New Home Sales Rise; So What?

Sorry. I just can’t get too excited over today’s news that sales of new homes rose 7.3% in April. So what? But I pass the news on despite myself. Sales are now running at an annual rate of 323,000, which is much better than March’s 301,000, but is way below – to the tune of 23.1% down – last year’s number. It is far too early to call this the first signs of a turn about in real estate. The unsold inventory of new homes is at an all time low of 175,000. That is not because new homes are flying off the shelves, but because construction has slowed to a crawl. At the current pace of sales clearing that inventory would take between 6 and 7 months, which is not far off normal. Then again quite what normal is in these post-crissi days is yet to be discovered.

Besides, new homes sales are dwarfed by the activity in the existing homes arena. There the unsold inventory is huge, at around 3,900,000. This is just the listed unsold inventory. According to reports from realtors and the banks there are another 2,500,000 foreclosed homes sitting in bank portfolios waiting to be sold as well. This massive inventory overhang in the existing home market is distorting everything at the moment and will shape the real estate recovery, such as it is, over the next year or two.

The size of the foreclosed portfolio alone casts a very long shadow over home prices. Banks have been unable to keep up with their own foreclosure activities. They have created a huge backlog for themselves which could cause their losses to escalate as they begin to clear it out. The steady trickle of foreclosed homes has had a depressing effect on home prices already, were the banks to pick up the speed at which they liquidate their inventory, they would destabilize prices even more.

Considering that the median price of an existing home has now fallen to $163,700, while the comparable price for a new home is $217,900, the bank portfolio effect will leak from the existing home market into the new home market as well.

So, even with today’s announcement of apparent improvement, I see no reason to get excited over real estate any time soon. On the contrary: that inventory overhang makes me think that prices have another round of declines ahead of them. Things could get worse before a true recovery sets in.