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May 24, 2010
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The expectations were for a rate of 5.65 million, and the March numbers were revised slightly higher. The median price of an existing home sold was $173,100, up 4.0% from a year ago.
The Good News
By region the results were mixed. The Northeast fared very well, with sales popping 21.1% from March and up 41.6% from a year ago. The Midwest did the next best with a 9.9% monthly rise, and with sales up 29.1% from a year ago. The South also had a healthy gain of 8.6% on the month and saw sales that were 23.0% above a year ago. The West, on the other hand, saw sales fall by 6.2% on the month and up just 5.2% from a year ago. That is the good news.
The Bad News
The bad news is that inventories of existing home sales rose even faster, at least on a month-over-month basis. There are now 4.04 million homes on the multiple listing services, and that does not count the rather substantial shadow inventory of distressed homes either in the process of foreclosure or where the owners are far behind on their mortgage payments but not yet in the foreclosure process. However, it is not really possible to tell if the rise in inventories is simply some of that shadow inventory moving into the light or represents a new uptick in supply.
Relative to a year ago, inventories are up 2.7%, which is much less than the increase in sales. Thus, the months of supply on the market rose to 8.4 months in April from 8.1 months in March but is well below the 10.0 months of a year ago.
While some of the increase in inventory is just normal seasonality, that usually applies to sales as well (that’s why it is called the "spring buying season"). Thus the increase in the months supply metric is troublesome.
The graph below (from http://www.calculatedriskblog.com/) shows that while the months of supply are well below the worst levels of late 2008 and early 2009, they remain quite elevated. While the four to five months that was normal during the housing bubble is probably too frothy, a level between five and six months would tend to indicate a healthy market.
With so much supply available relative to demand, it is hard to see a major rebound in housing prices anytime soon, particularly as the home buying tax credit comes off.
Some of the increase in sales is due to the homebuyer tax credit, but since existing home sales are recorded when the transaction closes, the real rush on the existing home side has not begun. Sales had to be under contract by the end of April to qualify, but have until the end of June to close. The new home sales data, due out on Wednesday, will be more affected by the tax credit in April.
Existing Home Sales Less Important
While there are far more existing home sales than new home sales (in March existing sales were 92.9% of the total home sales), they are actually much less important to the economy. That is because each existing home sale will only really stimulate the economy to the extent that the new buyers want to redecorate. While this might be nice for Sherwin Williams (SHW) to see a few more gallons of paint, or for Ethan Allen (ETH) to sell some more furniture, that is a lot less economic activity than building a whole new house and furnishing it.
New homes also use paint from Sherwin Williams, but they also use wallboard from USG (USG) and lumber from Weyerhaeuser (WY) and also employ a lot of construction workers in the process.
Where Existing Home Sales Are Important
On the other hand, the price of existing homes is very important. The 4.0% rise in median home prices is not the best measure of housing prices -- as it can be easily affected by changes in the mix of houses being sold -- but it is an encouraging sign. We will get a better read on housing prices tomorrow when the Case Schiller data comes out (although that will be for March, not April). After all, the equity in one's house is the main store of wealth (or at least it used to be) for the vast majority of Americans.
Each time housing prices fall, more people are pushed underwater on their mortgages (currently 24% of all homes with mortgages). In theory, as long as people have positive equity in their homes, there should be no foreclosures.
After all, regardless of how bad the homeowner’s cash flow situation is (e.g. a lost job) they would still be better off simply selling the house and getting something for it, rather than have the bank take it over and get nothing for it. Also, the further someone is below water on their home, the more sense it makes to simply stop paying on the mortgage and wait for the sheriff to show up at the door. Given the backlog of deeply delinquent mortgages in many areas of the country, it thus becomes possible for people to live without paying their mortgage or rent for over a year (varies greatly by state and even locality).
While that solution helps out those individuals cash flow situation, it is a very bad situation for the overall economy. Eventually the bank will get around to taking over the house and it will go on the market, further adding to the supply of houses available for sale and further depressing prices, thus continuing the downward spiral. Fortunately, though, current prices are nowhere near as out of line with rents and incomes as they were a few years ago. Thus further price declines for current levels would probably be moderate.
In Summation
Overall I have to see this as a mixed report. The rise in sales does indicate a brightening in the consumer's mood, and the fact that it is occurring with the bulk of the tax credit-related sales still to come (or at least be recorded) in the months ahead is good news.
So far, as the second graph (also from http://www.calculatedriskblog.com/) shows, the bounce in sales this time has not been as big as in the fall, when most people thought the credit would expire, but was unexpectedly renewed and even enhanced). It is quite likely that sale will increase again in May and June, but that party will probably be followed by a hangover in July and August.
On the other hand, the sharp rise in inventories is disconcerting. Since used homes are pretty good substitutes for new homes, the high level of used home inventories will tend to curtail the building of new homes. Since historically homebuilding has been one of the key locomotives that pulls the economy out of recessions, its absence will make the current recovery much more anemic than most recoveries.
However if we can continue to add 200,000 private sector jobs a month or so, the rate of household formation should rise and start to absorb those inventories. The current rate of housing construction is so low that we could still have significantly below-average levels of home building and still generate very large percentage increases. With the stimulus spending peaking and the inventory replenishment cycle more or less completed, we will need a successful passing of the baton to housing to run the next leg of the economic recovery.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
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