Existing Home Sales Rise: Good News, But Don't Get Carried Away

The following article on the national residential housing market was found on Seeking Alpha.

Existing Home Sales Rise: Good News, But Don't Get Carried Away By Dirk van Dijk
June 23, 2009

Sales of existing homes rose 2.4% in May to a seasonally adjusted annual rate of 4.77 million from April’s 4.66 million pace. April’s activity was revised down from its initial read of 4.68 million. The increase in sales happened despite a slight uptick in mortgage rates, which averaged 4.86% in May vs. a record low 4.81% in April.

Currently, mortgage rates are at 5.38%, which though still at historically very low levels, might represent enough of an increase to take some of the steam out of the nascent recovery in existing home sales. A year ago, mortgage rates were 6.08%. Existing home sales have been relatively stable for awhile now, with the current level being just 3.6% below the pace of a year ago.

A big part of the stabilization and now minor recovery in activity has been the decline in prices. The median price of an existing home is now $173,000, which is down 16.8% from a year ago. (The median price is not the best measure of housing prices, since it is greatly influenced by the mix of houses being sold. However, the median price measure is broadly in line with what better measures like the Case Schiller index have been showing.)

In other words, the market does work, even for housing. When prices drop, sales pick up. Further evidence of this can be seen in the details of the report:

In the West, the median price is down a whopping 30.6% from a year ago, yet sales are up 11.8%. For the month they dropped 0.9%. In the Midwest sales rose 9.0% for the month and are down just 4.4% from a year ago. The median price in the Midwest is off 10.4%. In the Northeast sales were up 3.9% on the month but down 10.1% from a year ago, with the median price down by 12.5%. In the South, sales were unchanged vs. a month ago and off 8.9% from a year ago. It has seen the smallest decline in median prices at just 9.9% from a year ago.

Both single family and condo sales improved for the month with single family sales up 1.9% but down 3.0% from a year ago, and condo sales up 6.1% for the month and down 8.9% from a year ago. The median price of a single family home is down 16.1% from a year ago, while the median condo price is down 21.9%. This made the median prices of single family homes and condos almost equal -- $172,900 for single family homes and $173,800 for condos. Keep in mind that lower sales prices will mean lower property tax revenues for municipalities and school districts, further pressuring budgets.

Perhaps the best news in the report is that inventories dropped by 3.8% to 3.80 million, or 9.6 months of supply vs. 10.1 months in April. Also, distressed sales fell to 33% of the total from 45% in April. While 33% is still a very high number, the large drop is very encouraging.

I would caution that there is still a large shadow inventory out there of people who want to sell their homes but are waiting for a better market, and also of banks that have been holding back on listing some of their foreclosures. However, it is very hard to quantify the shadow inventory, and it exists regardless of the state of the official inventory.

As the graph below shows (from Calculated Risk), inventories are still very high relative to sales, but we have been making erratic progress for over a year now. However, months of supply are still about twice as high as the norm of a few years ago. The pickup in sales is good news, but do not get too carried away by it.

Existing home sales do not directly affect the economy the way that new home sales do, but they do have some positive effects. The stabilization of existing home sales is good news for firms like Bed Bath & Beyond (BBY) and Sherwin-Williams (SHW), since when people move to a new house they are likely to redecorate and paint.