Mixed Housing Data: Clearing Up the Picture

by: John Lounsbury

In the past few days both the National Association of Realtors (NAR - here) and the S&P Case-Shiller (here) data for existing home sales have been released. The NAR data covered sales through the end of July, and Case-Shiller data was through the end of June. On Aug. 26, the U.S. Census released the July new home sales data (here).

First we will look at the existing home data releases. Then we will examine the new housing data. The results are mixed. This may indicate that a bottom in housing is near or has been reached. This article will conclude with a summary of what else needs to happen to clarify the picture.

Sales of existing homes in the lowest price ranges are increasing. Sales in the higher price ranges are decreasing. Yet the median sales price is going up. Let's take a close look at these numbers to see what is going on.

NAR Data

A graphic from The 5-Min. Forecast (here) shows how houses under $250,000, and especially under $100,000, are dominating the market.

This correlates with other observations from the NAR. In the second quarter, 36% of all sales were "distressed", i.e., short sales and foreclosed homes. These homes are the most marked down in price. Distressed homes now selling under $250,000, may have been 50% or more higher two years ago and are attractive to bargain hunters. Also, 31% of all existing home sales are to first time buyers, who are concentrated in the lower price ranges.

At the end of the second quarter 2009, the NAR reported the median existing home sale median price had declined 15.6% year over year. This was a bigger drop than what they reported for the first quarter, which was -13.8%. This change is consistent with an increase in volume for lower priced homes and an decrease for higher priced homes.

Just as the 7.2% increase in sales volume for the second quarter should not be taken as proof that the housing market has bottomed, the larger year over year drop in median price for the second quarter should not be taken as proof that the market has not bottomed. Both numbers represent a shift in the distribution of buyers in the market toward lower priced homes. More data is needed to define where we are, or more time, or both.

Case-Shiller Report

The latest S&P Case-Shiller Home Price Indices report for June was released Aug. 25 (here). Many feel the Case-Shiller indices have better internal controls than the NAR report. However, the median price changes year over year are similar. The Composite-10 Index change was -15.1% and the Composite-20 was -15.4%, both year over year. The Case-Shiller National Index, which was less volatile at the top of the bubble, has tracked changes in the two metropolitan indices since.

All three Case-Shiller indices had their values increase over the past two months. Both of the metropolitan indices increased (on monthly changes) by 1.9% and the national index by 2.9%. Case-Shiller does not report sales by price range, so we can only infer that the improvement in prices during the last two months reported (May and June) happened in spite of the year over year price drop due to a structural change in the home buyer population. The market is now dominated by people looking for distressed properties and first time home buyers, and yet prices rose. The short term median price increases may have permanency, rather than entirely due to seasonality.

Below is a graph showing the S&P Case-Shiller Index history:




New Home Sales

The latest data release for new home sales (Aug. 26) has been reviewed at TheStreet.com (here). That analysis reveals possible trend changes not seen in the existing homes data, including:

1. In recent months, median prices are flattening and average prices are rising.
2. Since January, there has been a strong rebound in new home sales.
3. Higher-priced homes are gaining market share.
4. The business model for homebuilders appears to be changing.

The new home market is showing some different characteristics compared to the existing homes. For example, higher priced homes are gaining market share for new homes and losing for existing homes. This may reflect the burden of foreclosures on the existing home market. Read the rest of the details (here).

Conclusions

There are a number of factors in the current snapshots of the housing market which indicate that we may be near a bottom. However, there are many factors still on the table that prevent making a reasoned call. Looking forward, we do not yet know how the foreclosure overhang may change in the coming months. Many negative factors will effect the foreclosure picture negatively. These include:

1. High mortage delinquencies;
2. High numbers of mortgagors underwater (owe more than house is worth);
3. Rapidly rising rate of prime foreclosures (read more here)
4 Variable mortgage resets; and
5. High unemployment .

These factors will impact the supply of existing homes coming to market, as well as reduce demand. Demand is necessarily reduced if we are removing potential buyers through increasing unemployment (realized or feared) and credit impairment. There are over a million net new houshold formations per year, but that won't help if we are removing an even greater number from the potential buyer population.

The factors discussed above are still on my analysis work schedule. More will be written as results are obtained.

Disclosure: No positions in housing related stocks.