Existing Home Sales and Housing: A Long Way From Normalcy

Includes: IYR, REZ, RWX, XHB
by: The Mays Report

The National Association of Realtors reported today that sales of existing homes slumped in October after rising in consecutive months. Existing home sales declined by 2.2% to a seasonally adjusted annual rate of 4.43 million units. This is 25.9% below the 5.98 million units sold a year ago. Median home prices declined 0.9% from October 2009 to $170,500.

Higher Underwriting Standards

The NAR reports a noteworthy share of appraisals below the price negotiated between a buyer and seller. An NAR practitioner survey showed that 10% of realtors reported a contract cancelled as a result of a low appraisal, 13% had a contract delayed, and 16% said that contract negotiations resulted in a lower sales price due to a low appraisal. Of the 13% which had a contract delayed, how many of those appraisals were increased so the sale could take place? I would rather see a lower number of home sales at a market price which is more in line with historical rates of appreciation because it is sustainable in the long run.

Home Sales By Region

Sales were down in all regions and at every price point. The South lead the drop with sales falling 3.4% to an annual pace of 1.71 million homes.

Existing Home Sales by Region and Price
Source: National Association of Realtors

Lawrence Yun, NAR Chief Economist, said the recent sales pattern can be expected to continue. "The housing market is experiencing an uneven recovery, and a temporary foreclosure stoppage in some states is likely to have held back a number of completed sales. Still, sales activity is clearly off the bottom and is attempting to settle into normal, sustainable levels," he said. "Based on current and improving job market conditions, and from attractive affordability conditions, sales should steadily improve to healthier levels of above 5 million by spring of next year."

That's awfully optimistic of the NAR to see the job market improving enough by spring to get existing home sales back over the 5 million level. It is interesting to note that the NAR is not forecasting future job growth. They also have not mentioned the shadow inventory, which has been estimated at 2.1 million units through August. This estimate combined with our known inventory of 3.8 million units through october gives us close to 6 million units or about 18 months supply. There is an informative blog post, written by By Nick Timiraos on the Wall St. Journal Blog entitled "Shadow Inventory of Homes Rising" which covers the shadow inventory in detail.

Until the foreclosure "bubble" has burst we have no idea how much inventory must eventually be added to the total supply, how more supply will impact the market price, (we can reasonably guess that prices will go lower), and how long it will take to bring supply back down to normal levels. My guess is that like employment, it will be a long, slow slog before we return to any semblance of normalcy in the housing market.

Disclosure: No positions mentioned

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