Housing Woes Return?

Let’s not all get into a tizzy over today’s report that sales of existing homes plunged 16.7% in December: to an annual rate of 5.45 million from November’s 6.54 million. We are going to see quite a few quirky and volatile reports over the next week or so, and this is the first. The reason the National Association of Realtors gives us is that the numbers are distorted by the huge swell of buyers back in the fall last year when the first time buyer tax credit was thought to be expiring. The allure of that credit brought a surge of buyers onto the market looking for deals at the low prices housing has sunk to over the past year or so. So the imminent expiry of the credit created a crush to get deals done in November. According to this narrative, December’s figure reflects the absence of the credit and the aftermath of the fall binge.

Well now.

What the realtors are not telling us is also important. That crush of buyers probably pushed prices up from where they would have been. After all the rules of supply and demand dictate that a sudden surge in demand will put pressure on prices, especially if buyers are thinking there is a deadline fast approaching. The tax credit most likely cut short the haggling some buyers might otherwise have done over price. In which case the firming trend in house prices is also over-stated at the moment. The realtors cannot have it both ways!

Given these two views of the data I think a little prudence is in order. Housing remains in a slump, but is not in free fall the way it was. Prices are still weak, but not declining. There is a huge inventory overhang of unsold homes, mostly listed at prices that reflect the past rather than current realities. In addition: there is a ‘shadow inventory’ of homes that people would like to sell, but are not listing for sale because they cannot stomach the prices at which they would have to sell in the market as it is today.

As ever the optimists, the realtors are expecting a renewed surge this spring. Apart from the fact that spring is traditionally a strong sales season I cannot figure out where this surge would come from. While it is true that in some areas home prices are now back into line with historic rent/purchase ratios, they remain out of line with the more important income/sales price ratio. For the latter to get back into its long term range we still need another 10% t0 come off average prices. Even if that were to happen, the inventory overhang will continue to put pressure on sellers rather than buyers. And if that is not enough to keep the sector weak I cannot see wages picking up any time soon: that alone implies fewer motivated buyers than in a normal spring.

Of course the upcoming selling season will be compared to last year’s which was disastrous, so many of the year to year statistics will look good. It is in the context of a longer view that they will be weak.

So what do we make of today’s report?

Not much.

Housing is in for a long period of weakness. The after effects of the bubble will continue to dog prices: there is an over supply of housing in many price ranges and geographic areas. It will take more than one good spring season to unwind that problem. Add in the fact that banks have over-tightened their credit rules and the outlook gets even more limited. Given what we know today 2010 will be a tough year for the realtors: inventories need to be worked off and prices adjusted to the new post recession realities. Real estate is notorious for bumpy landings, and the December report is a reminder that demand throughout the economy is still heavily reliant on government stimulus.

Take that stimulus away and we reveal a weak and only slowly recovering economy.

That will be the story over the next few reports, especially the GDP number to be released later this week. By all accounts GDP grew about 5% [maybe more] in the fourth quarter of 2009. The release of that kind of report will cause a flurry of declarations of recovery in the media. Nothing could be more premature. The fourth quarter will be heavily distorted by inventories and stimulus.

Caution is still the watchword here.