Eye on the Economy: Lots of Encouraging Housing News, But…
The news surrounding the housing market of late has been undeniably encouraging. Both new and existing single-family home sales saw their fourth consecutive monthly increases in July, rising 9.6% and 7.2%, respectively.
On the rise for six straight months and foreshadowing the improvement in existing home sales, the Pending Home Sales Index of the National Association of Realtors® rose 3.2% in July from its June reading.
In an even more upbeat sign of a budding recovery, the inventory of new single-family homes for sale has fallen to 271,000, its lowest level since March 1993. Inventories have been falling for 27 months from a peak of 572,000 homes for sale in July 2006.
A higher sales rate and lower inventory reduced July’s supply of housing to 7.5 months, down from 8.5 months in June. The months’ supply measures how long it would take to sell the current inventory of homes based on the month’s sales rate. As recently as January, this measure stood at an all-time high of 12.4 months.
Home Prices Are Stabilizing
The seasonally adjusted S&P/Case-Shiller 20-city and 10-city Home Price Indexes were both up 0.75% in June following miniscule declines in May (0.01% and 0.02%, respectively). Until the June report, both indexes had fallen for three years running, from June 2006 through May 2009.
Among the 20 cities, 15 turned in higher home prices from May to June on a seasonally adjusted basis. Three of the five with declines — Tampa, Fla.; Charlotte, N.C.; and Seattle — each fell less than half a percent (0.01%, 0.15% and 0.29%, respectively).
Nine cities saw price increases in May, compared to only five in April, one in March (Denver) and none in February.
Any Optimism Must Be Cautious
Despite some significant grounds for optimism in the most recent period, some words of caution are in order.
The recovery in housing appears to have been largely driven by the federal tax credit for first-time home buyers, making smaller, less expensive housing the strongest sector of the market.
The median square footage of homes that have been started has fallen from a peak of 2,309 square feet in the first quarter of 2007 to 2,091 square feet in the second quarter of this year. Median new home prices have fallen from a peak of $262,600 in March 2007 to $210,100 in July 2009. Median existing home prices have fallen from a peak of $230,900 in July 2006 to $178,300 in July 2009.
The window of opportunity for potential home purchasers to qualify for the home buyer tax credit is rapidly closing. Purchasers must close on a house by Nov. 30 to qualify for the tax credit (see First-Time Home Buyer Tax Credit for more information on the credit).
If a buyer is not already engaged in the purchase process, it will be difficult, if not impossible to purchase a new home and qualify for the tax credit at this point. Finding and purchasing an existing home by the Nov. 30 deadline is still feasible, but again, the time is drawing short.
Home buyers who do not qualify for the first-time home buyer tax credit, but see the advantage of historically low mortgage rates, lower prices and the ability to drive a hard bargain, have contributed to the increased demand for housing.
However, unless Congress extends the tax credit, a drop-off in demand from first-time home buyers could put an early end to the housing recovery.
Some Negatives Abound
It also needs to be emphasized that the good news that recently has been greeting the housing industry needs to be put within the context of the long pummeling that has brought activity to dramatic lows.
Despite their recent rebound, single-family new home sales are down 13.4% from a year ago. At a seasonally adjusted annual rate of 433,000 in July, they were only about 40% of what would be considered a reasonable sales pace in normal times. Between 1999 and 2003, new home sales averaged about 1.1 million homes per year.
What is most troubling is that the median number of months for a sale after the completion of a new home rose to 12.4 months in July, a record high for this measure since the Census Bureau began tracking it in 1975.
July’s existing home sales were 5.0% above the rate of a year ago. While, July’s 5.2 million sales are closer to the 1999 to 2003 average of 5.5 million, a substantial share of the sales are distressed or foreclosed properties — another factor pushing down median existing home prices.
The inventory of 3.3 million existing homes for sale, an 8.6 months’ supply, seems tolerable, though elevated. However, it appears that there are many home owners who would put their house on the market if they thought they could sell it within a relatively short period at a reasonable price.
Although home prices may have stabilized in June, they are still down significantly. The S&P/Case-Shiller 20-city and 10-city Home Price Indexes were both down 15% from June 2008. The 20-city index is down 31% from its peak in July 2006. All 20 cities were down from June of last year. Only five cities — Denver, Boston, Charlotte, N.C., Cleveland and Dallas — had year-over-year price declines of less than 10%.
And the Multifamily Market Continues to Struggle
Although sales of existing condominiums rose in July to 630,000 from 560,000 in June, inventories of existing condos for sale rose from 611,000 to 791,000. Thus, even with the higher sales rate, the months’ supply of condos for sale rose from 13.1 in June to 15.1 in July.
New condo production is virtually non-existent — production averaged 33 condo starts per state per month for the first six months of 2009 — and all multifamily construction continues a downward spiral and will likely approach 100,000 starts on a seasonally adjusted annual basis for the remainder of 2009.
NAHB Chief Economist David Crowe analyzes the economy from the point of view of the housing market every other week in the free e-newsletter, “Eye on the Economy.” The preceding is a reissue of his Sept. 2 edition. To subscribe to “Eye on the Economy,” click here.
Tax Credit Web Site Looks at Opportunity of a Lifetime
Builders and other industry professionals can help spur home sales by referring prospective first-time home buyers to www.federalhousingtaxcredit.com. The NAHB Web site provides detailed information on the $8,000 federal tax credit for first-time home buyers included in the economic stimulus legislation signed into law by President Obama.
Consumers can use the Web site to find information on the tax credit — including a detailed question and answer section. It also includes information about other housing-related and small business measures in the legislation and a number of home-buying resources for consumers.
Spanish Version Also Available Online
A Spanish version of this increasingly popular Web site is also available to provide detailed information on the tax credit to Spanish-speaking first-time home buyers.
Industry professionals are encouraged to highlight either tax credit Web site when marketing to their potential first-time home buyer market.
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