A Tale of Two Bottoms: Sales and Home Values

Yesterday, National Association of Realtors (NAR) released their existing home sales numbers for June, reporting the third consecutive monthly gain for existing home sales.  Annual sales were up to 4.89 million homes (seasonally adjusted annual rate) marking a 3.6% increase over May’s number (and relative to a 2.4% increase between April and May).  This lends further support to the view that we’re seeing a bottom in sales volume nationally.  Demand for housing has been spurred by the Federal tax credit to first-time home buyers, mortgage rates that are relatively low historically, lower home prices, large numbers of very cheap foreclosures, and increasing consumer confidence.

But, obviously, a bottom in sales volume is not the same thing as a bottom in home values.  The former is a necessary precondition for the latter, but most economists expect prices to keep falling nationally through at least the early part of next year.  Why?  Well, for a variety of reasons having to do with both supply and demand, specifically:

• Current trends may owe a lot to seasonality and the $8,000 first-time home buyer tax credit.  As such, current demand may not be based on sustainable market forces.

• With negative equity rates high and unemployment continuing to rise, we have likely not seen the peak in foreclosure rates.  Indeed, even recent foreclosure rates may have been artificially suppressed due to various moratorium in effect.  Unemployment rates are not expected to peak until next year and high foreclosure rates will continue to put downward pressure on home prices.

• Continued economic uncertainty associated with job losses will continue to keep some people on the sidelines of the real estate market.  Consumer confidence seems to have rebounded from their lows in the fall, but many people are still nervous, particularly when it comes to costly transactions like home purchases.

• There is likely a lot of shadow inventory out there.  In Zillow’s Q1 Homeowner Confidence Survey, 31% of homeowners said they would be at least somewhat likely to put their home up for sale if they saw signs of a turnaround. This “shadow inventory” of homes not counted in the official for-sale inventory numbers would add to the already high levels of inventory and prolong any recovery.

• Even with home values in the US down more than 20% from their peak, they are still not yet back in line with historical norms relative to rental prices (or median household incomes), possibly indicating that there is either more unwinding of values to be done or we’re in for a very prolonged period of negligible appreciation (more on this in a future blog post).

With respect to shadow inventory, a key metric to be watching over the coming months is inventory levels of existing homes for sale.  While home sales notched up 3.6% in June, inventory levels only declined 0.7%, and it’s this latter number that may prove difficult to move substantially if foreclosures and shadow inventory (pent-up supply) continue to pour water into the top of the inventory bucket faster than new home sales can drain it out of the bottom.

To think about this phenomenon over time, Chart 1 shows the number of existing homes sold each month (not seasonally adjusted) compared to the number of homes added to the inventory of unsold homes each month.  As you can see, sales have risen since January as the typical spring home-selling season swings into action.  But, new inventory being added to the existing inventory has also been rising at almost the same clip (albeit in a more erratic pattern).  If predictions of shadow inventory bear out, expect a sustained saw-tooth pattern of new monthly inventory caused when batches of homeowners – who’ve been waiting on the sidelines for months and years – collectively put their homes up for sale, temporarily glutting the market for a period of time (thus putting downward pressure on home prices).

So, in closing, we’ve likely still got some way to go before finding the bottom in home values nationally.  That doesn’t mean, of course, that specific markets aren’t going to get there earlier, because some certainly are. I’ll look at some of these in future posts.

Dr. Stan Humphries is a real estate economist and real estate expert for Zillow. Stan is in charge of the data and analytics team at Zillow, which develops housing market data for most major metropolitan statistical areas in the U.S., and provides economic research for current real estate market conditions. He helped create the algorithms for the popular Zestimate® home value and the Zillow Home Value Index (ZHVI).