Economic Notes: Building a Foundation?
3/25/2009
Housing sales increased nationally in February, with new home sales rising 4.7% and existing home sales 5.1% above January’s level.
Although these gains come after a prolonged decline in housing activity, when sales had fallen to record lows, they prompt the question: Has housing touched bottom and, if so, is a rebound underway? There are several points to consider.
First, prices matter. Compared to February 2008, when prices were already down, the median price of a new home dropped another 18.1% and that of an existing home fell an additional 15.5%. The bubble has deflated and prospective purchasers are taking note.
The price declines may have run their course, however. The Federal Housing Finance Administration reported an increase in its housing price index in January – only the second uptick in 18 months. If prices continue to rise, fence sitters will jump.
Second, the impact of foreclosures is evident in the recent data. Despite increased sales, the inventory of unsold existing homes rose slightly in February. This is due to rising foreclosures and to previously discouraged sellers placing their units back on the market.
The National Association of RealtorsÒ estimates that distressed transactions (e.g., foreclosures, short-sales, etc.) accounted for perhaps 45 percent of all sales, which explains at least some of the continuing drop in median prices.
As mortgage mitigation programs curtail foreclosures, prices will stabilize and would-be buyers will see less reason to wait.
Third, as builder discounts encourage sales and with housing starts at near-record lows, the inventory of new homes on the market continues to drop. This will also contribute to a firming of prices.
Fourth, mortgage rates have dropped dramatically and are expected to remain at relatively low levels for the foreseeable future. Lower rates, in combination with lower prices, make housing quite affordable.
The foregoing suggests that (1) the sales volume of existing homes has bottomed; and (2) as the surge in foreclosures slows, prices will stabilize. New home construction will languish until the ratio of existing units-on-offer to sales drops from its current 9.7 months to around six months, sometime in 2010.
But while a bottom is a precursor to recovery, a housing recovery cannot occur until the general economy (most particularly employment) turns around.
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The statements, opinions, and conclusions contained herein are based solely upon the author’s own studies, research, and personal experience. Neither J.H. Cohn LLP nor the author makes any representation or warranty as to the accuracy or completeness of this information. J.H. Cohn LLP and the author expressly disclaim any liability for any loss or damage which may be incurred, of any kind whatsoever, as a result of or arising from the use of any of the information contained herein or reliance on the accuracy or completeness of it.
For more information, contact Patrick O’Keefe, director of economic research at J.H. Cohn, at pokeefe@jhcohn.com or 973-364-7724.