Home Sales Slip: A Blip Or A Trend


There was a lot of stuff floating around today that pertained to the housing market. Here is a compilation of sorts and some thoughts.

First, the National Association of Realtors reported that new home sales were down 0.6% which resulted in a SAAR rate of 5.02 million home sales. The inventory of homes for sale rose 9.5% to 3.59 million which represents an 8.6 month supply. Months of supply were 7.8 in January.

It’s not that unusual for the inventory to increase in the Spring as homeowners list their properties in anticipation of the stronger summer selling season. Diana Olick doesn’t buy that argument as an adequate explanation of this increase:

I saw some analysts claim this is a seasonal effect, as sellers get ready for the Spring market, but the Realtors said it is a much bigger jump than usual, in fact the biggest they’ve seen in a few decades.

“The inventory increase, one of the strongest from January to February, is discomforting, and it could pressure prices to decline later on,” admits Lawrence Yun, chief economist for the National Association of Realtors.

It’s a mistake to impute too much into one month’s worth of data but Olick had a post yesterday that adds a little more meat to the bone of the meme that housing isn’t getting much better at all.

Fannie Mae took a big scissors to its forecast for residential investment (mortgage funding) this quarter. A month ago they thought the it would rise 2.8 percent in Q1, but now they’re saying it could drop 17.2 percent. That’s some change.

On top of that they slashed their forecast for mortgage originations for 2010 to 1.31 trillion from 1.97 trillion in 2009 (a 33 percent plunge!). That forecast is also a drop from their February forecast of 1.34 trillion.

I also noted in the FHA’s latest February Outlook, that FHA loan volume has been falling steadily for the past few months. Sure, they blame it on the bad weather and some changes to the streamline refi program, but February’s numbers are down 26 percent from December, and December is supposed to be slow season, while February is the unofficial start of the Spring housing market.

Finally, Janet Yellen delivered an interesting speech today that I recommend you read in full. She had this to say about the housing market:

It was housing of course that led the economy down. The great bust wiped out some $7 trillion in home values. In the second half of 2009 though, housing showed signs of stabilizing and I became hopeful that the sector would provide a significant boost to the economy this year. Now the market seems to have stalled. Home prices have been more or less stable since the middle of last year, but new home sales have resumed a downward slide and are at very low levels. Existing home sales spiked towards the end of last year in response to the homebuyer tax credit and have receded markedly since then. The credit expires this spring, removing an important prop. With sales still weak, builders have little incentive to ramp up home construction.

The continued high pace of foreclosures also creates risks to the recovery of the housing sector. Mortgage delinquencies and foreclosures are still rising as a consequence of the plunge in house prices over the past few years combined with high levels of unemployment. Despite the return to growth of the broader economy, we’ve seen no let-up in the pace at which borrowers are falling behind in their loans. Further additions to the already swollen stockpile of vacant homes represent a threat to house prices and new home construction activity.

It’s not always easy to understand the dynamics of the housing sector. Last year, for example, the share of mortgages that was 30 to 89 days past due declined. On the face of it, that looked like a hopeful sign. Unfortunately, when my staff examined the numbers more closely, it turned out that the drop actually represented a worsening of mortgage market conditions. What you want to see is delinquent borrowers becoming current. Instead, what happened was that delinquent mortgages moved in the other direction to an even poorer performance status. Many wound up in foreclosure. All in all, I expect that the share of loans that are seriously delinquent will continue to move higher. I am also concerned that we had a temporary reprieve in new foreclosures as the federal government’s trial modification program got under way. But not all of these modifications will stick, which means that some borrowers in the program could find themselves facing foreclosure again.

At the end of this month, the Fed will complete a large-scale program of purchases of mortgage-backed securities issued by Fannie Mae and Freddie Mac. Lenders sell mortgages to these two agencies, which package them as securities sold to investors. Last year, the Fed began buying these securities as part of a series of extraordinary measures to promote recovery. At the time the program was announced, mortgage spreads over yields on Treasury securities of comparable maturity were very high, reflecting in part the disruptions that had occurred in financial markets. I believe that our program worked to narrow those spreads, bringing mortgage rates down and contributing to the stabilization of the housing market. Financial markets have improved considerably over the last year, and I am hopeful that mortgages will remain highly affordable even after our purchases cease. Any significant run-up in mortgage rates would create risks for a housing recovery.

The NAR numbers and Olick’s commentary lead me to conclude that unsurprisingly the housing recovery is encountering a rough patch, not necessarily that it is going off the tracks. I’m not sure that we should or could have expected any different outcome given an economy that has the level of unemployment and underemployment of this one. Expecting a different result isn’t sane.

Perhaps the most pertinent question would be what level of home sales constitute a recovery? Do we aspire to return to 7 million plus a year or are we at or near a level that will hold? This chart from Calculated Risk shows historical sales levels:

home sales calculated risk

Seems as if 5 million SAAR isn’t all that far off trend. Of course, that means that we are going to have to live with a lot of inventory for more than a few years and the new home builders are going to scream bloody murder, but short of leveling the existing inventory so they can build new homes on top of the rubble I don’t see a way around that issue.

I may be a bit paranoid but I sense in Yellen’s speech an implication that the Fed or the government may have to step back into artificial stimulation of the housing market if things don’t work out to their liking. Right now I’d argue that they’ve done enough and probably well established the fact that the market is going to move pretty much in its own direction regardless of their efforts. It would be much better to claim victory and retreat than to take another whack at goosing things.

Given time the housing market will heal itself. Given less governmental intrusion it will move to a sustainable level. It should be clear by now that government intrusion simply wastes a great deal of money while generating few positive returns.


Calculated Risk reports that California officials are not about to give up on intervention:

The deal reached Monday provides $200 million in new tax credits for homebuyers, to be split evenly among those buying a home for the first time and anyone buying a newly constructed home. Anyone qualified who makes a purchase between this May and August 2011 will receive a credit for 5 percent of the home’s purchase price, up to $10,000 over three years.

Don’t be surprised if the feds follow suit in the event that home sales stall this summer after the federal credit expires (if it actually does). Buyers may well go on strike in anticipation of the government blinking once more. Remember, they did it to the car companies with 0% financing. They’re quite used to hearing about limited time offers that turn out to be perpetual.

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