Home Sales Retreat; Price Declines Accelerate

MBA (5/27/2008 ) Velz, Orawin
The housing market deteriorated, according to two housing reports last week. Existing home sales fell modestly in April. A moderately slower sales pace and a large increase in inventory pushed up the months’ supply for single-family homes to the highest level since July 1985. After stabilizing around 12.0 months over the past seven months, the months’ supply of condos jumped to 14.2 months in April.
Excess supply of homes has put an additional downward pressure on home prices. The median price for single-family existing homes fell 8.5 percent in April from a year ago, the third consecutive year-over-year drop of at least 8 percent. The median price for total existing homes has declined about 12.0 percent since its peak in July 2006.

Also released last week, a home price measure from the Office of Federal Housing Enterprise Oversight (OFHEO), tracking resales of the same homes over time, showed that prices dropped 3.1 percent in the first quarter of 2008 from a year ago—a record decline—after only a 0.5 percent year-over-year drop in the previous quarter.

Tighter lending standards, especially for prime jumbo loans after the August financial turmoil, have prevented many potential homebuyers from qualifying for a home purchase. The existing home market has fared much better than the new home market, however. Since September 2007, total existing home sales have fallen about 4.0 percent, compared with a huge drop of 24.0 percent for new home sales. (Data for April new home sales will be released on May 27.)

There are reasons for optimism: recent efforts by Fannie Mae and Freddie Mac to provide liquidity in the jumbo-conforming market are beginning to improve that segment of the market. The spread between conforming and jumbo-conforming mortgage rates has narrowed to less than 0.5 percentage points. Still, only home buyers with good credit history and the ability to make an ample down payments and those who can apply with full documentation, will fully benefit from recent developments.

Long-term yields were volatile last week. The Treasury market rallied and yields dropped on Tuesday as oil prices topped $129 a barrel and core producer inflation accelerated, pushing investors out of the stock markets in a flight to quality. On Thursday stock markets rallied while Treasury declined and yields rose on the news of an unexpected drop in initial unemployment claims. On Friday, stocks fell, extending the market's biggest weekly retreat since February, on concerns of a worsening housing recession and rising energy costs. The yield on 10-year Treasuries stayed around 3.84 percent by mid-Friday afternoon, 20 basis points higher than the closing rate on the previous Friday.

Housing and Mortgage Indicators:
The Office of Federal Housing Enterprise Oversight (OFHEO) House Price Index (HPI) showed that home prices have continued to deteriorate. The all-transactions HPI, which includes refinance transactions, was flat in the first quarter from a year ago. The purchase-only index (i.e., the index excluding refinance transactions) showed a year-over-year decline of 3.1 percent in the first quarter of 2008 after a 0.5 percent year-over-year drop in the fourth quarter of 2007.

Fifteen states posted year-over-year declines in home prices, including California, Nevada and Florida, each of which saw more than an 8.0 percent drop in prices. In the fourth quarter of 2007, 11 states saw drops in home prices from a year ago. Of the 292 metropolitan areas covered in the report, 128 posted a quarterly decline in the overall HPI, up from 99 in the fourth quarter of last year.

Total existing home sales fell 1.0 percent in April to a seasonally-adjusted annualized rate of 4.89 million, as both single-family home sales and condo sales dropped. Single-family home sales edged down 0.5 percent, compared with a 5.2 percent decline in condo sales.

Sales of single-family homes during the first four months of this year were down 19.0 percent from the same period last year. Condo sales have performed worse, with year-to-date sales 27.6 percent lower than last year. Since their peak in September 2005, single-family existing home sales have declined about 33.0 percent, surpassing the peak-to-trough drop of about 30.0 percent seen in the 1990-91 recession.

Existing home sales fell in two regions: 4.4 percent in the Northeast and 6.0 percent in the Midwest. Sales were flat in the South and increased 4.4 percent in West.

The housing market continued to experience a significant imbalance, with inventory of total existing homes rising in April. The number of total homes available for sale jumped 10.5 percent from March and 7.9 percent from April 2007. The inventory data are not seasonally-adjusted; therefore some of the increase in inventory reflected the normal increase for April.

A decline in sales pace and an increase in inventory pushed up the months’ supply of total existing homes from 10.0 months in March to 11.2 months in April. The months’ supply for single-family homes was 10.7 months in April, compared with 8.3 months a year ago. The months’ supply for condos rose from 9.0 months in April 2007 to 14.2 months in April of this year, a record high since record keeping for the condo series started in 1999.

The huge inventory overhang has further put downward pressure on home prices. The median price for single-family existing homes fell 8.5 percent in April from a year ago. The median price for condos fell 3.7 percent from last April, the sixth consecutive monthly drop.

Economic Indicators:
The Conference Board index of leading indicators—a gauge of future business activity three to six months ahead—rose 0.1 percent in April following the same increase in March. This is the first time the index has risen for two consecutive months since September and October 2006. Since its peak in January 2006, the index has declined more than 2.0 percent. According to The Conference Board, the index is consistent with a weak economy “but not one in recession.”

Six of the 10 components of the leading economic indicators increased during the month. These included a surprise increase in residential building permits and higher stock prices. Weaker consumer confidence and a decline in the manufacturing average weekly hours were the biggest drags on the index.

The Conference Board’s index of leading indicators is designed to forecast economic activity and turning points in the business cycle based on ten economic components. However, the arbiter of the business cycle is the National Bureau of Economic Research. Its Business Cycle Dating Committee uses a different set of variables to decide when the economy slips into a recession.

The Producer Price Index (PPI) rose 0.2 percent, following a 1.1 percent increase in March. A drop in energy costs and unchanged food costs held the increase in overall prices down. Although unadjusted energy prices increased 2.9 percent during the month, they declined on a seasonally-adjusted basis because the increase was smaller than the gain in April in prior years.

The prices of crude oil and other energy products have continued to increase in May and will likely lead to rising overall prices in the near term.

Excluding food and energy items, the core PPI was up 0.4 percent, accelerating from a 0.2 percent increase the previous month. The increase in the volatile prices for passenger cars and trucks pushed core prices up, reversing the drop in the previous month. The biggest increase in commercial furniture prices since February 1981 also helped boost core prices. Over the past year, the core PPI rose 3.0 percent, the largest gain since December 1991.

The Chicago Federal Reserve Bank’s National Activity Index fell from negative 0.98 in March to negative 1.17 in April. A negative value indicates that growth in national economic activity was below its historical trends.

According to the Chicago Fed, an index value below negative 0.7 suggests "an increasing likelihood that a recession has begun.” The three-month moving average reached negative 1.24 in April, its lowest reading since November 2001. The three-month moving average has been below the negative 0.7 threshold for five consecutive months.