Economists' Commentary: Existing Home Sales in May
June 23, 2009
By Lawrence Yun, Chief Economist
Good news. Home sales rose for the second straight month and inventory got trimmed. Home prices still show much lower values from a year ago, but part of that is due to more transactions on the lower-priced homes and fewer on the high-end. The rise in the national median home price should not be viewed as a genuine price gain yet since most if not all of the rise could be due to seasonal factors of more families with children entering the market this time of the year and they tend to buy non-distressed homes at higher values.
The detailed data is here. In short on the data, existing home sales rose 2.4 percent in May to a seasonally adjusted annual rate of 4.77 million units from a 4.66 million unit pace in April (which is a downward revision from 4.68 reported earlier). Compared to the same month one year ago, existing home sales were down by 3.6 percent.
Regionally, home sales rose by the strongest amount in the Midwest with a 9.0 percent rise. In the Midwest, sales were higher in Omaha, Minneapolis, and Cleveland and Michigan markets. Chicago and Milwaukee are showing signs of sales stabilization. More fully, from April to May:
In the Midwest, existing home sales increased 9.0 percent
In the Northeast, sales increased 3.9 percent
In the South, sales were unchanged
In the West, sales fell 0.9 percent
The monthly data can be a bit bouncy, so a better trend can be assessed by comparing to one year ago. The sales trend continues to show the West region as the only region with higher sales. Still some of the steam is coming off in the West. Sales are down in the mountain states and in the Pacific Northwest. Sales are positive in many California markets as well as Arizona and Nevada. But some of the cities that had shown spectacular gains of a 50 to 100 percent rise in year-over-year sales are showing only modestly higher or have turned negative. Sacramento, Oakland, and San Fernando Valley are examples. A similar pattern of leveling off in sales now after sharp gains is observed in Sarasota, Florida and the Northern Virginia outer suburbs.
At the same time, many markets are beginning to move towards sales stabilization (meaning the year-over-year changes are becoming less negative). Few markets appear to enter a takeoff stage with much stronger sales now than a year ago. Maryland suburbs, Orlando, Miami, and Phoenix are examples.
The national median existing home price in May was $173,000, which is a decline of 16.8 percent from one year ago. (Prior month price data was revised down to $166,600 from $170,200 with the price having fallen by 17.2 percent in April from one year ago.) Prices were lower in all four regions. From one-year ago, prices were lower by 12.5 percent in the Northeast, 10.4 percent in the Midwest, 9.9 percent in the South and 30.6 percent in the West. The plunging values in the West reflect much greater sales in the deeply-discounted foreclosed properties.
The median price has now fallen by 25 percent from the peak in 2006, translating into a loss of equity of $5.5 trillion in homeowner housing equity. The aggregate housing valuation of $17 trillion would now match that in 2003 – six years ago. We need to be mindful of many local market variations. Some California markets would have witnessed price declines in excess of 50 percent, while many Texans to this day may be experiencing home price gains without having suffered any downfall.
Though losses have been significant for many homeowners, lower prices are good news for potential buyers. The housing affordability is at the highest since 1970. The recent affordability level of 174 is 62 percent higher compared to at the height of the boom. Translation: a middle-income family now has more than sufficient income (62 percent additional income) to buy a middle-priced home at current mortgage rates and stay well within family budget. Of course, not everyone will be buying a middle-priced home. So people who buy a higher priced home should have appropriately higher income and people with lower income should look for a below median priced home for financial safety.
Inventories at the end of May declined 3.5 percent to 3.80 million homes available for sale. It will now take 9.6 months to exhaust the inventory at the current sales pace. Past data showed inventory in May from April could go in either direction, so the decline in this May can be interpreted as not a seasonal factor but some reduction as more buyers pick-off inventory and fewer new listings coming on line. From one year ago, inventory is lower by 15.3 percent. Still, overall, the inventory levels are high and favor the buyer over the seller.
Regarding the single-family versus condo market, the condo market is beginning to show some rebound after being hard hit, though broadly speaking the single-family market has held up relatively better. Condo sales increased 6.1 percent while single family home sales advanced 1.9 percent and over the month. Month-to-month data tends to be a bit volatile. From one-year ago, there is a much sharper difference with single-family falling only 3.0 percent, while condo sales fell 8.9 percent. Single family home price were lower by 16.1 percent while condo prices declined 21.9 percent. The months supply of inventory for single-family homes was trimmed to 9.0 months from 9.5 months in the prior month and from 11 months nearly a year ago. For condos, there were 15.0 months supply of inventory, down from 15.4 months in the prior month and from the peak 16.4 months in November of last year.
The increase in home sales is needed in order to stabilize housing values and get the economy going. So the latest data is certainly welcome news. However, the increase in closing sales, which existing home sales measure, was lower than as implied by pending home sale contracts, which had risen 5.6 percent in April.
The rise in mortgage rates raises concerns on future home sales because the housing sector is so sensitive to changes in mortgage rates. Small adjustments are generally of less concern. In fact, there is a short term boost to sales in the initial phase of rising rates as some buyers want to lock-in rates before they go up even higher.
The job losses will also shrink the pool of eligible homebuyers. Since the start of the recession in January 2008, there are 6 million fewer people with jobs.
On top of the rising rates and loss in jobs, there is a new event that has been developing in the past month that is raising alarm bells. Appraisals!
We are getting bombarded with stories of last minute fallout in contracts because appraisals are coming in with unrealistically low values. There was a ready buyer and a ready seller to make a deal at a mutually acceptable price. More properties are being appraised by non-local specialists, being based on non-comparables (normal homes being compared as a distressed home), and consumers are paying a much higher fee. Because of lower appraisals, it opens up a new round of negotiations which may delay closing or simply lead to a cancellation. Lower appraisals also force the buyers to come up with extra cash to make up the difference between price and appraisal, which some buyers are unwilling to do, and again lead to a fallout. This issue has suddenly snowballed. We are now in the process of conducting research to assess the extent of the problem related to the appraisals and the subsequent fall out.
Any delay in the housing market recovery will, unfortunately, mean an additional rise in foreclosures and a further delay in economic recovery. NAR is talking with all relevant policymakers to address this issue to end the confusion and chaos related to appraisals.
The first-time buyers will be the key to help drive up sales. Not only is it a great opportunity for those with stable jobs and income to buy a starter home, but first-time buyers will also help unleash the next buyers. The existing homeowners can sell more easily, which then permits buying another home. First-time home buyers accounted for 29 percent of all buyers based on a survey of REALTORS about their recent clients. It is a decline from the 40 to 50 percent range in recent prior months. With the homebuyer tax credit geared for first-time buyers, it is somewhat surprising to see a downward trend in this figure. But the latest lower figure may reflect more triggering up the scale with trade-up or trade-down buyers now able to unload to buy the next home. Or it could be seasonal factor. More repeat homebuyers with children buy a home at this time of year as they want to do it between the school years. And they represent repeat buyers. Also these buyers may be less inclined to look at foreclosed homes.
The number of distressed sales declined in May to 33 percent of all sales compared to nearly half in the early months of this year. This decline could be simply be one-month statistical noise or it could be a seasonal factor for families with children buying normal homes and not distressed homes.
A separate data release by the Federal Housing Finance Agency today showed home prices stabilizing. From March to April, home values of those that had Fannie and Freddie loans declined by 0.1 percent – or in common person’s language: no change. The price measurement is a repeat price index showing it is proper to compare from one month to the next. From one year ago, prices were down 6.8 percent, which matches the lowest decline in 8 months. The data clearly implies stable home values in more established neighborhoods with little subprime loans.
This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >
Comments? Questions? E-mail NAR Research.
NAR members, learn how you can add this commentary to your Web site, blog, or newsletter. Read more >
