Home Sales Threaten Pricing Again

Trouble Ahead, Trouble Behind

Another leg lower in home sales, rising home inventory, steady foreclosure flooding and a still soft consumer threaten to take home prices lower.

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Home Sales Threaten Pricing Again

The day's data flow offered the Existing Home Sales report and the FHFA House Price Index. Unfortunately, we found further support in the data for our case and concern for another drop in home prices. Over the last six months, sales and prices have settled, but we think the settling has inspired fantastic expectations for housing and economic recovery. However, through all of this imaginative reporting by the popular press and continued poor forecasting by government representatives, we have noted expectations for, and pointed to, a sorry flow of data showing an economy that should soften again. And it is!

Existing Home Sales

Existing Home Sales were reported this morning for the month of June. The annual pace of sales fell 5.1% to 5.37 million, down from 5.66 million in May. While the rate of activity was expected to decline in June, the actual result was better than the economists' consensus forecast for 5.26 million (based on a Bloomberg survey).

Existing home sales measure closed transactions, which the First-Time Homebuyers Tax Credit still impacted through June. Thus, you can expect to see further decline in this rate and in the supply of home inventory over the next few months. Keep in mind though that delays in closings and the expected government allowance of late credit-inclusive closings should still help support the next month or two of activity. The process of home purchase has been extended due to legal bottlenecks and increased short-sale and foreclosure activity.

Total housing inventory increased 2.5% in June, to 3.99 million existing homes for sale. Given the latest rate of sales, that places housing supply at 8.9 months, up from 8.3 months in May. Some of this data is suspect to me, given that it is produced by a biased organization, the National Association of Realtors (NAR). For this reason, I especially question the pricing data. That said, the fact that S&P/Case Shiller and FHFA both show similar price trends act as an effective check here. We take a look at pricing further down the post.

Mortgage rates could not be much more inspiring for the real estate market. Freddie Mac (NYSE: FRE) reports that the national average commitment rate for a 30-year conventional fixed-rate mortgage dipped to record low territory in June, to 4.74%.

Based on the NAR's report, the national median existing-home price for all types of housing was $183,700 in June. The NAR states this level was 1.0% higher than the prior year mark, but the organization does not offer a month-to-month comparison, instead stating that seasonality makes this irrelevant. Seasonality, however, does not stop the organization from reporting monthly sales changes and inventory levels. This made us suspicious, but as it turns out, the silence is not deafening. Last month's report shows prices gained 6.1% from May, and a call into the the NAR showed that after revision, prices remained up over 5%.

The NAR contact explained to us the NAR's view that monthly change is irrelevant here. It seems to us that making seasonal adjustment to price is simply too complicated, as it is impacted by types of buyers and several factors not included in the monthly press release. The NAR said that generally, prices have been flat over the last six months, which is something we've seen in other metrics as well.

Looking regionally, the median price of a home in the Northeast fell by 1.2% versus the year ago period; the Midwest marked a 0.1% decline; the South saw prices unchanged; and the West region of the nation recorded a 1.5% price rise. This regional strength for the California, Arizona inclusive area is again seen in the FHFA report.

FHFA House Price Index

The FHFA does provide seasonally adjusted home prices, though a month behind. The FHFA House Price Index gained 0.5% in May, following a revised higher 0.9% price increase in April. Prices remained down 1.2% over the trailing 12 month period, and the index is still 12.3% short of its April 2007 peak. As far as Fannie (NYSE: FNM) and Freddie sponsored home purchases are concerned, prices did best in the Pacific Region (+1.8% - includes California), Mountain Region (+1.7% - includes Arizona, Nevada, more) and South Atlantic (+1.0% - includes Florida, Carolinas, up to Delaware). Prices were weak in the East North Central (-0.6%) and East South Central Regions (-0.2%) (these include Michigan, Ohio, Illinois, Mississippi, more).

We often note here how a ship must come to a stop first before reversing direction. Well, May marked the first monthly decline in the rate of price gain per the House Price Index since it began its upward rise in March. We have been one of few voices raising awareness of the slowing of activity, and continue to expect a second leg lower for home prices. We expect seating on the bandwagon will tighten with time, as has been the case since we started publishing the blog since before the bubble burst.

Also see: Housing Starts Sink Again



Relevant Tickers include NVR Inc. (NYSE: NVR), D.R. Horton (NYSE: DHI), Pulte Group (NYSE: PHM), Gafisa SA (NYSE: GFA), Toll Brothers (NYSE: TOL), Lennar (NYSE: LEN), MDC Holdings (NYSE: MDC), KB Home (NYSE: KBH), Ryland Group (NYSE: RYL), Meritage Homes (NYSE: MTH), Standard Pacific (NYSE: SPF), Hovnanian Enterprises (NYSE: HOV), Beazer Homes (NYSE: BZH), Brookfield Homes (NYSE: BHS), Avatar Holdings (Nasdaq: AVTR), Xinyuan Real Estate (NYSE: XIN), M/I Homes (NYSE: MHO), Comstock Homebuilding (Nasdaq: CHCI), Senior Housing Properties Trust (NYSE: SNH), NYSE: DMM, NYSE: UMM, Fidelity Select Construction & Housing (Nasdaq: FSHOX), China Housing (Nasdaq: CHLN), Equity Residential (NYSE: EQR), Avalonbay Communities (NYSE: AVB), UDR, Inc. (NYSE: UDR), Essex Property Trust (NYSE: ESS), Camden Property Trust (NYSE: CPT), BRE Properties (NYSE: BRE), Apartment Investment Management (NYSE: AIV), Home Properties (NYSE: HME), Mid-America Apartment (NYSE: MAA), Equity Lifestyle Properties (NYSE: ELS), American Campus Communities (NYSE: ACC), Colonial Properties Trust (NYSE: CLP), American Capital Agency (Nasdaq: AGNC), Sun Communities (NYSE: SUI), Education Realty Trust (NYSE: EDR), Associated Estates Realty (NYSE: AEC), PennyMac Mortgage Investment (NYSE: PMT) and Two Harbors Investment (NYSE: TWO).

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