Is Our Economy Completely Broken?

I don’t think so. In these times, it’s nice to see a positive surprise in the housing numbers, but the December pop in existing home sales has us rubbing our eyes to make sure that’s actually a “plus” and not a “minus” in front of the 6.5%… The jump in existing home sales for December […]

I don’t think so.

In these times, it’s nice to see a positive surprise in the housing numbers, but the December pop in existing home sales has us rubbing our eyes to make sure that’s actually a “plus” and not a “minus” in front of the 6.5%…
The jump in existing home sales for December was entirely single family-driven, and was accompanied by a welcome collapse in the amount of inventory on the market. The decline in months supply from 10.7 to 8.6 months was not only the result of higher sales, but also of absolute falling inventories. Total home inventories slid 13.2% month-over-month, a huge drop.
This decline in inventories, the latest component of a trend that started in July, is encouraging for our expectations of stable housing market in the second half of 2009. Excess supply is the one overhang preventing potential vulture investors from stepping more aggressively into the sector, and with today’s indication that this overhang is easing, we’ll likely see more interest on the demand side as well. Don’t jump out of your chair and call your real estate agent quite yet — we’re talking about the start of a trend that will likely play out over the next six months, not an instant fix. –Guy LeBas, Janney Montgomery Scott

Despite the bounce in sales in December, the housing market remains in critical condition. Lower prices and lower interest rates will help sales to some extent, but the dismal condition of the labor market will remain a considerable drag on home sales over the remainder of 2009. Also, it will take several more months of data on the inventory front before December’s decline in inventories can be put in proper perspective.
One factor that likely helped magnify the decline in inventories in December was that many lenders and local governments had imposed moratoriums on foreclosures over the final months of 2008. As these start to expire, and as deteriorating economic and labor market conditions push more homes into the foreclosure process, inventories are likely to rise.
Along with what we believe will be declining sales over coming months, this will likely lead to a reversal of the seeming progress made on the inventory front in December. Should that prove to be the case, home prices will remain under downward pressure. Lower prices will help improve affordability, as will lower mortgage interest rates, but tougher mortgage lending standards and continued job losses will exert more of an influence on home sales over coming months. –Richard F. Moody, Mission Residential
Sales undershot the level implied by the pending home sales index in the three months to November, but this December gain has closed the gap. Still, it does not fully reverse the November drop and the clear message from the data is that sales have softened markedly since the summer, following a few months of modest gains. According to the NAR all the rise in spring and summer sales was due to vultures buying cheap foreclosed properties, and even that business now seems to have been battered by the credit crunch. Prices are still falling, but at least inventory fell in December. It remains extremely high, though. Still, rising mortgage apps might mean better first quarter. –Ian Shepherdson, High Frequency Economics
We suspect that the big sales drop in November exaggerated underlying trends and the December bounce puts sales back slightly above the average of the two previous months. As has been the case in recent months, a substantial portion of the sales in December were of properties in foreclosure. Reflecting the urgency of sellers to clear out these properties, both the median and average sales price fell sharply… While average prices fell most sharply in the West (-10.9%) and the Northeast (-7.6%) they were slightly higher in the Midwest and South. Encouragingly, the increased sales resulting from more realistic pricing has cut the nationwide inventory of unsold existing homes to a two-year low. –David Resler, Nomura Securities
Existing home sales peaked during the summer of 2005 and have fallen fairly steadily since then. This month’s jump in sales, while welcome, is unlikely to represent the beginning of an improving trend given that the inventory of homes available for sale is still very high, home prices are continuing to fall, and mortgage lending standards have tightened substantially. The inventory of unsold homes–while declining–is still very high, putting downward pressure on both new construction and home prices. Home prices have been falling on a year-on-year basis for more than 2 years and, in recent months, the price declines have accelerated. As long as inventories stay very high and a high proportion of sales are distressed, prices will continue to decline. A sustained recovery in the housing market is unlikely until home prices stabilize. –Stephen A. Wood, Insight Economics
The most substantial problem with the resales data is the increasing prevalence of bank-owned properties (ordinarily auctioned) are being sold through traditional realtor channels. This will tend to boost both inventories and sales, leaving the impression of higher activity levels, an increasing upward bias in the series. (The fact that the properties are finding buyers is not one of the many negatives) This is not the case with new construction, which shows a decimated sales pace through November 2008 –Steven Wieting, Citigroup
While distressed sales continue to account for a huge chunk of overall activity, part of the market clearing process is that distressed properties must be sold, so the fact that this is occurring is good. Still, it certainly depresses prices (see below), and there are plenty more foreclosed (or soon to be foreclosed) homes in the pipeline. The inescapable conclusion, therefore, is that median sales prices will continue to decline for the foreseeable future. –Joshua Shapiro, MFR Inc.
A sharp drop in home prices appears to have brought some buyers into the market, particularly in the West (and the National Association of Realtors noted that distressed properties accounted for 45% of all sales). With mortgage rates falling toward the end of 2008 and prices likely continuing to adjust lower, it will be interesting to see if existing home sales can stabilize around these levels. Recent pending home sales data, however, have remained weak. –RDQ Economics