Thursday morning (February 26) a new U.S. Department of Commerce report found new home sales in January at a lower level than any time since they started keeping records in 1963 (New-Home Sales Tumble To Record Low; Prices Fall). The day before, the National Association of Realtors announced a 12-year low in sales of existing homes for January (January Existing Home Sales).
This is a good time to update and extend a comprehensive review of the national housing market posted nearly two months ago (link cited below).
Single Family Home Prices
The graph below contains two more months of data (November and December) available since the previous article on this subject, Because there has been a continuation of the rapid drop in prices from the earlier months, the new projection of a slightly more gradual price decline gets to the target box in late 2009 or early 2010. This target is somewhere around $120,000 to $125,000, or about 20% below the December average price. The target price is near the same value as two months ago ($120,000 to $130,000 then), but the time to reach the target box is now projected to be 3 – 12 months less. If the rate of house price decline slows significantly, then the time to reach target would become much longer and the target price would rise slightly ($1,000 to $2,000 per year).
Data just released this week (February 25) revealed a 5.3% drop in existing home sales for January to a 4.49 Million annual rate (January Existing Home Sales ). In January, 45% of all sales nationally were distressed sales (foreclosure and pre-foreclosure sales).
Housing Starts – Single Family
The National Association of Home Builders maintains a history of housing starts and makes projections into the future. The graph below was obtained on their web site on February 24. The graph shows a bottom on housing starts projected for December, 2008 at 622,000 units (annualized). The actual data is in the graph through year-end 2007. On the same web site one can obtain the actual monthly through January, 2009, most recently updated on February 18. The projection in the graph for December, 2008 was around 600,000 units; actual was 395,000. The projection for January, 2009 was for an increase from the December level; the actual number was a drop from December of 12% to 347,000 units. I have added a (red dotted) line representing the actual data since the graph was produced.
[Source]
The January number of housing starts (annualized) seems quite a low number, but single family housing starts will have to fall another 20% to reach my January projection of 275,000 units annualized at the bottom.
Using the 2005 average as a reference (1716 units), the January 2009 number represents a drop of 80% in single family housing starts.
Note: More recent projections than the one I quoted here (graph above) can be obtained by subscription at http://www.HousingEconomics.com
Housing Starts – Multi-Family
The NAHB (links above) also publishes the housing starts data for multi-family housing. This is summarized in the following table. Multi-family housing starts have declined by 66% from 2005, significantly less than the 80% drop in single family housing starts.
If some of the single family housing sales are to investors (and, therefore, increase the number of rental properties), this may further depress the multi-family housing construction business.
Note: The 2005 multi-family total is one (thousand) units greater than the two component categories, and the 2005 U.S. total is one (thousand) less than the sum of one unit and multi-family. This is presumed to be due to round-off errors.
Regional Differences
It is all well and good to talk about national markets, but real estate can vary significantly between different local markets. The National Association of Realtors (http://www.realtor.org/research/research/ehsdata) gives separate data for the four regions of the country. The following two tables show some of that data for prices and sales volumes. The data base does not show any 2005 data or the highs in price and volumes for 2006, just the total for the latter year. This data shows the region (West) with the largest price drop also has the most positive sales volume numbers.
The West has the smallest drop in volume from 2006 and actually has an increase in volume for 2008. Mark Perry (California Real Estate Market Is Up) recently reported an increase in sales volume in California on drastically lower prices. Since the West has had a larger loss in house price thus far, it is not unreasonable that region would have the most favorable sales volumes.
Summary
Some additional conclusions from this update:
1. The continued rapid drop in average home price has shortened my time estimate for reaching the “target equilibrium price” around $120,000 to $125,000. My time estimate is now late 2009 to early 2010. This is as much as 12 months earlier than my estimates just two months ago. If the rate of price decline slows in the next 2-3 months, the time estimate will be increased again.
2. In the previous article I estimated the drop from 4th quarter 2008 to a bottom in housing starts of 275,000 (annual rate) to be about 33%. With the unexpectedly lower housing starts rate of 347,000, the drop to the projected bottom is now 20%.
3. Multi-family housing starts have fallen much less (66%) from the cycle peak than have single family housing starts (80%).
4. There are significant regional differences in the housing market outlook. The West has seen prices fall much further than the other three regions. Not surprisingly, sales volume (existing homes) in the West has increased during 2008 while the other three regions have continued to see volume declines.
5. Sales of distressed homes (foreclosure and pre-foreclosure) constituted 45% of sales in January.
The increase in distressed sales is undoubtedly contributing to the continued rapid decline in sales prices. As shown by the West region, sales volumes will probably increase as prices drop. As prices approach historic price to income ratios, inventories should start to decline. If housing starts do not continue their decline, however, the entire process could be delayed. Also, if government action attempts to support prices above the “equilibrium” level, this would be another cause for delayed bottoming.
