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Friday, August 6, 2010

June Housing and Mortgage Market Trends

Big uncertainties remain for the housing market as the home purchase tax credit program expired and doubt lingers about the strength of the U.S. economic recovery. As I sat in the dark following an extended power-outage in a Maryland suburb of Washington DC, I noticed a similar feeling between the lack of electricity and the uncertain state of the housing market. Comments regarding the two situations could have been interchangeable –

“the storm was bigger than we first thought and it’s taking longer to work through the problems”
“we’re not sure when normality will be restored”
“we’ve revised the timeline and it will be longer than expected”

Meanwhile everyone is cursing the darkness and looking desperately for signs of improvement. My electricity is back after nearly a week, but the same can’t be said for the housing market.

As a result of the shaky situation, homebuilders have discounted sales to unload excess inventories. After the mad scramble to fulfill purchases before the expiration of the tax credit, potential home buyers are once again back to sitting on the sidelines. The low interest rate environment and falling home prices continue to sweeten deals, but not enough to overcome the softness of the labor market and the slide in consumer confidence.

Below are the highlights from the June numbers:

  • Existing home sales fell for the second straight month, declining 5.1% to an annualized pace of 5.37 million units. Sales have since fallen off in the wake of credit program ending. From a year prior, sales were up 9.9%. With the decrease in sales over the month, the months supply of inventory rose to 8.9 from 8.3. The supply of inventory will have to continue to decline before prices can be certain to have bottomed out. The historical normal is around 5 months of inventory.
  • New home sales shot up 23.6% in June to an annualized pace of 330,000 units. However, this followed a large decline in May, so the percentage increase is only giving an appearance of strength without much underlying support. The cumulative rise of sales off of the prior trend in March and April was about the same magnitude as the decline in sales in May and June. This suggests that the vast majority of sales that were driven by the tax credit where not newly induced buyers. Instead, it is likely that many buyers who would have purchased a home in later months simply moved their purchase forward by a couple months to take advantage of the credit. [See the blog posting on this subject.]
  • Housing starts fell again to an annualized level of 549,000 units, the second consecutive monthly decline. The number of starts fell to level last seen in November 2009. Meanwhile, permits rose 2.1% from the previous month to 586,000 units in June. The fact that starts (at 549,000 units), are still much greater than sales of new homes (at 330,000 units) shows the pressure on the homebuilding sector will continue for some time. It is a bit shocking that there is little demand to clear the near-record-low levels of new homes being built.
  • Mortgage rates continue to set new record lows – reaching a monthly average 4.38% in June. Rates have been pushed down by the Greek sovereign debt crisis this past Spring. The market uncertainty boosted investor appetite for US Treasuries due to the “flight to safety.” This, coupled with a general sentiment that the US economic recovery will be slower than previously anticipated, and the recent news that inflation remains in check, has had the effect of driving down long term interest rates.
  • The NAR Housing Affordability Index (at 170) still remains high and shows that the typical household has more than enough financial resources to buy the median priced home. However, the index has been declining in recent months, which reflects rising home prices supported in part by the tax credits. With the conclusion of the tax credit program, home demand has fallen back. Moreover, mortgage rates continue to find new record lows. Thus, we expect this index to rise over the next several months.
The Housing and Mortgage Market Trend Sheet, located in the "OCE Documents of Interest" column at the right, is now updated with June figures. The trend sheet includes sales, pricing, construction, underwriting and delinquency data.

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