Housing Perks Up

There’s no doubting that today’s release of the data for new home sales during June represents a marked improvement: we may be reaching the bottom of the real estate slump after all. This is obviously good news, so enjoy it.

The actual numbers are still nowhere near those of the heady peak bubble days, but they do show a decided firming. Especially in the lower price ranges where the combination of lower mortgage interest rates, lower prices, and the first time buyer tax credit have sparked a turn about in activity.

Sales rebounded to 384,000 in June, up 11% from the revised figure of 346,000 for May. Bear in mind, though, that last June sales were 488,000, or 21.3% higher than this year.

Another good sign was that sales improved in most regions, with only the South declining further.

Before we all get too euphoric, however, we should keep in mind that this turn about was strongly assisted by administration’s stimulus – specifically that tax credit for first time buyers. Once the effect of the tax credit wears off, as the number of people taking advantage of it dwindles, we will start to get a better indicator of just how resilient the turn around is.

Also, as I have argued before, there appears to be some ‘bottom feeding’ in the existing home sales numbers that have also shown some life: foreclosed homes constitute a very high percentage of sales, and therefore distort the figures somewhat. I think it quite possible that a similar effect is at work in the new homes data as well – in this case in the form of ‘distressed sales’ by builders who want to clear inventory. In fact the inventory of new homes awaiting sale dropped by about 4% last month, so the backlog is being cleared – at current sales levels there are a little under nine months worth of houses waiting to be sold, which is a marked improvement from the twelve months worth of inventory as recently as January. This elimination of unsold inventory will ultimately help put a floor under the fall in prices which have now fallen a further 12% in the last year.

What do we look for going forward?

1. Will there be a continued reduction in inventories. I think so. This will help firm prices.
2. Then what happens when the tax credit is no longer a driver of sales: in other words, just how robust is the market without a government subsidy?
3. When will the South stop its free-fall: the Southern region constitutes the bulk of all home sales, until there is a turn around there the national figures will remain weak.
4. How will a continuing rise in unemployment affect the immediate future? This slight recovery in the market may turn out to be a temporary ‘blip’ if the underlying economy doesn’t perk up.
5. How much lower will prices have to go? There is no doubt that part of the recovery in recent months has been driven by the abundance of price cutting. I expect the prices in the housing market in general to continue to drift down throughout the year before hitting bottom next spring. Don’t forget that the price adjustment has shown a marked regional effect: some regions have dropped like a stone while others are only now on the way down, so the national figures may continue to fall even though some areas show a much firmer trend.
6. The ‘time unsold’ is still drifting upwards – this is the measure of how long it takes to sell a new home. It is now up to almost a year, and has been steadily creeping up all year. As long as this continues all the activity will center around clearing out old inventory: the number of new homes under construction is now down to 113,000, compared with 201,000 in June last year.

All this implies that the market for new homes is settling in at a much lower level of activity. The bottom of the market is in sight, but there is no sign yet of growth. This is important because during most of the last business cycle construction provided one of the mainstays of job growth. So, by implication, a steady but low level of activity removes a very important job source from the economy.

Still it’s fun to report good news for a change.

Addendum:

A really interesting point made by Calculated Risk. There are most likely going to be ‘two bottoms’ in this real estate cycle: one for real estate investment and one for prices. This chart throws some historic perspective on the discussion. First it is clear that investment has now dropped to a very low level: as a percentage of GDP it is lower than at any time during the past forty years. And second, the cycle of price movements and investment movements are decoupled: the bottom for one is not necessarily the bottom for the other. In fact in the early 1990’s the bottom for real prices was a full five years after that of investment. The possible implication for us? That even though the housing industry might see some form of rebound in the near term, that does not mean prices will rebound. The price adjustment still appears to have more to go. Something worth thinking about.