A Sustainable Housing Rebound Is No Slam Dunk

By Chad Brand

For several years now I have been watching the home inventory data to determine if and when a sustainable rebound in the housing market may occur. Although it is only a single data point, inventory levels have traditionally been the best predictor of future home price appreciation. Unfortunately, the inventory figures have not greatly improved this year, even as the last few months of data has shown a slight up tick in sales and prices over the very near term. Existing home inventories remain in the nine to ten month range, only down slightly from the eleven to twelve month peak and nowhere near the normal level of around six months. It is hard for me to predict a sustainable rebound in the housing market with more than nine months of supply and a lackluster economy.

So if the answer is not inventories coming down, what has been behind the recent optimism in the housing market? To me, it's the $8,000 first time home buyer tax credit that was part of the economic stimulus plan passed in February. There has been a direct correlation between the price of homes and the rebound we have seen in recent months; the cheapest homes have sold the best, with the most expensive properties seeing the largest drops in sales and pricing. To me, this is proof that first time homebuyers are behind the recent strength in the housing market. It is not unreasonable to attribute this to the $8,000 tax credit. That is a lot of money, especially for younger first time buyers.

What happens to the housing market when the tax credit ends in November? It is a forgone conclusion that the low end of the market will lose some steam. With the high end of the market faring far worse recently, I do not think that bodes well for the housing market. Investors and home buyers alike should be wary of the recent housing market optimism. The odds are very good that the tax credit is the main reason for the pickup in sales and prices that we saw in the second quarter. When that goes away it will be difficult to make up the difference.

Comments

[romorris:]

Maybe, but don't make any bets that the tax credit will go away in November. It looks like it will be around quite a bit longer.

Aug 28 09:41 AM

[Steven R. S...:]

What many are trying to call the bottom of the Housing Market, may in fact, only be a normal Seasonal Uptick. Yes, July sales volumes in a normal market, are higher than June, or May. August is the peak, then volumes decline until January, when the up cycle repeats.

Separate from the normal annual cycle, much of the up tick is helped by builders packing their deals full of Concessions from Buying Down the interest rates, to paying the closing costs, to giving free upgrades.

I have found $225,000 sales with $30,000 in Concessions that were used to prop up the Sales Price in new homes. In some sub markets in my Inland Empire Region, this is usual and customary.

Sales numbers, when not analyzed as to what they are made up, are giving a false read on recovery. Sales Prices and Market Values are not the same in the current market, there can be more than a 10% variance between the two, but then, that subject deserves a whole article, not just a comment.

Aug 28 11:49 AM

[HardwoodFlo...:]

Well, if Chad has been spending the last few years studying the inventory numbers then he should well realize that the month supply ratio is directly corrolated to the amount of sales. Sales of new houses and existing, while invenotry levels have been dropping, actually suck.

Now, if sales of homes were at normal levels supply would be in the 3-4 month range- lowest levels in ten years. However this ain't gonna happen anytime soone because,of JUMBOS.

Even people with 20-30% down with verifiable incomes cannot get loans that are above the $400K FHA backed loan that banks are willing to lend. The truth is banks aren't willing to lend on anything that isn't FHA. This is crushing the top end of the market that is so clearly pointed out in the article.

Unlike cars, a home is very often financed. Lots of people jsut buy cars with cash. $60K car, lots of people trade in then buy with cash without a auto loan. However, when you start talking about a $1MM house, and you put down $300K, you tend to want to finance the home with a long term mortgage with interest you can deduct from your income etc.

That's the big difference, it's not like there are is a nation of unqualified buyers out there. There are qualified buyers out there but banks have been unwilling to finance them b/c it ain't backed by the government. It's nuts. So then why are banks in business?

I thought they were in business to loan money. Sure sometimes that requires risk. That risk is mitigated by putting down 20% (at least in the old days that meant something) with an idea that it was the person lending it's obligation to pay it back. However, with the government making it so easy for banks, borrowing at zero and lending it out at 6% then securing the loans why write mortgages that aren't secured by the government and that is what's going on.

If there was a "normal" move-up market. If there was financing available that wasn't FHA backed. The RE market, inventory months, prices, new home builds would take off like a rocket.

Jobs would get better, the economy would start rolling again. But as usual with the governement involved it's a total cock-up.

Aug 28 03:44 PM