Last week, three reports on the current status of the housing market were released over three successive days:
- On Monday, May 24, the National Association of Realtors published its monthly report on existing home sales for the month of April.
- On Tuesday, May 25, Standard & Poor’s issued its quarterly S&P/Case-Shiller® Home Price Indices for the first quarter of this year.
- On Wednesday, May 26, the U.S. Census Bureau provided its monthly report on new residential home sales for the month of April.
Additionally, on May 20, the National Association of Home Builders (in conjunction with Wells Fargo) released its quarterly Housing Opportunity Index (HOI) for the first quarter of this year.
Because the recent Great Recession was closely linked to the collapse of a housing and real estate bubble which had built up for much of the previous decade, our long-term path of recovery out of this recession will also be linked to (first) stabilization and (second) recovery in these markets. In this Weekly Market Update, we’ll examine each of these recent reports for signs and indications of where we stand regarding a much needed and hoped for recovery in the residential housing market.
Existing Home Sales
Existing home sales rose 7.6% in April versus March to a seasonally adjusted annual rate of 5.8 million, according to the National Association of Realtors (NAR). The inventory of unsold homes (measured as total number of months’ supply at current sales rates) was 8.4 months, up from 8.1 months in March.
Over the past year, one key effect on home sales has been the homebuyer tax credit, which was originally part of the $787 billion stimulus package passed by Congress in February of last year. The credit provided up to $8,000 for first-time homebuyers to purchase a new or existing home. It was originally scheduled to expire at the end of last November. However, it was both extended (to the end of April of this year) and broadened to also include a tax credit of up to $6,500 for existing homeowners who wanted to buy another home as a primary residence. As the chart below illustrates, the program has been successful in raising existing home sales from their depressed levels in 2008 (only 4.9 million) to levels more consistent with those before the housing crisis (e.g. 5.7 million in 2007).
Source: National Association of Realtors
Notes: (1) Existing home sales include single family homes, townhomes, condominiums and co-ops.
(2) Seasonally adjusted annual rates are used in reporting monthly data to smooth out seasonal variations in resale activity.
According to the NAR, first-time homebuyers represented 49% of buyers in April, up from 44% in March. In addition, distressed homes (e.g. homes under a foreclosure order or for sale by the mortgage holder) represented approximately one-third of sales for both months. Since a further extension of the homebuyer tax credit is unlikely, the question becomes: What happens to existing home sales once this incentive disappears?
Home Prices
Standard & Poor’s released data through the end of March (i.e. first quarter) on national home prices based on their series of S&P/Case-Shiller Home Price Indices. These include a National Home Price Index along with 20 regional indices covering major metropolitan areas. The chart below plots the historical values of the National Home Price Index from the first quarter of 1998 to the first quarter of this year as a line, and the quarterly percentage changes in this index as the bars. Most notable is that, despite the recent trend of increasing existing home sales discussed in the previous section, the price index declined -3.2% for the first quarter following a smaller decline of -1% in the fourth quarter of last year.
Source: Standard & Poors in conjunction with Fiserv, Inc.
Notes: (1) The index tracks the value of single family homes in the U.S. and is a composite of single family home price indexes for the nine U.S. Census divisions
(2) Case-Shiller and Case-Shiller Indexes are registered trademarks of Fiserv, Inc.
Some of the decline in the first quarter may be due to the high percentage (approximately one-third) of existing home sales that were distressed properties where prices reflected motivated sellers such as banks seeking to reduce their inventory of homes and non-performing mortgages.
No one is anticipating that with the expiration of the homebuyers tax credit at the end of April we will see a renewed sharp decline in home prices as we experienced through 2007 and 2008. However, the data suggest that home prices will likely remain weak for at least the remainder of this year unless dramatic economic growth quickly brings down unemployment and raises household incomes.
New Residential Home Sales
Consistent with the data on existing homes sales, the report by the U.S. Census Bureau on new one-family home sales for April showed an increase of 14.8% over March on a seasonally adjusted annual basis to 504,000 units. This followed an even larger increase of 29.9% for the month of March versus February. Two factors were cited for this dramatic gain: first, the homebuyer tax credit program offered by the federal government; and second, the fact that median selling prices of new one-family homes have dropped from $222,600 (at the end of last year) to $198,400 in April. The chart below, which illustrates monthly historical new home sales volumes and prices, also shows that while the increase in seasonally adjusted annual sales volume since the start of this year is welcome, it is still below its long-term average of approximately 685,000 units per year.
Source: The U.S. Census Bureau and U.S. Department of Housing and Urban Development
Notes: (1) Median new one family home selling prices are in nominal dollars
Housing Opportunity Index
The Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria. The index is published by the National Association of Home Builders (NAHB) in conjunction with Wells Fargo. A composite national HOI Index (shown in the graph below) is comprised of data from over 200 metro areas in the U.S. In addition to median family income, the index also considers housing costs such as monthly mortgage payments based on current mortgage interest rates, plus property taxes and insurance.
As the chart below illustrates, one of the (few) positive outcomes of the recent housing crisis is that home affordability for a household earning a median income is now higher than it has been in 18 years. Much of this reflects the decline in home prices since 2006 along with the very low mortgage interest rates currently available to qualified borrowers. The irony of this development is that it comes at a time where the national unemployment rate is approximately 10%, consumer confidence is well below its long-term average, many would-be buyers are saddled with existing homes/mortgages that are “underwater” and most households have experienced a marked decline in their overall net worth as a result of numerous market and economic factors that have occurred over the past three years.
Source: The National Association of Home Builders and Wells Fargo
Notes: (1) The Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria based on two major components -- income and housing cost.
(2) The monthly principal and interest that an owner would pay is based on the assumption of a 30 year fixed rate mortgage, with a loan for 90 percent of the sales price (i.e., 10 percent down payment). The interest rate is a weighted average of fixed and adjustable rates during that quarter, as reported by the Federal Housing Finance Board. In addition to principal and interest, cost also includes estimated property taxes and property insurance for that home.
Summary
Both existing and new residential homes sales have seen impressive increases in volume over the past several months ending in April. Some of this can be attributed to the effect of the homebuyer tax credit, which was extended through April. And some of the increase is also due to the fact that home prices—while no longer in a free fall—are still relatively soft: Both existing and new homes experienced modest price declines over the past two months. Home affordability is at an 18-year high for households with median incomes.
However, two factors will likely weigh on residential home sales for the remainder of this year. The first factor is the expiration of the homebuyer tax credit. It appears to have done the job it was intended to accomplish a year ago in bringing buyers back to the market in order to cushion and slow price declines. With its expiration, the primary incentive for new buyers will be the very high affordability of home ownership (as measured by the HOI). Nonetheless, some renewed softness in home sales could re-emerge for the next quarter or two.
The second factor is the rate of economic recovery we will experience for the remainder of this year and accompanying growth in employment. Over the longer (one to three year time frame), very little else can contribute more to recovery in the residential housing market than reduced unemployment accompanied by rising incomes and increased consumer confidence.
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