home sales

We all know the housing bubble, and the policies that enabled it, are a prime cause of the current crisis. So watching every bit of housing data has become something of an obsession. The problem with this, of course, is that month-to-month changes are notoriously inaccurate guides as to the underlying direction of any economic statistic. Housing is no exception.

But clusters of data can provide more insight.

So if we take today’s reports on the housing market, mix in yesterday’s home price data and then look at broader indicators such as unemployment and incomes we are better positioned to discern what’s going on.

The short answer is that housing continues to wallow in very bad shape. I just don’t see a healthy housing market for years to come. If, on the other hand, your concern is bargain hunting, then 2010 is beginning to look good.

First the news:

Today’s data shows that home sales rose 2.9% last month. That’s not a very significant change and should be ignored as a sign of the market having hit bottom. Let’s see a few more months of steady gains before we break our the champagne. Especially since almost 45% of all sales included in the data were distressed properties, and overall sales were down 35% from their peak three plus years ago. Bargain hunting is the theme of the moth..

Some of the details are astonishing: the unsold inventory of homes priced over $750,000 is now a gargantuan forty months. Such is this overhang that the realtors are calling for more government aid to help this part of the market. I say no. Cut prices. Our problem is that we massively over-built homes at the higher price points as every developer piled in to exploit the bubble. Affordability issues were thrown aside as long as exotic forms of credit were made available to enable enough people to buy these expensive properties. In other words it was not basic income strength that provided the flow of buyers, it was the collapse of credit standards. So we have an inventory of high end properties far in excess of the number of properly qualified buyers.

Throw in the fact that incomes are stagnant, and have been for years, and that most consumers are trying to reduce rather than increase debt loads, and the only conclusion I can come to is that the high end property market has a very long way to go before it reaches stability. And that must include much more aggressive price cutting than we have seen so far.

The low end of the market seems to be adjusting more quickly, largely because the flood of foreclosures has forced a downward shift in pricing, and the government’s new home owner credit is encouraging first time buyers to take the plunge.

Given the impact that distressed properties and government credits are having, and the fact that even the lower priced homes have an unsold inventory almost twice ‘normal’, there is no way the housing market can be viewed as functioning remotely well. The very weak outlook for unemployment over the next year only adds to this conclusion: the huge over supply of homes is weighing so heavily on the market that, without outside help, the market just seems frozen.

So when will it recover?

Who knows?

The imbalances remain huge. Price stickiness – they come down slowly and erratically rather than smoothly and quickly – prevails, especially in markets like New York. Yet the signs of adjustment are there: New York saw its largest ever price reduction just last month, so reality is creeping in. Finally.

At this rate 2010 or even 2011 seems the best bet for housing to arrive at its new balance. Hopefully one stripped of its obscene price inflation and destructive support, both from the government and from the banks. Perhaps then we can rid ourselves of the folly of biasing our economy towards real estate. Home ownership should be viewed as any other transaction and not privileged with excessive government assistance. It is time to abolish the tax deduction afforded mortgages. It is expensive and skews household savings away from more productive uses. It drives up home prices by creating excessive demand. In the new era of Federal budget austerity that should follow our current malaise, I hope to see this welfare for home owners ended.

Addendum, May 28th, 11:30 a.m.:

This morning’s data on new home sales, as opposed to existing home sales, confirms the housing slump is far from over. Prices are down about 15% from this time last year; and the volume of sales has dropped a whopping 34%. The latest release was an estimate of 352,000 sales at an annual rate, which is the preliminary number for April. The previous estimate for March was revised down slightly to 351,000. Unsold inventory is stuck above ten months. Clearly the housing sector has a very long way to go!