Existing Home Sales See First Increase in Seven Months

MBA (3/25/2008 ) Velz, Orawin
Total existing home sales rose 2.9 percent in February to a seasonally-adjusted annualized rate of 5.03 million, as both single-family and condo sales increased. This is the second consecutive increase in single-family home sales, which were up 2.8 percent, following a 0.7 percent increase in January. Condo sales rose 3.7 percent, the first increase in seven months.
Sales of single-family homes during the first two months of this year were down 20.3 percent from those during the same period last year. Year-to-date condo sales have been 28.4 percent lower than those last year. Total existing home sales have declined 30.6 percent since their peak in September 2005.

February existing home sales rose in three regions: 11.2 percent in the Northeast; 2.5 percent in the Midwest and 2.1 percent in the South. Sales dropped 1.1 percent in the West.

Inventory of total existing homes dropped in February. The number of total homes available for sale fell 3.0 percent from January from 4.16 million to 4.03 million. (The data are not seasonally-adjusted.) Inventory was still up 6.0 percent over the past year, however.

The increase in the sales pace and a drop in inventory pushed down the months’ supply of total existing homes (or the inventory-sales ratio) to 9.6 months in February from 10.2 months in January. The months’ supply for single-family homes was 9.2 months in February, compared with 6.6 months a year ago. The months’ supply for condos rose from 9.3 months in February 2007 to 13.0 months—a record high since record keeping for the condo series starts in 1999.

Elevated months’ supply continued to put downward pressure on home prices. The median price for single-family existing homes fell 8.7 percent in February from a year ago. This is the 19th consecutive month of year-over-year drop in prices and the largest on the record since the series’ inception in 1968. The median price for condos fell 4.9 percent from last February, the fourth consecutive monthly drop.

While the increase in home sales is encouraging, the improvement unlikely indicates the bottom of the housing market. Existing single-family homes, condos and co-ops are based on closing. Thus February existing home sales reflected market environments in December and January. Mortgage rates dropped in December and January, spurring increases in housing demand.

The Mortgage Bankers Association’s Weekly Survey of Mortgage Applications showed healthy pickups in the purchase index in December through mid-January. However, mortgage rates rose in February through mid-March and the four-week moving average in the purchase index has trended down since the beginning of February, suggesting home sales should resume its decline in the near term.

There is one silver lining to the housing market. Recent actions over the past week by the Federal Reserve and the Bush Administration to support the mortgage-backed securities markets have brought down the spread between the yield on the 10-year Treasuries and the yield on agency’s mortgage-back securities to about 80 basis points at the end of last week from more than 200 basis points during the second week of March. This spread helps determine the spread between the yield on the benchmark 10-year Treasury note and the 30-year fixed rate mortgage yield. The narrowing spread should help support housing activity in late spring in the face of weakening labor market and declining economic activity.

A separate report from the Federal Reserve Bank of Chicago showed that the nation’s economic activity contracted in February to its lowest level in nearly five years. The National Activity Index fell to -1.04 in February from -0.68 in January. This is the biggest drop since April 2003. The three-month moving average, which smoothes the month-to-month volatility and thus provides a more consistent picture of economic growth, was -0.87 in February, compared with -0.73 in January and -0.78 in December. The Chicago Fed says that figures below -0.70 in the three-month average indicate the possibility of recession. Recent behaviors of the index showed increasing odds that a recession has begun, according to the Chicago Fed.

The stock markets rallied after JP Mortgage Chase & Co. increased bid for Bear Stearns Co. to $10 per share, in order to quell a shareholder rebellion over its takeover. Under the terms of the deal the two firms struck March 16, the takeover price had been $2.52 a share. Treasury yields increased as funds moved from Treasuries to stocks. Other developments that caused a stock market rally and decreased demand for safe-haven Treasuries included news that the U.S. Federal Home Loan Bank system will be allowed to expand its holdings of Fannie Mae and Freddie Mac securities by more than $100 billion. The yield on the 10-year Treasury note jumped to 3.54 percent, 21 basis points higher than the closing rate last week.