Existing Home Sales Resume Decline

MBA (4/23/2008 ) Velz, Orawin
Total existing home sales fell 2.0 percent in March to a seasonally-adjusted annualized rate of 4.93 million, as the drop in single-family home sales outweighed the increase in condo sales.
Single-family home sales fell 2.7 percent, completely reversing the increase in February (which was the first increase in seven months). Condo sales rose 3.6 percent, following a 3.7 percent increase in February and an 8.2 percent drop in January.

Sales of single-family homes during the first quarter of this year were down 20.0 percent from those during the same period last year. Condo sales have performed worse, with year-to-date condo sales 28.7 percent lower than those last year. Since their peak in September 2005, single-family existing home sales have declined about 32 percent, surpassing the peak-to-trough drop of about 30 percent seen in the 1990-91 recession.

Even with a drop in home sales for the month, sales’ performance improved considerably for the quarter as a whole. The decline in the first quarter—at a 3.7 percent annualized rate—moderated significantly from the drop of at least 25 percent in each of the previous three quarters.

Existing home sales rose in two regions: 2.3 percent in the Northeast and 2.2 percent in the West. Sales dropped 6.5 percent in the Midwest and 3.5 percent in the South.

Aggressive actions by the Federal Reserve have failed to spur housing demand for several reasons. First, the economy has slowed significantly during the past two quarters, with four consecutive monthly declines in non-farm private employment and a sharp drop in consumer confidence to the lowest level since the early 1980s. Second, tighter lending standards for all types of mortgage loans, including prime loans, have reduced the number of qualified homebuyers. In addition, those who can qualify are reluctant to buy in falling home price markets, according to anecdotal evidence from home builders.

More stringent underwriting standards have been reflected in widening mortgage yields relative to default-free Treasury yields. While the 10-year Treasury yields—the benchmark for fixed mortgage rates—have declined considerably since the Fed started to lower interest rates in September of last year, the spread between the 10-year and conforming mortgage yields widened to about 260 basis points in mid-March.

While currently that spread has narrowed to about 220 basis points, it is still much wider than the 150 basis point seen before the financial turmoil. For the jumbo market, the stress has worsened since last August, with the spread between fixed jumbo and conforming rates remaining elevated at 130 basis points, compared with 100 basis points seen at the start of the credit turmoil.

The housing market continues to experience a significant imbalance, with the inventory of total existing homes rising in March. The number of total homes available for sale increased 1.0 percent from February and 6.6 percent from last March. (The data are not seasonally-adjusted.) A decline in the sales pace and an increase in inventory pushed up the months’ supply of total existing homes to 9.9 months in March from 9.6 months in February. The months’ supply for single-family homes was 9.5 months in March, compared with 7.2 months a year ago. The months’ supply for condos rose from 9.0 months in March 2007 to 12.8 months in March of this year, a record high since record keeping for the condo series starts in 1999.

The huge inventory overhang has further put downward pressure on home prices. The median price for single-family existing homes fell 8.3 percent in March from a year ago, following a record year-over-year drop of 8.9 percent in February. This is the 20th consecutive month of year-over-year decline in prices. From the peak in June 2007, the median price for single-family homes has declined 13.5 percent. The median price for condos fell 2.8 percent from last March, the fifth consecutive monthly drop.

Median or average home prices are not a good measure of home price trend because they are biased by a change in the mix of sales. Measures of home prices that track prices of the same home over time, i.e., those using a repeat sales transaction methodology, are more useful in tracking home price trend.

Yesterday, the Office of Federal Housing Enterprise Oversight released a home price index using this methodology. OFHEO published the overall house price index (including refinancing transactions) on the quarterly basis and publishes the purchase-only index (excluding refi transactions) on a monthly basis. The OFHEO purchase-only House Price Index increased 0.6 percent in February from January, the first monthly increase in eight months. From a year ago, the purchase-only index fell 2.4 percent, slightly moderating from a year-over-year drop of 2.7 percent in January. Since peaking in April 2007, the monthly purchase-only index has declined 3.1 percent.

The OFHEO index portrays a more optimistic picture of home prices than other measures of home prices. It is based on data from Fannie Mae and Freddie Mac. Thus the index includes only conventional conforming loans, largely excluding high-priced homes, especially in areas of the country where home prices have weakened considerably over the past year. The OFHEO data also include relatively fewer subprime loans and adjustable rate mortgage loans, which have performed relatively worse over the past year.