A Tale of Two Bottoms: Sales and Home Values
By: Stan Humphries, Chief Economist | July 24, 2009
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.
- Stumble it!
- Categories: Real Estate Analytics
Comments
14 Comments so far
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M Realty on July 24, 2009 10:53 am
I just stopped trying to predict what is going to happen, and I stopped watching the news and rates for the bottom. That way I can just take business as it comes and to the best that I can, I will know the market is back without having to worry about the numbers.
-Tyler
MiamiCondoShop on July 24, 2009 12:47 pm
To me that’s a scary chart, if the levels of inventory keep tracking the level of sales we will never climb out of this mess. Already there are years worth of inventory sitting on the market if NO new homes are added. In Downtown Miami, it is estimated it will take 10 years to clear inventory at current sales rates and prices.
straightener chi on July 25, 2009 6:58 am
I just stopped trying to predict what is going to happen.
Just a homeowner on July 25, 2009 2:52 pm
A regional or city-by-city analysis of the degree to which home values are in line with historical norms relative to rental prices (or median household incomes) would be interesting to read (or to see as a feature on Zillow).
Objective View on July 25, 2009 8:10 pm
No predictions are necessary, just facts: unemployment and consumer debt are at record highs, homes doubled in price over 5 years while salaries remained flat, and our best jobs are shipped to India and China.
A world of pain is on the way, the meltdown has only just begun.
realtormikejett on July 25, 2009 9:43 pm
I feel like this is more industry bs….numbers lie….where are you really getting your facts…what is really missing here is the qualification factor of people who dont have a secure enought job or no equity or not enough in the bank or down payment even with the goverment 8K..to get a lender to take a CHANCE and give a under 50K or combined 100K family a loan….Let’s get realistic and know this is really the reality out there and NAR, Banks, Wall St or just trying to keep the Foriegn Investors hyped on the massive inventory tide that is building and downward trending there existing real estate investment. I know people are not jumping in the RE merry go round with assuming a much greater measure of risk.
Nice try…my work is not easy and finding buyers for all these homes is a great challenge. Yes I need positive news to promote my buisness..but reality who really can afford to buy a home at any price with all what I mention before. The most important indicator I will watch is the unemployement numbers..that will tell me what I really want to watch get better.
Pamela St. Peter, Realtor on July 26, 2009 5:40 am
Home ownership in this country has gotten out of whack. There is no right to own - it’s earned. Earned by learning how to manage ones finances and not using credit cards like ATM machines. Earned by SAVING money (now isn’t that a novel thought)for that down payment. Banks are still lending (albeit they are doing so with a barrage of questions and forms right now). But you have to qualify - is that a bad thing?
Buying and selling a home is based on life stuff - not solely on the stock market, good time/bad time to buy, or even unemployment numbers. It’s directed by things that happen in our lives; job transfers/relocation, having babies, and even downsizing. I think it’s time to start putting things into perspective again.
Esko Kiuru on July 26, 2009 5:00 pm
Stan,
Home prices have stabilized some in Las Vegas in the lower end of the marketplace where demand is relatively strong. First-time buyers and investors are having fun picking the best deals. But the middle and upper ranges are still sliding, so the overall average is likely to fall further in the coming months.
abe vigoda on July 27, 2009 6:42 am
Thank you for this insightful, well thought article. Hopefully, people will once again start to think of houses as a place to live rather than as investments. Like any other commodity, it is subject to the laws of supply and demand. Prices will need to keep adjusting to reflect the various macro economic pressures and also the huge amount of excess inventory and foreclosures.
You cannot fight the laws of physics or math.
DebtFree on July 27, 2009 1:10 pm
RE: “Buying and selling a home is based on life stuff”
Indeed, having a $5,000 mortgage payment from buying an overpriced property can certainly impact “life stuff” (stress, fights over money, “staycations,” and delayed retirement).
It’s time to start putting things into perspective again, a return to the norm that people pay 3X income MAXIMUM to purchase a house.
Glenn Kelman on July 28, 2009 1:10 pm
I think I rented a movie with this title not so long ago… And we linked to this excellent post in our latest newsletter; nice work Stan!
Redfin’s July Newsletter… | Redfin Corporate Blog on July 28, 2009 9:42 pm
[...] But More Inventory is Coming: 9% Increase in Foreclosure Filings More inventory is on the way via foreclosures. Nationally, foreclosure filings increased 9% in the first half of 2009 over the previous six months, and nearly 15% over the same period last year. While California mortgage defaults decreased for the first time in a year, many banks are staffing up for more foreclosures by September. What this means is that prices won’t rise with demand: the real estate market is like a grocery-store cereal aisle, where every time someone buys a new box of cereal, the banks put another on the shelf. [...]
Denise Kellar on July 31, 2009 3:58 pm
Real Estate and Banking have a marriage contract. When one stops talking - there’s a problem. But there’s no real intervention process in place here. Banks are worried about #’s and the bottom line. They are not subscribing, nor had a foolproof plan in place to deal w/abnormal or even “normal” short sale/foreclosure sales. It’s a twofold issue 1)profit margin 2)drastic bottom line losses from housing. Add job loss/insecurity and we’ve got a perfect storm. Real estate sales have improved no doubt; with pressure from the “Price King” to drop drop drop. The buyer’s who held off buying in the last two years have a golden egg in their lap. Rather than speculate on “shadow inventory” as those who want to sell; it’s still a shadow as to how much more inventory the banks really hold and when that will flood the market. Some indications, it’s around the corner. Next year (or 6-12 months from now) all the rental inventory will flood the market, that’s the other shadow inventory. If the bank’s don’t improve their handling of the desperate inventory, we may see another 10-20% drop in prices just because there’s overwhelming inventory that none of us can control; which takes forever to move, while the banks sit on their thumbs and just wait, while any profit to be realized just dwindles away!
property prices on August 18, 2009 2:16 am
Thanks for info about Home values.