. In the Midwest,
sales rose 1.0% for the month but are down 14.0% year over year.
The South, the largest of the four regions, saw a 0.5% rise on the
month, but a 5.6% year over year decline.
Prices rose in the higher priced areas of the country, and fell
in the cheaper areas. The Northeast is the most expensive region,
with the median home going for $261,000, up 3.1% from a year ago.
The West is also relatively expensive, with a median price of
$240,400, up 9.5% from a year ago. The Midwest, already the
cheapest area of the nation to live in with a median price of
$147,700, saw a year over year decline of 5.3%. Prices in Dixie
dropped 0.1% from a year ago to $159,100. The median price is not
the best measure of housing prices, as it is affected by the mix of
houses being sold. However, the data is consistent with what the
better, but less timely, measures (such as the Case Schiller index)
have been indicating. The median price is not seasonally
adjusted.
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 one exception
to that is Realtors' 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. Also, the newly employed Construction workers will have
money in their pockets to spend, and as they do, that will
stimulate other jobs.
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 let the bank take it and get nothing
for it. The more people under water, 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
in 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 not writing the checks. Of course that will
be a hit to your credit rating, but $50,000 is probably worth a bit
of a 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 June, inventories rose by 3.3% to 3.77 million. Combined with
the slight fall in sales, that puts the months of supply at 9.5
months, up from 9.1 months in May, but below the record 12.5 months
set a year ago. It is still a very high level. A "normal" months of
supply is about six months, and during the housing bubble just over
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.
The second graph (also Calculated Risk) traces the months
of supply and the year over year change in inventory. The level
still suggests downward pressure on existing home prices over the
next few months. The inventory numbers (and hence the months
supply) are not seasonally adjusted, and there is a tendency for
inventory levels to rise in the spring. The year over year drop in
inventory is somewhat encouraging, but the level of inventories has
to be viewed relative to the sales pace.
![](http://www.zacks.com/images/upload_dir/1311179251.jpg)
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 3% from here, and will probably bottom out by the end
of the year. 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 3%, then lots of people with
razor thin current positive equity 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. That is
possible, especially if the austerity mania that is sweeping
Washington results in a substantial slowing of the overall economy.
That now seems very likely. If the debt ceiling is not raised, the
economy will not slow, it will collapse. In that case, Dr. Schiller
is a giddy optimist on housing prices. However, barring such a
scenario in Congress, we will probably muddle through for the rest
of the year, as the waning of temporary drags like the effects of
the Japanese Tsunami help offset the drag from fiscal
austerity.
The next two graphs (also from Calculated Risk) track
housing prices relative to the two most important drivers of
housing prices: rents and incomes. My forecast of a further 3%
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. I
would also note that apartment vacancies have been declining
recently, which will likely lead to increases in rents; this would
tilt the rent vs. buy decision in the favor of buying.
![](http://www.zacks.com/images/upload_dir/1311179370.jpg)
![](http://www.zacks.com/images/upload_dir/1311179552.jpg)
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 next graph
(again from Calculated Risk). 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 that 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.
![](http://www.zacks.com/images/upload_dir/1311179710.jpg)
This was a weak report. The monthly in inventory was worrisome.
A 9.5 months of supply is very disturbing and points to continuing
downward pressure on existing home prices. The huge glut of
existing homes on the market, and the shadow inventory of homes
that is 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.
While we got a bit of a bounce in housing starts and building
permits last month, the strength was mostly in the very volatile
multi family segment, and the overall level is still extremely
depressed. 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.
The most important part of this report is what it says about the
future direction of home prices. There the news is still bad, and
at the margin, getting worse. In terms of economic activity and
growth, the far more important report, New Home Sales, comes out on
Thursday. New home sales have been slammed much harder than
existing home sales.
In normal times, there is about a 6:1 ratio between existing and
new home sales. In May, that ratio was 15.7 to 1. I don't expect
much of a bounce in New Home Sales, and they well remain at near
record lows. I suspect it will be a long time (perhaps until 2015
or so) before we return to that historic 6:1 ratio. Still, that
would imply an annual rate of new home sales of 795,000 based on
the current level of used home sales, even over a four year
recovery period, which still works out to a very strong compounded
annual growth rate of 45.4%. That will be an important factor in
overall economic growth going forward.
![](http://www.zacks.com/images/upload_dir/1311179919.jpg)
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