Will Real Estate Recover This Selling Season?

The Mortgage Corner

Some very heartening news came out today. Sales of newly built, single-family homes rose 11.1 percent to a seasonally adjusted annual rate of 300,000 units in March, reported the U.S. Commerce Department. The gain partially offsets a large decline that occurred in new-home sales this February, when activity hit a record low due partly to poor weather conditions.

New-home sales have been rising since January, and the inventory of homes for sale is at a record low—just 183,000 units, a 7.3 months’ supply at this sales rate. Does that mean we will finally see some kind of a construction recovery this year? The analysts are mixed. Wells Fargo Securities projects only modest increases over the next two years, according to Calculated Risk, with 330,000 new-home sales likely this year, followed by 440,000 in 2012. It is likely to take another three years before new-home sales return to healthy annual sales of around 770,000, said Wells Fargo economist Anika Khan.

Existing-home sales, housing starts, and even pending home sales that close in approximately 60 days also ticked up at the beginning of this selling season. Existing-sales in March 2011 (5.10 million SAAR) were 3.7 percent higher than last month, but were 6.3 percent lower than March 2010, with inventory hovering around an 8-months’ supply.

In fact, commercial real estate has been reviving—in part because its prices were never in a bubble, and businesses are beginning to expand again. Apartment construction has also been expanding due to higher rents. So it is the individual housing market that has been suffering, as some 2 million homes either sit in foreclosure, or have delinquent loans, as we said in a past column.

The key to a recovery will be reducing the inventory of existing homes. The good news is that inventories have been declining since the top of the bubble, even though almost 50 percent of existing-home sales are either short sales, or foreclosures. Inventories began to rise again in 2010 as more people lost their jobs, so that 2 million homes are now in trouble, as we said (though 50 percent are just 30-day lates, which are more likely to recover). And reducing inventory will also depend on the amount of pent-up demand—i.e., the number of prospective homebuyers waiting for prices to ‘settle’. We know that more than 1 million new households are formed every year, and rents are rising as rental vacancy rates decline. So it will the dollars and cents calculation—whether it is cheaper to rent or buy—that will decide when some of the 3 million new households formed over the past 3 years decide to buy.

While the existing home sales report showed a modest rise in home prices, the more reliable Federal Housing Finance Authority—regulator of Fannie Mae/Freddie Mac—home price index suggests otherwise. Home prices continued a recent downtrend and it appears to be worsening somewhat.  The FHFA purchase only house price index declined 1.6 percent in February, following a revised decrease of 1.0 percent in January (originally down 0.3 percent).  The latest weakening is consistent with the increased share of home sales being distressed sales.  The FHFA home price index is seasonally adjusted and is based on repeat transactions (comparing same houses) with conforming loan amounts, whereas the existing home sales report has neither of these key features.

"The March pace of new-home sales more accurately reflects current market conditions than the extremely low pace we saw in the first two months of this year, when unusually poor weather likely kept buyers away," said NAHB Chief Economist David Crowe. "That said, the average sales pace for the first quarter of 2011 held at about the same level seen for the last half of 2010. A limiting factor is the extremely thin inventory of new homes for sale, which is now at its second-lowest level in history. Builders continue to confront major challenges in obtaining financing to build new homes, and the shortage of new product makes it that much tougher for them to compete with existing homes on the market. At the same time, tighter lending conditions are making it more difficult for qualified buyers to obtain a mortgage."

This is the best of all worlds for buyers at present, of course, with record low interest rates for those able to qualify for a mortgage, and housing prices back to the 2002 level.

Harlan Green © 2011