Rough Seas For Housing Recovery

by: Steven Hansen

The nascent recovery of new and existing home sales may be losing some steam.

  • New Home December 2012 sales were the worst year-over-year gain in 2012.
  • Pending Home December 2012 index was the worst year-over-year gain in 2012. Pending home sales are counted when a purchase agreement is signed for an existing home.

Both new homes sales and pending home sales are based on contract signing - while existing home sales are based on contract (closing) completion. So both pending home sales and pending home sales offer a glimpse of the future.

What is being seen is a cooling of the growth in home sales. The evidence at this point is not strong, and could be argued it might be a transient effect.

Defining the Effect

First a look at pending home sales (graph below); there was a drop in the index in December 2012.

Click to enlarge

New home sales also had a drop in the December data. Could this drop be a sporadic month of data (one month is not a trend)?

Year-over-Year Change - Unadjusted New Home Sales Volumes (blue line) with zero growth line emphasized (red line)

Click to enlarge

These observations change when three month rolling average of data is used to smooth out the data and make trends more noticeable. Here it is obvious new home sales are in a six month down trend, while the down trend in pending home sales is there but not obvious at first glance because of a smaller slope value.

3 Month Rolling Average of Year-over-Year Growth of Pending Home Sales (blue line) and New Home Sales (red line)

Click to enlarge

Using 3 month averages, any change in the graph is a trend. Note that the turning points are similar in pending homes and new home sales.

Playing With Possibilities

The most likely possibility is changing seasonality. Home sales seemed to have gotten on track in 2012 and become fairly predictable. Maybe the fiscal cliff or bad weather kept buyers away from houses more in 2012 than in previous years.

Maybe a piece of the puzzle lies in the continuing decline of inventory of homes for sale.

Click to enlarge

This continuing decline in inventory has been puzzling. Without inventory, there are not enough homes for sale. So there is no doubt there are not enough sellers. The question is why.

The average for equity in a home has fallen almost half. This means fewer existing owners can bring enough money for a new mortgage, or if cashing out - fewer have enough money to close after paying expenses. The graph below shows existing home equity divided by 130 million homes. In most cases, a seller would become a buyer of another home but fewer sellers can get in that position. So they sit and wait.

Click to enlarge

It will be interesting to see how home sales plays out in 2013. However, the dynamics which are in play are slowing improvement in home prices and flat per capita income. Slowly growing mortgage interest rates may also provide a drag - 2013 home sales' year-over-year growth may be closer to zero than double digits.

My weekly economic summary is in my instablog. The data released this week was far from great - with one data set recessionary.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.