Tuesday, December 22, 2009

RECOVERY: Existing Home Sales Highest Since Feb. 2007, Inventory Levels Lowest Since April 2006

Highlights from today's report on existing home sales:

1. Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 7.4% to a seasonally adjusted annual rate of 6.54 million units in November from 6.09 million in October, and are 44.1% higher than the 4.54 million-unit pace in November 2008. Current sales remain at the highest level since February 2007 when they hit 6.55 million (see top chart).

2. Total housing inventory at the end of November declined 1.3% to 3.52 million existing homes available for sale, which represents a 6.5-month supply at the current sales pace, down from a 7 month supply in October. Raw unsold inventory figures are 15.5% below a year ago. The last time there was a lower supply of homes on the market was April 2006 when it was at a 6.1 months supply (see bottom chart above).

Bottom Line: The news today confirms that the national real estate market is in a gradual, but unmistakable recovery. Home sales have increased in 7 out of the last 8 months, and by almost 1.5 million units combined for the last three months (450,000 gain in Sept., 550,000 in Oct. and 450,000 in Nov.). From the March low of 4.55 million units, November sales are up 44%. Home prices have firmed and stabilized, and the balance between the supply and demand (measured by the months supply of inventory) has returned to the 2006 level. Taken together, these trends provide strong evidence that the worst is definitely behind us for the U.S. housing market, market conditions are returning to pre-recession levels, and even better days are ahead.


At 12/22/2009 5:21 PM, Anonymous Lyle said...

Let me pose a thought, given how often americans move why own a home? Recall that the real costs of home ownership go beyond the monthly payment and taxes and insurance, to include repair (1-3% a year depending upon the age of the home), and the high transaction costs of a real estate overall 10% plus. If you add them up unless you are in the 33% or more braket the tax savings are not enough. Adding the transaction costs in for a 5 year period of ownership you get an add on of between 3 and 6% of the value of the house per year beyond the mortgage taxes and insurance.

At 12/22/2009 6:08 PM, Blogger PeakTrader said...

Buying a home may be the best investment for the 2010s. Prices are down, mortgage rates are low, and inflation may accelerate (prices, rates, and rents may all rise substantially). Moreover, there's an $8,000 tax credit (not deduction). Census data since 1940 show there's never been a 10-year period where the median home price didn't appreciate after inflation (in some decades, the real median home price appreciated about 50% after 10 years).

Where else to invest? The stock market may continue the bear market range for another eight years (and it's currently in the middle of that range), gold may not be cheap, Treasury bonds pay almost nothing. Of course, with homeownership, people can live in their investment.

The facts:

1. Homeowners have much more net worth than renters, in all income categories.

2. Homeowners generally live in better homes than renters.

3. Houses are an appreciating asset.

At 12/22/2009 7:24 PM, Anonymous Anonymous said...

The last time there was a lower supply of homes on the market was April 2006 when it was at a 6.1 months supply ...

That's the rub. A lot of inventory is being withheld:

A supply of 1.7 million homes headed for sale because of foreclosure or delinquency looms over the nation's housing market, which could dampen progress toward recovery should the Obama administration fail in its efforts to aid struggling homeowners, researchers said.

A variety of measures to keep discounted bank-owned properties off the market -- including moratoriums on foreclosures by major lenders and federal initiatives aimed at keeping people in their homes with mortgage payments they can afford -- has helped increase a backlog of so-called shadow inventory 55% in the year ended Sept. 30, according to a report released Thursday by First American CoreLogic, a Santa Ana-based real estate research firm.

Shadow inventory properties are homes that have not been tallied into official inventory numbers tracked by Realtors and other real estate professionals. They include homes taken back by lenders through foreclosures and similar actions, as well as homes whose owners are at least 90 days delinquent on their mortgage payments.

L A Times

Houses prices, like everything else, are a function of supply and demand.

The inventory (supply) of houses on the market has dropped significantly in recent months, fueling hope that the housing bust is over and done with.

Unfortunately, the inventory of houses listed for sale may severely understate the actual inventory of houses owners want to sell. This, in turn, may be creating a far too rosy picture of supply and demand.

Amherst Securities has produced a scary analysis of this "shadow inventory" overhang, which Amherst estimates is a shocking 7 million houses. (The consensus is only 2-3 million).

The Business Insider

And the foreclosure crisis has not yet passed:

WASHINGTON (Reuters) - Only 12 percent of U.S. homeowners eligible for loan modifications under the Obama administration's housing rescue plan have had their mortgages reworked, and millions more foreclosures are coming, the Treasury Department said on Wednesday.


The market is currently being propped up by government subsidies and loan programs that mirror the very programs that led to the crisis to begin with. Fannie, Freddie, the FHA and GNMA are all writing junk mortgages as fast as they can. There is really no way to tell if the market has stabilized until after this support is withdrawn.

At 12/22/2009 7:32 PM, Blogger Bill said...

PeakTrader: I completely agree with you regarding real estate as an investment. Of course, we have have taken a bath here lately but even with that we are much higher than 10 years ago in nominal terms. The key is to have sufficient cash flow to support your mortgage and to stay in the home for as long as possible.

As for inflation, if it picks up the 2010s could be excellent for housing prices. During the last decade of high inflation, the 1970s, the price of the average home in America nearly tripled in nominal terms. So, housing is a good hedge against inflation also.
See: http://www.census.gov/hhes/www/housing/census/historic/values.html

At 12/22/2009 7:54 PM, Blogger PeakTrader said...

Bill, I also completely agree. Data of U.S. median home price; unadjusted for inflation, from Historical Census of Housing Tables - Home Values:

2009 $173,000

2000 $119,600
1990 $79,100
1980 $47,200
1970 $17,000
1960 $11,900
1950 $7,354
1940 $2,938

At 12/22/2009 7:58 PM, Blogger bobble said...

anon 7:24 "A lot of inventory is being withheld:
A supply of 1.7 million homes headed for sale because of foreclosure or delinquency looms over the nation's housing market . . . "

you betcha. here's an anecdotal example.

last week i was talking to a guy i know who had gotten caught up in the sub-prime fiasco. he said that he has not make a mortgage payment to his bank in over a year, yet the bank has not foreclosed and he is still living in his house.

i'm thinking the bank does not want to foreclose because it is probably carrying the mortgage at full value on its books. after foreclosure the loan would have to be written down to its real value.

At 12/22/2009 8:14 PM, Blogger bobble said...

" . . . market conditions are returning to pre-recession levels, and even better days are ahead."

you didn't mention 1) the government handing out $8,000 to homebuyers or 2) the fed forcing the 30yr mortgage rate down to an unnatural 5% by purchasing $1.25 trillion worth of agency MBS.

but, given that you seem so thrilled with home sales, i'm assuming you approve of this tiny government intervention into free markets.

At 12/22/2009 10:27 PM, Blogger QT said...


You offer an interesting question. In many ways, homeownership entails costs that are seldom recovered on resale.

Additionally, one is tied to a particular location unable to take advantage of career opportunities so being home-bound implies lower income.

One can only say that a home acts as an enforced savings plan albeit an expensive one given the nature of compound interest.

At 12/23/2009 1:05 AM, Blogger KO said...

Almost no one is in the position of having to decide between zero housing expenditures versus buying a house.

The return on rent is zero so the true comparison is the net cost/gain of a home purchase versus the same period of renting.

5 years of rent is not a small number. And rent tends to increase over time, while mortgage payments are generally flat and tend to be refinanced downward. Recent practices excepted.

It seems likely that interest rates will be higher a year from now. So even with lower prices, monthly payments could still be higher. For people who are qualified and likely to stay put for a while, now is a pretty good time to be looking.

At 12/23/2009 10:23 AM, Anonymous Anonymous said...

Sorry, I don't believe the numbers. I live on an island. Last year about this time there were over 200 homes on MLS. Today there are 156 for sale. Yet, in the last year there were not nearly as many sales as the reduction in homes for sale would imply.

I think there are many discouraged sellers, just as discouraged workers raise the unemployment rate to more like 17%.

At 12/23/2009 10:26 AM, Anonymous Lyle said...

But in a flat price environment the first 5 to 10 years of a mortgage you might as well be paying rent. (the amount of prepayment on a 30 year mortgage in those years is small, after 15 years you have paid off about 25 % of the principal). The logic works if and only if home prices rise faster than overall inflation. From 1900 to 1980 they did not. If you sell your house for the same real price you paid, its a pretty poor forced savings plan, far better a 401k or IRA invested in bonds or if you think long term stocks (1871-2008 return 8% per year on average adjusted for inflation). The last decade was just a reversion to the mean from the high returns of the two prior decades. So using a home for an investment is historically a pretty poor investment, in particular if you are likely to move around a lot.

At 12/23/2009 11:07 AM, Anonymous Anonymous said...

Demand for U.S. home loans fell last week to the lowest level in almost two months even though mortgage rates held steady below 5 percent, the Mortgage Bankers Association said on Wednesday.

The industry group's mortgage applications index slid 10.7 percent in the week ended Dec. 18 to a seasonally adjusted 595.8, the lowest level since the week ended Oct. 23.

An index of demand for refinance loans dropped 10.1 percent and requests for loans to buy homes fell 11.6 percent last week.


Housing may have started turning a corner after its deepest crash since the Great Depression, thanks mainly to government actions to keep loan rates low and provide buyer tax credits.


Inventories are shrinking while mortgage terms are being altered, but it remains to be seen how many of these modifications stick or turn into foreclosures.

RoundPoint estimates as many as 7 million distressed properties could come on to the market.

"Even if it comes out in a controlled manner it's going to be difficult to digest" and to achieve a sustained recovery, said Ahmad. "Until that shadow inventory is addressed we really haven't solved the problem."


At 12/23/2009 11:41 AM, Anonymous morganovich said...

meanwhile, new home sales dropped like a rock:


wait until march when the fed stops holding mortgage interest rates down. then we'll see what "natural" demand looks like...

At 12/23/2009 11:50 AM, Anonymous morganovich said...


you think the numbers you put up are a good return? you have to be kidding.

from $3k 1940 to $173k 2009 is less than a 6% annual rate of return.

do the math.

assume about 2% annual overhead in taxes and insurance, and now it's a 4% return.

you would have been better off in bonds even before repairs and maintenance.

At 12/23/2009 12:25 PM, Blogger PeakTrader said...

Morganovich, you can't live in a bond, but you can sink your money in rent.

Median home values adjusted to 2000 dollars:

2000 $119,600
1990 $101,100
1980 $93,400
1970 $65,300
1960 $58,600
1950 $44,600
1940 $30,600

There may be another 50% real return from 2010 to 2020.

At 12/23/2009 12:40 PM, Blogger Bill said...

As an individual who owns rental properties, I must say I love to hear all the anti-home owner types spouting off about how bad owning homes are. hahaha.

Seriously though, in related news, home sales in Northeast Florida increased by 70% in November, 2009 compared to November, 2008 and the number of home sales has increased in year-over-year comparisons for 15 straight months!

At 12/23/2009 12:49 PM, Blogger Bill said...

By the way, you can argue that you dont care for owning a home and prefer the relative freedom of renting in terms of ease of moving. This is true. But, rents increase while mortgage payments remain the same. So, everyone will have to pay either rent or a mortgage. Facing that choice, I would prefer to pay a fixed amount which is declining yearly in real terms due to inflation while rents are rising in most years due to inflation.

Meanwhile, the value of my home is rising in most years and keeps pace with inflation typically so I am earning money there that a renter never will. So, it is clear that homeownership under the right circumstances is financially superior to renting (except for the landlord - we love you renters).

At 12/23/2009 12:55 PM, Blogger PeakTrader said...

The median home price is down from $222,000 in 2006 to $173,000 today, a 30-year fixed rate mortgage is below 5%, and there's an $8,000 tax credit. If you believe inflation and interest rates will rise, now is the time to find that bigger, better, and newer house, or you can buy a 10-year Treasury bond paying 3 1/2%, while renting.

At 12/23/2009 1:51 PM, Anonymous Anonymous said...

But, rents increase while mortgage payments remain the same.

I guess some of us have never heard of ARM's and negative equity.

At 12/23/2009 2:02 PM, Anonymous William Matz said...

The report data is insufficient to allow any definitive conclusions for a variety of reasons:

1. Many sales are to investors who quickly fix and flip, thus creating two sales out of one.

2. Shadow inventory (discussed above)

3. Tax credits are pulling forward sales, creating a likely large drop next year when they expire. Look at huge drop in new home contracts in November when there was uncertinty about renewal of credits.

4. The pending retreat by the Fed from purchases of FNMA/FHLMC will likely drive up rates by 1% in early 2010.

5. Employment/wage trends do not suggest much of a boost to demand.

6. Commercial defaults acting increasingly as brake on economy.

7. Massive, unbooked mortgage losses may trigger new financial crisis.

At 12/23/2009 2:33 PM, Blogger KO said...

morganovich said...

you think the numbers you put up are a good return? you have to be kidding.

from $3k 1940 to $173k 2009 is less than a 6% annual rate of return.

But hardly anyone pays full price with their own money. Most are levered. So the return on their equity is pretty good.

Factoring in the ongoing negative cash flow takes away from that, but it is again an alternative to renting. So the relative return when comparing the two alteratives is pretty good.

At 12/23/2009 2:54 PM, Blogger Bill said...

William Martz:
In response to your points, I would say that sure there are headwinds still but they are lessening and the increase in sales is reducing inventory which is a precursor to price gains (which are indeed already occurring).

Going point by point:

1. Who cares whom is involved in the transactions? The point is that they are happening and inventory is clearing.

2. The shadow inventory issue is inflated and I have seen no definitive proof that it even exists. In my experience, I see homes foreclosed by the banks and then placed on the markets. I have not seen first hand evidence of the banks not selling homes on which they have foreclosed.

3. Tax credits pulled forward sales of cars too but when the cash for clunkers expired car sales continued to increase after a month. Also, if I recall correctly the sales increases with housing predate the tax credit.

4. This may or may not happen but the increase of rates by 1% will not deter many buyers especially if prices are competitive. Also, who is to say that the Fed would not continue to intervene if housing looks shaky?

5. You need to examine the most recent employment/wage trends released just today. They are improving:
"The report also showed incomes climbed 0.4 percent, the biggest increase since May, and inflation cooled. Wages and salaries grew 0.3 percent last month, the biggest gain since April.

Pay rose as firings eased and companies asked existing staff to work more hours. Payrolls dropped by 11,000 workers in November, the smallest decrease since the recession began in December 2007, and the average number of hours worked climbed by the most in six years, figures from the Labor Department showed earlier this month."

6. As the economy continues to rebound, commercial defaults will decline and their affect on the overall economy will be minute.

7. This is the same argument as the "shadow inventory" and has the same proof offered to support it - nothing. To rest an argument on the idea that there is a banking conspiracy is to not have a solid argument.

At 12/23/2009 3:02 PM, Blogger Unknown said...

Whether buying a home is better then renting one is a loaded question. If you bought a home in'2000, like the example, in the sacramento area, you would be a lot worse off, then a similar renter. The mortgage buyer would have lost all of their equity and be "upside down", because prices for '09 are below '00 prices. The comment about hopeful buyers living in betters homes then renters is nonsense. My ex-wife bought in '00 for less then $100k and is now "upside down", and her motgage is ready to reset at a higher rate in Jan. This will leave her with a higher mortgage payment, lost deposit and no equity. I, on the other hand have been renting a room & bath in homes with a value from $500k to $800k, for half my ex-wife's mortgage payment. I have saved the difference and invested it wisely. the moral to the story is; real estate is not always a good investment, especially during 'oo to '10, in some areas of the country. What say ye?

At 12/23/2009 3:21 PM, Blogger PeakTrader said...

Jack, I agree, buying a home isn't always a good investment. Also, there are always examples of people buying near or at the top of a market. However, the aggregate data show most people bought well before the peak, refinanced at lower rates, many more than once, extracted trillions of dollars of home equity, built-up a great deal of equity, even after the $50,000 decline in the median home price over the past three years, or paid-off their mortgages.

At 12/24/2009 9:53 AM, Anonymous moganovich said...


but you pay interest on the full value of the loan. given that the rate is almost certainly higher than 4%, you're losing money on an IO, or if you use a traditional loan, you are adding to your invested equity, decreasing leverage, and reducing ROI.

you can lever up bonds too (or buy funds that do).

housing is a lousy asset class. the only reason it makes any sense to to avoid rent. as a money maker, it underperforms horribly. if you take out a loan, you'll be lucky to make any money at all over its term.

6% interest + 2% costs = 8% in the hole every year,2 points over average appreciation...

At 2/03/2010 10:23 PM, Anonymous Anonymous said...

Not all homeowners who are under water (based on comparison with short sales and foreclosure sales) will decide to walk away because they can "rent" cheaper than their house payment. Estimate are that 10% will move to rental property, mobile homes, because owning a home is no longer equivalent to an ATM machine. But 90% of homeowners who fall into the higher tax bracket because they have jobs/income, will still continue to receive 20% or more tax break on their income tax. These 90% of homeowners are not interested in the foreclosure and short sale properties where homes were neglected and have lost value. Overall, the 10% who managed to buy into this market and "walk" have created a 30% decline in home values. Do I sound angry? Yes, 90%of the homeowners who put down 20% or perhaps even their life investment into a home maybe are just a little upset that 10% of the buyers who bought more than they could afford decided to walk away from their homes.

At 2/12/2010 9:30 AM, Anonymous Day Trade said...

Perry doesn't get it--

These charts are fine, and there may be a residential recovery mode in process (though availability excludes houses being purposely held out of foreclosure due to banks not wanting to show big foreclosure numbers and government incentives for not foreclosing--neither of these is a sign of good real estate health). But the coming catastrophe will be the crash in commercial real estate, which will trigger the total bankruptcy of the US. Even the cavepersons on CNBC are starting to realize this.


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