Home Sales Bounce Up

Committed as I am to the spirit of balance, I have to report briefly on today’s good news. Sales of existing homes rose 7.7% in August. Of course they are still way below the unsustainable pace reached at the peak of the bubble – they are pottering along at an annual rate of about 4.9 million units, compared with the white hot 7.08 million of 2007. Still a bounce up is a bounce up. We should cheer.

What happened?

Well nothing fundamental. Rents have risen a little making the monthly cost of purchasing more competitive; mortgage rates are near all time lows, for those who qualify; and there seems to have been a push to buy before the top level for a conforming loan is dropped from its temporary high. For those of you who don’t know what that is: a conforming loan is one that meets the FHA underwriting requirements, one of which is the amount of the loan. As a temporary, and ill-fated, attempt to boost real estate the FHA raised the ceiling on the amount considered as acceptable. That temporary ceiling fell victim to the Republican desire to cut government intervention and so is about to drop. The problem is that in some parts of the country home prices ensure that pretty mush all loans violate the conforming ceiling even with a healthy downpayment. With the ceiling about to drop it appears many buyers rushed to buy and thus qualify for the larger loans, thus boosting sales. We will have to wait to see by how much.

And, of course, another factor in boosting sales was the steady drop in prices that now seems to be continuing beyond levels suggested by market conditions. The median price of a home was $168,300, down a little over 5% from last year.

Lastly we should recognize the pressure on sales created by the influx of foreclosed homes. Distressed sales accounted for 31% of all sales in August, slightly up from July, and led to a wider gap between the price of new homes and existing homes. That gap is now about $50,000, much larger than normal, and reflects the downward pressure on prices that the unwinding of the bubble is still exerting.

So, all in all, I cannot argue that this bounce up in sales looks sustainable. There were too many oddball contributions to it, and the backlog of foreclosed homes will weigh down on the market for a while longer. The unsold inventory of homes is roughly equivalent to 8.5 months of sales. In the past – no guarantee of the future as we all know – an unsold inventory of closer to 7 months has been the point at which prices start to firm up and bidding on homes pushes up rather than down. At current sales rates, and with a huge shadow inventory of homes not officially for sale but with owners keen to sell anyway, I cannot see prices settling or rising any time soon. Indeed the downward pressure could linger well beyond next year and into 2014/2015.

One interesting side note: there is considerable indication that we have now overshot the bottom in real estate. This means sales and prices, while still weak and trending down, are not fully reflective of long term trends, but are being established by short term adjustments. If – a huge if I realize – we arrive at a more stable economic pattern of growth, prices are likely to rise to take this overshoot into account; plus we will need to have a rapid climb in construction to overcome what appears to be a shortage of housing. This sounds peculiar in our current circumstances, but makes sense with respect to the longer term trends and demographic pressure. Caution: even when those increases show up – if they show up – we will not be caught in a bubble like rise. Your return will be higher from other investments, so don’t go speculating in real estate!