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Wednesday, April 26, 2006

Existing Home Sales - March

Update: For a graphic demonstration of the pricing pressures on hot markets with rising numbers of homes going into pre-foreclosure, see this forum topic at Professor Piggington's. End update

Existing home sales and price figures were released for March. Remember, new home sales are generally recorded when the contract is signed, and existing home sales are recorded as of closing. The new home sales figure is therefore more of a leading indicator than existing home sales. Last month (February stats) existing home sales rose while new home sales declined overall and by a wide margin in the west.

New home sales will probably be out within a day or two. However reported prices for new home sales in hot markets are being distorted by incentives not reflected in the reported price. Within a few months existing home prices will be a better, although lagging, indicator for the housing market.

The existing home sales and prices for March show further trouble in store for the housing market. At this point it's important to realize that the price appreciation figures are figured year over year. That is, appreciation figures compare March 2006's reported median prices to March 2005's reported median prices. Normally that's a decent measure, but when bubbles peak the crest can be quite sharp, and in some areas in the US, declining house prices for six months are still being reported as yoy price appreciations. See this article about Treasure Coast (FL SE coast) real estate:

In the Fort Pierce-Port St. Lucie Metropolitan Statistical Area, which includes Stuart, the median price of an existing single-family home increased by 10 percent, to $258,000 from $235,000 last year. Prices had gone up 14 percent in January and 17 percent in February.
...
"I think the 10 percent increase is a false number because the market has changed since March 2005," said Brad Hunter, who follows housing trends on the Treasure Coast and South Florida for Metrostudy's South Florida division. "It's really meaningless. Prices are in a decline."
...
As of Tuesday, there were 5,955 homes for sale on the Multiple Listing Service for St. Lucie County. In the first 23 days of April, 309 homes sold in St. Lucie, down from 440 in the same period last year.
That inventory figure translates to 19 months of supply. It's no mystery as to why housing prices are dropping in Florida. But look at the appreciation figures and note how they are dropping month-by-month. What is happening is that homes are losing their gains. Within a few months, we will be in negative yoy territory in many hot markets. We are entering the slow period for sales in most of Florida now.

If you look at NAR's Existing Home stats (pdf file) you will see that housing seems to have peaked last year.
Non-seasonal:
US sales are down .5% compared to March 2006; sales in the West were down 11.2% compared to March 2005.
Year over year median price appreciation:
US: 7.4%; Northeast 5.0%; Midwest: 2.6%; South: 6.5%; West: 8.3%
The average price appreciation is lower for each region.

For multi-year comparisons by quarter, see NAHB's existing and new home sales and prices on this page. These are Excel files and they only contain data through the fourth quarter of 2005. For the US as a whole, new home prices ended 2005 almost exactly where they started, whereas existing home prices showed solid growth over the course of 2005 for the US and in the Midwest, South and West. But if you look at the updated yearly figures for 2006 from NAR through March, you can see the market appears to have peaked last year.

For contrasting commentaries, see NAR's rosy outlook and contrast it to this more realistic commentary.

In many cases the industry is still in deep denial about what's happening. See, for example, this Voice of San Diego article:

Prices aren't in a freefall and sellers aren't panicking, said Gary London, president of the London Group Realty Advisors in San Diego. It may be taking longer to sell a property, but London said people who can't sell are more likely to pull their homes off the market than to slash their asking prices.

"Prices might level, might even go down a little, but where you're really going to see a reduction is in this level of listings. People will simply take their homes off the market," he said.

That's Darren Fulhorst's plan. The 39-year-old La Jolla resident bought his five bedroom, three-bathroom home in La Jolla in Jan. 2005 and he put it on the market one week ago. Fulhorst said he isn't desperate to sell, but he nevertheless put his home on the market for $100,000 to $200,000 less than comparable properties.

"I'm not accepting anything lower," Fulhorst said. "I'm listing it for six weeks, at the peak sales time, at an excellent price, and if it doesn't sell, I'm holding onto it."
The article starts by noting that San Diego sales listings reached an all-time high over the weekend. The rest of it is mostly devoted to various people explaining why that doesn't mean a thing! Except, of course, that it does. Look at Fulhorst's situation, which is used to support the idea that prices won't drop (although they already are dropping). He is listing his property toward the bottom of the offerings by pricing it at least $100,000 below at least some comparables, yet he knows it may not sell. Does that sound like a stable price environment to you? There are always some people who must sell, and they push the market down for new home buyers. For one thing, they force appraisals down for their local area.

More people are leaving San Diego than are moving in. The affordability rates in San Diego are abysmal, well below 20% at best, and inventory is quite high. Furthermore, San Diego is one of those areas in which the majority of all home buyers in the last few years put little or no money down and/or financed with various exotic mortgages. With a minimum of 40% of SD borrowers facing sharply higher mortgage costs within the next few years, we can see that this is not a market with stable home ownership.

What can take up the excess inventory? Credit standards for underwriting loans really cannot go lower for this market. The only thing the market could come up with to make it easier to buy would be a ten year interest-only loan. But even that would not be much help in increasing affordability and therefore sales, because interest rates appear to be on the upswing. This is why the last wave of buying was achieved with option-ARMs. These loans often have teaser rates for an initial year or two, but either add the unpaid interest to the loan principal or have higher underlying margins that kick in within a few years.

Many recent buyers in SD cannot afford to keep their homes. The reason most of them bought using the exotics was to make the home affordable. In a market with price appreciation above 15% each year they could be confident that they would not lose money, even if they were forced to sell in three years because they couldn't afford their mortgage. In a market with price appreciation below 10% a year they cannot be sure they will not lose money and they usually do, compared to renting. In a market with price appreciation below 7% a year the lender may well lose money.

In other words, the demand implosion in these markets and the subsequent fall in prices will be produced by stiffer credit terms. There is no possible "soft landing" for RE in areas in which more than 30% of the buyers are using non-amortizing mortgages with less than 20% downpayments. So the statement about prices "levelling" is ludicrous. Prices cannot "level" in San Diego. They must either go up or come down. A "levelling" will produce a self-reinforcing spiral of tightened credit standards driving down demand, followed by higher inventories and lower prices.

The problem with any housing market supported by creative financing is that it must experience continuous high price appreciation in order to allow borrowers to continue to buy. Inevitably the market crests, and then there is a quick drop produced by a drastic reduction in demand. We are now seeing the crest in CA. Inman News:

The sales rate of existing single-family homes dropped 15.1 percent while the median price of an existing home in California increased 13 percent in March compared to March 2005, the California Association of Realtors reported today.
...
Condo sales dropped 23 percent from March 2005 to March 2006, while condo prices increased 8.7 percent from March 2005 to March 2006 and dropped 0.4 percent from February 2006.
...
The median price of an existing, single-family detached home in California during March 2006 was $561,350, a 13 percent increase over the revised $496,890 median for March 2005, C.A.R. reported, and the March 2006 median price increased 4.8 percent compared with February's revised $535,480 median price.

The inventory of homes for sale fell from a 6.6 month supply in February to 4.8 months in March, said Leslie Appleton-Young, C.A.R. vice president and chief economist.
...
Regionally, sales dropped 27.5 percent in the Orange County area from March 2005 to March 2006, 27.2 percent in the Sacramento area, 25.4 percent in the Monterey area, and 24 percent in the Central Valley area. Prices dropped in 11 of 20 regions from February to March, and year-over-year price appreciation in March was slowest in Northern Santa Barbara County area (1.6 percent), and highest in the High Desert region (23.6 percent).
Have a nice day, and remember, friends don't let friends play with non-amortizing mortgages unless they have a 20% downpayment. That means cash, not a 20% piggyback loan.



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