Housing Market Summary
Last week offered real estate market news that many of us wish we never heard. The overall sentiment being bearish and offering us a glimpse of what a post-tax credit real estate market looks like. In this article you’ll start seeing emerging trends in New Home Sales, Existing Home Sales, Mortgage Purchase Applications, positive news on interest rates, and an update on New Home Construction.
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New Homes Sales Hit Record Low
With only 28,000 new homes sold in the US in May, a new record low has been reached in New Home Sales. While this number is abysmal, many economists such as Jay Feldman, of Credit Suisse in New York, believes housing’s ability to impact the economy is being reduced. Feldman said housing’s “capacity to do the portfolio of GDP activities marginal harm going forward is greatly diminished”. Today residential construction spending only accounts for 2.4% of GDP vs. a peak of 6.3% during the boom in 2005.
Outlook: We’re going to see sustained bleak New Home Sales over the next few months as supply is constrained and many new homes can’t compete with quality homes at deep discounts.
Existing Home Sales Disappoint
Seeing a 2.2% dip in existing home sales in May from April, the seasonally adjusted annual rate (SAAR) of home sales was 5.66 million. Analysts expected to see a number around 6.1 million units figuring many buyers closed tax credit transactions well ahead of the deadline. The existing home sales number vs. the new home sales is a tough comparison as existing home sales are booked when the sale closes vs. new home sales being booked at time of contract. The good news? April’s number was adjusted up to 5.79 million which shows nearly a 20% year-over-year improvement. Existing home inventory dropped 3.4% to 3.89 million representing an 8.3 month supply in the market vs. a healthy 6 month supply. This of course doesn’t include roughly 3.5 million homes estimated in the shadow inventory.
Outlook: Prepare for a steep drop in existing home sales when the tax credit transactions finish cycling through. Looking at how New Home Sales are performing is a potential indicator.
Mortgage Purchase Applications Drop to lowest since 1997
In the most recent survey by the Mortgage Bankers Association, the Mortgage Composite Index dropped 6% from the previous week despite another drop in interest rates. This number dropping is cause for concern as it is a leading indicator of purchase and refinance activity. The Purchase Index dropped 1.2% which is the lowest amount of purchase activity since 1997. Leading the decline was a 4.4% decline in government applications while conventional applications were down slightly at 1%.
Outlook: As the economy recovers we’re certain to see soft spots in purchase activity. Renewed interest in purchases will likely only happen as confidence returns to the market. I think we’ll continue to see weak activity here over the next few months.
New Home Construction Sinks
While up nearly 8% over May of last year, New Home Construction missed economists’ estimates by 10% showing 10% decline from April. The real news here is the 17.2% decline in single family home starts, which is the key barometer of the health of the housing market. Builders simply can’t get financing right now causing builder confidence to decline.
Outlook: Don’t expect New Construction to uptick anytime soon. The credit markets are still very tight and until builders can get financing, the outlook is bleak. This is good for inventory contraction though as the existing home market is standing at an 8.3 month supply.
Interest Rates Hit Record Lows
I thought I’d save the best for last. Mortgage rates hit a record low 4.69% last week, the lowest since Freddie Mac started tracking them. Although mortgage rates are at record lows, it isn’t enough to spur additional interest in purchasing, meanwhile much of those able to refinance have already done so. The big issue here is a full ¼ of Americans are underwater on their homes, a condition not going away anytime soon.
Outlook: While rates may drop slightly more it’s improbable we’ll see much more in the way if interest rate decline. Look for a bottoming out here.
I wish the government was doing more for the people who are paying their mortgages and are locked in at higher rates but don’t qualify for refinances. I think there’s a big opportunity here to free up additional household income for many who would then spur the economy by spending from pent-up demand. Over the next few months we’re going to see the full effects of the post-tax credit economy. I anticipate there’s going to be limited good news in the housing market in the upcoming months as the impact of removed government intervention will fully be realized.