April 23, 2009

By Lawrence Yun, Chief Economist

Existing home sales fell in March, but the data still points towards stabilization. There are normal month-to-month swings in the data, so it is not a total disappointment to see a fall in March after a strong gain in February. Inventory is getting trimmed. The home price decline was less than in prior months.

First, on the figures, existing single-family plus condominium sales declined 3.0 percent in March to a seasonally adjusted annual rate of 4.57 million units from a 4.71 million unit pace in February (downward revision from the 4.72 reported earlier). Compared to the same month one year ago, existing home sales were down by 7.1 percent.

Inventories at the end of March declined 1.7 percent to 3.74 million homes available for sale. Despite slightly fewer homes on the market, the months’ supply of inventory inched higher to 9.8 months due to lower home sales in March. Inventory had peaked at 4.6 million corresponding to an 11-months’ supply in the summer of last year. So the inventory is clearly moving in the right direction. Based on past seasonal patterns, expect inventory to be rising at least through the summer. The question is whether demand will be rising to clear off the newly listed homes that hit the marketplace. We need to get down to 7 to 8 months supply before home prices can stabilize.

Home prices fell again – which is no surprise given an oversupply of homes. The national median existing home price in March was $175,200, which is a decline of 12.4% from one year ago. February home prices were revised higher to $168,200 (from $165,400 that was reported earlier). Even though the price rose in March, a month-to-month comparison can be misleading. Every year, home prices tick up in March from February, not because of a genuine price gain, but because of changes in the mix of homes that are sold. In winter, fewer families with children buy a home and activity is dominated by single-households or from families without school-aged kids. But as spring rolls around, more families with children, who need a larger-sized and hence higher priced homes, get sold. Because of this phenomenon the median home price is higher in spring versus winter. However, with that caution in mind, the latest monthly price increase from February to March was 4.2 percent. The increase is notably higher than the typical 1-to-2 percent rise over this time period. Is the stronger price gain a ‘green shoot’ that is sprouting, or just a statistical data fluke?

Regarding distressed sales, about half of all home sales now are distressed sale properties involving either foreclosures or short-sales. It had been about 45 percent for several months prior, so this market segment has ticked up. It will rise further in my view as more distressed properties reach the market due to the end of the voluntary foreclosure moratorium that many lending institutions had enacted. The rise in distressed sales means we have bifurcated markets. Areas with a large concentration of distressed sales have tumbling home prices while areas with few subprime loans and foreclosures have seen much less of a price decline. A piece of good news on distressed sales is that buyers love them. Multiple biddings are becoming more common for foreclosed properties.
Trying get a mortgage to buy a condo property is much more difficult. There are additional origination fees, certain owner-occupancy requirements before Fannie and Freddie consider buying, and like. No surprise therefore that the condo market is underperforming in comparison to the single-family market. Condo sales declined 4.1 percent over the month, while single family home sales fell 2.8 percent. Month-to-month data can jump around, so looking at year-over-year figures show condo sales falling 17.8 percent versus single-family sales decline of only 5.7 percent. It’s the same song on home prices: single family home prices were lower by 11.5 percent while condo prices declined 18.7 percent.

The regional breakdown on sales from month-to-month is as follows:

·     In the Northeast, existing home sales decreased 8.0 percent

·     In the Midwest, sales were unchanged

·     in the South, sales fell 1.7 percent

·     in the West, sales fell 4.2 percent

Prices were lower in all four regions. From one-year ago, prices were lower by 18.4 percent in the Northeast, 6.1 percent in the Midwest, 12.2 percent in the South and 11.1 percent in the West. Note the price decline in the West region is now only 11.1% compared to 20 to 30 percent declines in the prior nine months. The monthly price change in the West was a 9.5 percent rise. Again, prices rise nearly every March from February, so read the monthly price increase with caution.

I am inclined to say that the worst is over in California, Nevada, and Arizona. The situation is far from normal, but the declines are over and the market is turning for the better for both home sales and home prices. There will be a continuous showing of year-over-year price declines for the remainder of the year, but month-to-month prices are shifting up after adjusting for seasonal factors. In other words, someone who bought in March of this year will likely see a higher home price by March of next year in the three western states cited above. It is a recovery and healing process and certainly not a re-inflating of a bubble. Buyers are meeting very tough underwriting standards.

Though there is a clear improvement in 3 states, the vast majority of the country still has lower sales and lower prices.

First-time buyers are looking for bargains on top of the tax credit. The latest survey of REALTORS® about their clients showed that 53 percent of home buyers are first-time buyers.  That is much higher than the typical 40 percent.

Copyright National Association of REALTORS®, Reprinted with permission.