Commentary on New & Existing Homes Sales

Existing and new home sales and inventories were released by the National Association of Realtors and Census Bureau, respectively. As suggested in the first chart below, new home inventories continue their steady assent downward. At 292,000 units available for sale, inventories have retrenched to levels reflected in prior housing downturns. Though seasonally adjusted months of supply remains elevated at 10.2, the metric is somewhat skewed by extremely low levels of new home sales (which are off 75% from the peak hit in July 2005). Most economists believe 4-6 months of supply generally reflects a more normalized housing market, though I posit that by the time we see these levels, housing will firmly be in the correction phase.

While several data points in the new home market are encouraging, the existing home market still faces several challenges (and note that existing sales generally comprise more than 80% of total home sales). Positively, homes for sale have declined by 13.9% and now stand at 3.8mm. Negatively, this is well above the 2-2.5mm homes reflected in a healthy market. Further, months of supply still stands at 9.6, though down from the peak of 11.2 months recorded in November 2008.

As demonstrated in the chart below, we probably need to work through another 1.5-2mm of excess homes before pricing will comfortably find a bottom. With that said, prices are artificially being suppressed due to the overwhelming presence of distressed sales, which comprised about 1/3 of home sales last month and up to 70% in the most troubled markets. However, I view the high proportion of distressed sales as a positive since it demonstrates that the market is clearing. Unfortunately, it could take some time for this overhang to abate as several states recently extended foreclosure moratoriums that were previously implemented at the end of last year (CA being the most prominent).
In summary, I continue to believe that the housing market is in the midst of a prolonged bottoming process that will reward investors with a long-term time horizon. At approximately 500K, housing starts remain 1/3 of “natural demand” and approximately 35% below trough levels hit in the 1987-1991 housing recession. While the bubble exceeded any of the post-WWII housing upturns, the correction has been equally as severe. Further, low prices and record affordability (off the charts frankly) have skewed the rent vs. buy equation squarely in favor of homebuyers. Finally, the $8,000 federal tax credit and a friendly lending environment (thanks to the FHA) have made homeownership a viable option for a whole new crop of homeowners who prudently avoided buying during the bubble.