Housing Market Update

From the January 2010 Forest2Mill newsletter.

Sales of existing homes increased to 6.54 million units in November, up 7.4 percent from October (see Table 1) and 44.1 percent from November of 2008. This gain was primarily the result of first-time buyers rushing to close sales in order to meet the original deadline for the $8,000 tax credit; the National Association of Realtors estimates that 51 percent of all sales in November were to first-time buyers. Months of inventory fell once again in November, down from 7 months to 6.5 months. This is a 7.1 percent improvement from October and a 40.9 percent improvement from November 2008.

Sales of new homes declined in November, even after significant downward revisions in the numbers for August through October. Sales were down 11.3 percent from October to November, with just 355,000 units being sold. This is 9 percent below November 2008’s level. Inventory lost ground as well. October’s inventory was revised from 6.7 months to 7.2 months. November saw an increase to 7.9 months. This figure, while disappointing, is still 30.7 percent better than November 2008’s number.

Due to seasonality, expect home sales to fall in December before they find more traction in Spring 2010, a result of the extended and expanded home buyer tax credit.

Table 1: Housing Statistics at a Glance, January through December 2009

Home prices have also seen mixed results in November. The median price for existing homes remained relatively flat in November, increasing $400 from the previous month to $172,600. Year over year, prices have fallen 4.3 percent. The median price for new homes showed greater strength in November, increasing from a downwardly revised $209,400 in October to $217,400.

The last and most reliable word on home prices comes from the Case-Shiller index, which is produced by Standard & Poor’s. The index indicated that home prices continued on an upward trend in October (the most recent reporting period), increasing another 0.4 percent. While the gain is smaller than those seen in the previous quarter, David Blitzer, Chairman of the Index Committee at Standard & Poor’s, said “Coming after a series of solid gains, these data are likely to spark worries that home prices are about to take a second dip. Before jumping to conclusions, recognize that the one time that happened at the beginning of the 1980s, Fed policy saw dramatic reversals, which is very different from the stable and consistent Fed policy we have today. Further sales of existing homes—those included in the S&P/Case-Shiller Home Price Indices—have been very strong in recent months, working off the inventories of houses for sale.”

Housing permits, starts and completions all gained ground in November (see Table 2). Housing permits increased from 551,000 in October to 584,000 in November, a 6 percent increase. Year over year, permits are down 7.3 percent. Housing starts increased 8.9 percent in November, from 527,000 in October to 574,000. This is 12.4 percent below the November 2008 level. Completions increased 8.7 percent in November, moving from 745,000 in October to 810,000. While this is a 8.7 percent improvement from October, there has been a 25.3 percent year-over year decline since November 2008.

Table 2: New Residential Construction, January through December 2009

Source: U.S. Census Bureau and U.S. Department of Housing and Urban Development
^r=Revised
^p=Preliminary

While most of the housing statistics and indicators suggest a recovery is underway, there are a couple of additional data points we’re keeping our eyes on: foreclosures and mortgage interest rates.

Most economists tracking the housing market agree that a substantial “shadow” inventory of homes in foreclosure will hit the market over the next 2 years. The shadow inventory is currently estimated at somewhere between 1.7 and 3.5 million units, with the potential for an additional 3 million units to follow suit. These homes are currently being withheld from the market by banks. Over the last 1-2 years, aggressively-priced foreclosures have resulted in declining housing prices. Banks are withholding additional foreclosures because they are waiting until prices have recovered in order to minimize their losses. The paradox here is that as soon as prices recover enough for the banks to move these units into the actual inventory of homes for sale, the glut will cause prices to decline again.

Also attracting attention this month are mortgage interest rates. Several reports have indicated that we may be on the verge of sharply rising interest rates. According to Freddie Mac’s Primary Mortgage Market Survey, 30-year fixed interest rates have increased from 4.71 at the beginning of December to 5.05 for the week ending 12/24. Bankrate quoted the daily rate for December 29, 2009 at 5.34 percent. Many analysts are considering this the beginning of an upward trend. Freddie Mac has forecast a rate of 6 percent by the end of 2010. Morgan Stanley has predicted that the rate will increase to 8 percent.

The reasons for the increases appear to be linked to the yield on the 10-year U.S. Treasury rate and the Federal Reserve’s treasury and mortgage-backed security purchase plan. The yield on the 10-year treasury has moved from 3.2 percent at the beginning of the month to 3.8 percent as of December 30. Morgan Stanley has predicted that the yield could increase by 40 percent in 2010. If this happens, 8 percent interest rates on 30-year fixed loans are nearly certain.

The Federal Reserve has recently stopped purchasing US Treasuries, and this has led to an increase in yields (which are necessary to attract private buyers). In March 2010, the Fed plans to discontinue purchasing mortgage-backed securities as well. Clearly, how the government deals with these events, as well as the rise in inflation that may be on the horizon, will be critical in determining how quickly the housing recovery will take shape.

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