The nation’s housing sector is having trouble lifting itself out of the enormous hole it has been in since the real estate bust began several years ago. Recent data has been disappointing; demand for housing remains soft while the supply for housing remains excessive.
Existing-home sales fell by 3.8 percent in May compared with April to an annualized 4.81 million units. The decline in sales was broad-based across regions, with only the West not exhibiting any change in sales. The months supply of homes available for sale to 9.3 in May from 9.0 in April. Similarly, new home sales fell 2.1 percent in May to 319,000 annualized units. It is obvious that new home sales have been scraping bottom for the past 6 months. However, compared with one year ago, new home sales are up 13.5%. The months supply for new homes declined to 6.2 in May from 6.3 in April. The number of new homes available for sale has fallen to a new low of 166,000 units. The data extend back to 1963.
On a brighter note, new residential construction rose 3.5 percent in May to 560,000 annualized units but is still down 3.4 percent from one year ago. Total permits registered an 8.7 increase in May to 612,000 annualized units.
Most of the leading indicators for home sales were also down. The purchase index for mortgage applications was down 2.3 percent from a week ago and the index has hovered below 200 for the past several months. A purchase index below 200 indicates weak housing demand. Similarly, the pending home sale index plummeted 11.6% in April from the level in March. The data reflect contracts and not closings, which normally occur with a lag time of one or two months. Pending home sales are 26.5% below April 2010, a period coinciding with the end of the second homebuyer tax credit.
Finally, the Case-Shiller Home Price Indices for both the 10- and 20-city indices have been trending down in recent months and are down more than 30 percent from their peaks. They are now just at their cyclical lows set in mid-2009.
So what do we make of today’s sluggish housing markets? Is there any hope that housing demand will pick up soon and lead a solid recovery?
First, there are reasons for the housing markets inability to jump start a recovery. Economic growth was slower than expected in the first half of 2011, largely the result of a number of special factors. Poor weather conditions in most of the nation inhibited construction activity, and higher energy prices restrained consumer spending, particularly on big ticket items such as homes and automobiles.
The second quarter was also soft due to poor weather; higher energy costs plus parts shortages (delaying U.S. production) caused by the Japanese disaster. In addition, the labor market has been a bit softer than anticipated; nonfarm payrolls increased by only 54,000 in May.
Combine a soft economy with falling home values, delays in foreclosure processing which are slowing the pace of distress sales that have become a large share of existing-home sales, and tight mortgage credit conditions and you have a recipe for anemic housing demand.
Looking forward, the near term outlook for housing remains dismal but the longer view is quite more sanguine. According to the leading indicators, home sales in June and likely July are expected to remain sluggish. We also expect home values, as measured by the Case-Shiller Home Price Indices-to continue to fall-probably another 5 percent-by the end of this year and into the early months of next year.
However, a modest housing recovery is in sight. I expect the U.S. economy to gain momentum in the second half of this year. The Federal Reserve promises to remain accommodative suggesting relatively low interest rates for the remainder of the year, keeping housing affordability at near record levels. Business profits are high and companies are expected to be more aggressive hiring workers in the second half. The negative impact of higher energy prices are behind us as well as the negative impact of the Japanese disaster.
Of course, downside risks exist and include: a failed debt ceiling agreement; energy prices rise again, fiscal problems in Europe worsen, to name a few. Notwithstanding these potential headwinds, consumer spending and confidence are likely to improve towards the end of this year. Further, job growth will pick up, housing affordability will remain high and the pipeline for distressed properties will eventually flow and decrease. All of these factors suggest an improved home sales outlook for the second half of this year and beyond.
I cannot stress enough that progress in the housing sector is measured in inches, not meters; small steps not big ones. Home sales are expected to gain some traction but one home at a time. As for home prices, oversupply and ongoing foreclosure problems weigh heavily on price pressures. House prices will lag this rebound by almost half of a year. It will take some time and price cuts to work through today’s excess inventory of non-distressed and distressed properties. Sometime in 2012, home values will reverse course and head north once again. But, even then, home prices will post only modest gains.