Housing Market Update - July 2009

A Tale of Two Statistics: Inventory and Price

Like most economic indicators these days, the housing numbers in May were mixed. To provide an idea of where the numbers were hovering in May 2009 (the latest month for which statistics were available), Table 1 displays the data for existing home activity, new home activity and housing starts.

Table 1: Housing Statistics at a Glance, January through May 2009

1Source: National Association of Realtors

2Source: U.S. Census Bureau and U.S. Department of Housing and Urban Development

r=Revised

p=Preliminary

Inventories

As these statistics show, inventories remain high. Preliminary numbers for inventory of existing homes fell in May, though only to 9.6 months. Inventories for new homes increased to a high point for the year, 11.5 months. (A sustainable housing market will see inventories hovering at the 4-6 month range.)

A handful of factors don’t bode well for an improvement in inventory numbers in the short term. First, we continue to see a record number of foreclosures. According to RealtyTrac Inc., a California-based company that compiles nationwide statistics on foreclosures, U.S. foreclosure filings are expected to hit a record 1.8 million in the first half of 2009. In May, filings exceeded 300,000 for the third straight month.

In addition, efforts to stem foreclosures have been largely ineffective. A deficit in infrastructure, staff and training at mortgage companies has rendered the government's $75 million foreclosure avoidance program unworkable. The abundance of requests for help and the corresponding paperwork have buried the banks, and the assistant Treasury secretary for financial institutions, Michael S. Barr says it could take until the end of August for the program to make significant progress, at which time he believes 20,000 modifications per week will be the norm. (In the first four months of the program, Barr estimates there were over 50,000 modifications.)

Another foreclosure-related issue is the number of homes repossessed but not on the market. "We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac. In a recent study, RealtyTrac compared its database of bank-repossessed homes to multiple listing service records of for-sale homes in four states, including California. It found a significant disparity — only 30-percent of the foreclosures were listed for sale in the MLS. The remainder is part of a shadow inventory which poses substantial risk for home prices if not handled properly. Celia Chen, director of housing economics at Moody's Economy.com commented, "Eventually those homes will have to be dealt with. If they're all put on the market, that will add more inventory to an already bloated market and drive down home prices even more."

One final factor affecting inventory going forward is the number of homeowners who want to sell their homes, not out of financial stress but because they have been transferred or they want to move either to a new city or new home. Many of these homeowners have withheld their homes from the market hoping to wait until prices recover. As the market begins to turn, more of these homes will find their way to market and contribute to higher inventory levels.

Prices

As Table 1 indicates, home prices rose in May for both existing and new homes, both by about 4 percent. Standard & Poor's Case-Shiller Housing Index, arguably the most accurate analysis of home sales price data available, released its April sales price numbers on July 1. These numbers indicate that the steep declines in home prices that we've seen since the end of 2008 are indeed starting to moderate. In eight of the 20 markets that the Case-Shiller Index tracks, prices increased. David M. Blizter, index chair at Standard & Poor's said this about the numbers: "This is the critical moment. You have to slow the descent before you can turn up."