Home Sales and The Stimulus

Today’s news that sales of existing homes rose 7.6% in April is deceiving. There seems to have been a late surge in sales because the tax credit which was part of the stimulus was finally being eliminated. The prospect of the credit going away brought a burst of activity out of proportion with the underlying strength of the real estate market.

For a more complete picture of that market we need to note the 11.5% jump in unsold inventory. This inventory of unsold homes represents about 8.5 months supply at April’s higher pace, and so will act as a depressing effect on home prices as the year goes on. It is not unusual for the inventory of houses for sale to rise at this time of year: the spring selling season brings a lot of homes onto the market, but this year’s rise was unusually large. The data for unsold homes is not seasonally adjusted so the increase represents actual homes for sale.

There are two ways to look at this increase.

First we can take the pessimistic view that sales are too weak to clear the inventory and so it is backing up to unhealthy levels. Or, second, we can take a more optimistic view, and argue that the increase signals a thawing in the market and a rising confidence amongst home owners that they will be able to sell their homes.

Naturally the truth is likely to be somewhere in the middle.

My own view is that the market remains fairly weak, but that homeowners are, indeed, more confident this year about the prospects for making a sale. None of the usual fundamental factors supporting home sales have shown a sudden improvement. Wages, credit availability, and affordability have not moved sufficiently to suggest we are at a point where sales could grow at a stronger rate for long. In fact they are all quite weak still. This is why I see the real estate market being stuck in a low gear for the majority of this year. Having said that: there is a build up in the numbers of homeowners who would like to sell but who were prevented from doing so by the uncertainty of the last two years. This ‘backlog’ effect, and the mild recovery, are combining to encourage owners to test the market this spring. Hence the bump up in inventory.

But those weak fundamental factors will prevent the inventory from being cleared easily – at least on a national scale – and so we can expect the conditions to favor buyers all year long, and that prices will be weak as a consequence. I would not be surprised to see home prices drop a little more to reflect this dynamic. Having said that I also expect home prices to have been quite firm last month as the tax credit enabled sellers to fend off the need to cut prices much, if at all.

In sum: the house market doesn’t look set for a dramatic revival. That inventory overhang is worrisome, and until wages show some real life, and affordability drops back in line with historic norms, the market will recover only slowly.