Home Sales Raise More Questions Than They Answer

You’ve all no doubt by now seen the numbers. Existing home sales in April were up big time. The NAR report tells you everything (almost) that you need to know:

Existing-home sales1, which are completed transactions that include single-family, townhomes, condominiums and co-ops, increased 7.6 percent to a seasonally adjusted annual rate of 5.77 million units in April from an upwardly revised 5.36 million in March, and are 22.8 percent higher than the 4.70 million-unit pace in April 2009. Monthly sales rose 7.0 percent in March.

Total housing inventory at the end of April rose 11.5 percent to 4.04 million existing homes available for sale, which represents an 8.4-month supply2 at the current sales pace, up from an 8.1-month supply in March. Raw unsold inventory is 2.7 percent above a year ago, but remains 11.6 percent below the record of 4.58 million in July 2008.

Since the homebuyer tax credit expired in April, the rise in sales had been pretty much expected. Also some of the more prescient observers of the housing market have speculated that the tax credit was just pulling future sales forward and that once it expired we would probably see a slump. The inventory numbers may be the first signs that is happening.

One other item in the NAR report is of interest. Specifically, sales in all regions of the country were up smartly except for the West. There they fell 6.2%. If the tax credit was juicing sales elsewhere, why didn’t that occur in the West? Diana Olick speculates that sales in California — the 800 pound gorilla of the West — were driven by investors. Though she doesn’t explicitly say so, the implication she seems to be making is that demand from those buyers has tailed off.

If you think that economists have a clear picture of where all of this is going, guess again. Here’s the WSJ roundup of their opinions:

• The government incentives to buy homes worked, but who knows where we go from here. Existing home sales surged in April as the federal incentives to buy came to an end. This, of course was expected. We saw a similar pattern last fall when the first iteration of the home buyers’ incentive neared an end. This time, even though long time owner were added to the mix, the run up in sales was not nearly as dramatic. Indeed, the peak was about ten% lower. –Naroff Economic Advisors
• The continued improvement in home sales this month was likely driven by the homebuyer tax credit, as well as greater affordability in the housing market. Regarding the former, we believe the tax credit pulled forward some home-buying, which should result in some temporary payback in the next few months. However, we believe the underlying trend of existing home sales is still improving. On the inventories front, the unadjusted month supply of homes on the market in April ticked higher, to 8.4 months from 8.1 in March, but the NAR suggests that much of this gain was driven by seasonal effects.–Theresa Chen, Barclays Capital
• The sharp rise in supply in April could reflect a faster rate of foreclosures making their way to REO status (i.e. banks took possession of a larger number of homes and immediately put them up for sale), or it may be that potential sellers, sensing firmer demand, are trying to get rid of their properties. In either case, the April jump in supply put the current level of existing homes for sale nearly 3% above the year-ago reading, underscoring that while demand may be steadying, the supply situation still poses a headwind to the nascent housing recovery. –Omair Sharif, RBS
• The increased supply — and increased sales — seem to be signs of a rebound from very depressed market conditions of the past two years that discourage both buyers and sellers. The median price of a single family home sold in April was 4.5% higher than a year ago and the average sales price was up 5.2%. Both are the best price gains since mid 2006 and reflected better prices in all four regions. While these data are somewhat skewed by the tax credit effects, the latest existing home sales data reinforce our belief that the housing slump has ended and the activity — sales and production — in this key sector will continue to improve. –David Resler, Nomura Global Economics
• It is very difficult to judge the underlying level of demand for existing homes (i.e., that level that will prevail once government support is removed) and, with the current tax credit phasing out more slowly than last year’s program (although contracts had to be signed in April, buyers have until end June to complete the purchase), it will be several months before sales settle back to a more sustainable level (especially since for several months after June, sales will fall below their sustainable level because of the borrowing-forward nature of the current surge in sales). –RDQ Economics
• The proportion of distressed sales is holding steady at about one third, but overall supply is now rising quite quickly as would-be sellers see a chance to move their property. We remain nervous that this wave of supply will push prices back down in the second half of the year. –Ian Shepherdson, High Frequency Economics
• One surprise was the 21% jump in sales in the Northeast, which brought sales to their second highest level in 37 months. The Pending Home Sales Index for the Northeast has been flat in recent months. Since it is based on a small survey, it does not always reliably predict sales. The figure that puzzles are sales in the West, where sales soared just before the first tax credit expired, but have hardly responded to the second tax credit. –Patrick Newport, IHS Global Insight
• While demand for properties at the bottom of the market from first-time buyers (who accounted for an estimated 49% of existing home sales in April after 44% in March, 42% in February and 40% in January) and those to whom a $6500 to $8000 tax credit is meaningful is coinciding with supply of heavily-discounted distressed properties (mainly from the sub-prime strata), troubles are lurking further up the food chain. A high unemployment rate is creating problems for many formerly creditworthy homeowners, as are increasing numbers of resets and recasts of Prime ARMs and Option ARMS. We look for price pressures to intensify in the middle to upper end of the housing market as these factors begin to prompt increased distressed sales at those price points. Therefore, while most of the impact of the sub-prime disaster on prices at the bottom end of the market may well be behind us, there will be plenty of more pain for higher priced properties. –Joshua Shapiro, MFR Inc.
• With the spillovers from the European debt crisis having driven mortgage rates back down to record lows, however, and consumer income and confidence improving, home sales should have solid underlying support going forward once we get through this near-term volatility. –Ted Wieseman.

See what I mean. Not a whole lot of consensus about the meaning of the numbers or where the market is going.

I’ll go out on a limb and suggest that if the housing market does start to tank again then Housing Tax Credit lll might not be too far off. If buyers go on strike it may be because they believe the government will get back into the market just the way the car companies saddled themselves with permanent subsidy financing after 9/11. Maybe more to the point, with the Fall mid-term elections roaring towards us, a back in the dumps housing market will be the last thing that the Democrats want to see. A move to put the subsidy back in place would play well at the ballot box and any move by the Republicans to oppose it would be hard to defend.

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