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Monday, June 25, 2007

Existing Home Sales for May

Interesting reports. It makes more sense to consider single-family and condos separately, so I will concentrate on that.

Overall sales dropped from a month ago and a year ago. The eternal optimists of NAR seem to believe that the relatively small drop from a month ago means that the market is stabilizing. They've been singing this tune for over nine months, and it's no more accurate than before. April numbers were so extremely bad that the May drop seems less in comparison, but YoY continues a steady downward trend. Months of inventory are rising as well. The national figures mean little, but the figures by type and region tell a tale.

Single family:
Median prices compared to a year ago:
National: -2.4%
Northeast: -0.4%
Midwest: -2.2%
South: -3.5%
West: -0.4%

Months of inventory (Inventory / Current month's sales pace): 8.7 versus 8.2 in April
Single family sales YoY (using actual sales rather than the seasonal adjusted):
National: -10.4%
Northeast: -4.3%
Midwest: -6.7%
South: -11.8%
West: -15.2%
If you notice, most of the sales price decline showed in the south and midwest. These are currently the largest single family markets, so they overwhelmed the rest of the report. Both the south and west are showing large declines.

Condos:
Median prices compared to a year ago:
National: -0.4%
Northeast: 4.3%
Midwest: 4.2%
South: -6.9%
West: -3.2%


Months of inventory (Inventory / Current month's sales pace): 9.7 versus 10.0 in April
Condo sales YoY (using actual sales rather than the seasonal adjusted):
National: -8.4%
Northeast: 0.0%
Midwest: -16.7%
South: -10.0%
West: -15.4
For condos the price declines were concentrated in the south and the west. The condo market for the northeast does look good. The big drop in condo sales for the midwest along with the rise in pricing looks like condos are an urban phenomenon in the midwest. As single family becomes more affordable midwesterners are largely skipping the condos and buying houses.

Everything we are getting shows that the market is returning to more traditional parameters such as median price/median income. If those parameters are going to rule housing, than we have a few years of price declines coming.

What's astounding about May is that the median prices dropped. Because most of the changes in the mortgage market have impacted bottom-end buyers, under any normal situation one would now expect median prices to be rising. We are seeing the decline in median prices in the south and the west for condos and in the midwest and the south for single family. Single-family housing is far more affordable in the midwest and the south, so the bottom third of housing is probably still moving. The reason we don't see a significant downward price adjustment in the west for single-family housing is because the market for the bottom end probably dropped out, which is causing that very large YoY decline in sales. Home values are falling rapidly there, but the mix is changing so much that it doesn't show.

There are more market negatives in the pipeline; i.e. the FNMA subprime hike and the recent rise in average mortgage rates. So nobody knows where this will end, but at this point the housing market is not poised for improvement.

If you want to get a feel for what pricing is really doing, try The Housing Tracker (linking to new with more markets). Over the last year, for example, the median list price has dropped 7.2% in Orange County and 6.9% in Los Angeles. The apparent stickiness of western single-family prices is an illusion. In some areas, prices have dropped 10-20% over the year. But there is no one left to buy homes except those with a lot of money: the price/income ratio for LA is over 10. For Orange County it is over 8.

There is a function in the housing link I gave above that will show you these ratios (click on the city, and then the affordability link at the bottom of the paragraph at top). They seem to be pretty close with mine, and you can see how they have changed with time. These ratios are close to double what they were 5 years ago in many places. Housing really will not pick up until inventory clears, and inventory won't clear until affordability improves. In areas of the country in which there are good jobs and non-inflated home prices, real estate is doing very well!!! But, then, it was last year too.

This has nothing to do with the media or some nationwide doldrums. It has to do with economic fundamentals which can not be escaped.


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