Interest Rate Roundup

Thursday, December 28, 2006

A bounce? Yes. A new boom? Er ... no.

Existing home sales for November just hit the tape. Here’s the scoop on the numbers …

* Sales rose 0.6% on the month vs. forecasts for a 0.8% decline. The sales rate came in at 6.28 million units vs. 6.24 million a month earlier. But it’s down 10.7% from a year earlier (7.03 million units in 11/05).

* Inventory dropped a bit – 1% to 3.82 million units from 3.86 million units in October. That’s a 7.3 month supply at the current sales rate, just off the cycle peak of 7.4 months in October.

* Prices dropped again. The median price of all existing homes (condos + single family + co-ops) slipped to $218,000 in November from $219,000 in October and $225,000 a year ago. On a percentage basis, single-family only home prices dropped at a rate of about 3.6%. That’s the second-biggest decline ever, behind last month’s 4.2% drop.

My thoughts on these numbers ...

Like new home sales yesterday, existing home sales bounced in November. I expected this given the dip in mortgage rates we’ve seen lately. But are these numbers really all that good? I’d argue no, when you look at the big picture. Consider ...

- The sales rate is basically going nowhere, up a miniscule 1.1% from the September low and well off the high (-13.6%) of 7.27 million units in June 2005. That’s not exactly a rip-roaring rally.

- Inventories? Yes, they’re down 1.1% from the July cycle peak of 3.86 million units. But when you consider the supply of homes for sale skyrocketed 117% from the January 2001 low of 1.77 million units through the July peak, that 1%-ish decline doesn’t look so impressive. I chose January of '01 because that's when the Fed started cutting rates to "save" the economy from the after-effects of the stock market bust. It's when I believe the great bull market/bubble market for real estate got underway.

- That’s not all, either. It is absolutely normal and customary for for-sale inventory to stabilize or decline late in the year. People who don’t sell their homes during the peak spring and summer selling season often pull those homes from the market for the holidays. Then they re-list early in the following year.

You see that seasonal pattern time and time again. It happened in the boom years of 2001 ... 2002 ... 2003 ... and 2004. Even in 2005, when the market had already started topping out, inventory levels stabilized late in the year, before surging again in early 2006. I expect supply to start rising again after the first of the year, and set a new cycle high by spring 2007.

There is simply no getting around a few basic facts:

1) While sales aren’t falling sharply anymore, they’re not improving much, either.

2) Supply is still at astronomically high levels and ...

3) Homes remain relatively unaffordable, despite the recent decline we’ve seen in mortgage rates and home prices. It’s going to take bigger price concessions ... more incentives ... and most importantly, lots of TIME to work off these conditions. In other words, 2007 should be another weak year for the housing market.


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