Blog :: 12-2008

Crescenzi: What Home Inventory Plunge Means

The number of unsold new homes fell 34k in November, the most ever. There are now 372k unsold new homes for sale, significantly below the peak of 570k in June 2006.

The level is approaching normal. The supply problem is in the existing home market. It lags but it's next: the underbuilding of homes relative to population growth will inevitably result in the filling up of those homes, whether through sale or rental--humans need shelter. I would expect inventories to decline at least 500k to 750k in 2009 because of the population/underbuilding issue. At least 500k will disappear from the underbuilding idea and a further 250k (at least) will result from low mortgage rates and incentives from Barack Obama to spur home buying (4.5% mortgages or tax credits or both).

The math on why this is happening is simple: the construction of new homes has fallen below that of household formation. Housing starts have recently been at about 600k annualized, which works out to about 400k new dwellings, because many new starts are restarts--tear downs and such. Birth statistics and Census Bureau data indicate that household formation will on average run at a pace of about 1.2 million in the current year and immediate years ahead, owing to population growth of about 3.0 million.

This means that home inventories--new and existing combined--could fall by at 600k over the next year, depending on the extent of household formation (it slows during recessions, although it is only a delay in the inevitable--kids won't live home with their parents forever and roommates go their separate ways, eventually). Shelter is obviously a basic need, which makes the inventory call a bankable top-down theme for 2009.

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Tony Crescenzi

Tony Crescenzi is the Chief Bond Market Strategist at Miller Tabak + Co., LLC where he advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of the forthcoming book, "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market." Crescenzi is a contributor to"

Existing-Home Sales Decline in Economic Uncertainty

WASHINGTON , December 23, 2008

Existing-home sales weakened against a backdrop of an eroding economy, according to the National Association of Realtors®.

Existing-home sales - including single-family, townhomes, condominiums and co-ops - fell 8.6 percent to a seasonally adjusted annual rate¹ of 4.49 million units in November from a downwardly revised level of 4.91 million in October, and are 10.6 percent below the 5.02 million-unit pace in November 2007.

Lawrence Yun, NAR chief economist, expected a decline. "The quickly deteriorating conditions in the job market, stock market, and consumer confidence in October and November have knocked down home sales to another level. We hope the home sales impact from the stock market crash turns out to be short-lived, as was the case in 1987 and 2001," he said.

"It is, therefore, imperative to provide incentives for homebuyers to get back into the market. It also depends on how effectively Congress and the new administration can help facilitate the short sales process and unclog the mortgage pipeline - impediments remain for some buyers with good credit," Yun said.

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to 6.09 percent in November from 6.20 percent in October; the rate was 6.21 percent in November 2007. Last week, Freddie Mac reported the 30-year rate fell to 5.19 percent - the lowest on record since the series began in 1971.

NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said it's crucial to enact sufficient housing stimulus to spark an economic recovery. "We need more than low interest rates to encourage enough buyers to enter the market and meaningfully draw down inventory, which would stabilize home prices - that, in turn, would help the economy to recover," he said.

"We should extend the first-time buyer tax credit to all homebuyers and eliminate the repayment feature, and make permanent the higher loan limits that are vital in high-cost markets - the faster we do this, the faster housing and the economy can recover," McMillan said.

McMillan said NAR is grateful that the Treasury, the Federal Housing Finance Agency and the Federal Reserve have been working to bring interest rates down on most mortgages to historic lows.

Total housing inventory at the end of November rose 0.1 percent to 4.20 million existing homes available for sale, which represents an 11.2-month supply² at the current sales pace, up from a 10.3-month supply in October.

Despite an overall softening in sales, there has been a solid trend of rising activity in California, Nevada, Arizona and Florida markets. "Sales are rising only in areas with large numbers of distressed properties as bargain hunters take advantage of discounted home prices," Yun said.

The national median existing-home price³ for all housing types was $181,300 in November, down 13.2 percent from November 2007 when the median was $208,800. There remains a significant downward distortion in the current price from a large number of distress sales at discounted prices; the median is where half of the homes sold for more and half sold for less.

Yun cautioned that there will be negative consequences if housing stimulus is delayed. "Falling home prices would lead to faster contraction in consumer spending and further deterioration in bank balance sheets. More importantly, falling home values would lead to higher loan defaults, including those recently modified distressed mortgages."

Single-family home sales fell 8.0 percent to a seasonally adjusted annual rate of 4.02 million in November from a level of 4.37 million in October, and are 8.8 percent below a 4.41 million-unit pace a year ago. The median existing single-family home price was $180,800 in November, down 12.8 percent from November 2007.

Existing condominium and co-op sales dropped 13.0 percent to a seasonally adjusted annual rate of 470,000 units in November from 540,000 in October, and are 23.1 percent below the 611,000-unit pace in November 2007. The median existing condo price4 was $185,400 in November, down 15.5 percent from a year ago.

Regionally, existing-home sales in the Northeast dropped 12.0 percent to an annual pace of 730,000 in November, and are 18.0 percent lower than a year ago. The median price in the Northeast was $257,700, down 0.1percent from November 2007.

Existing-home sales in the Midwest fell 7.4 percent in November to a pace of 1.00 million and are 16.0 percent below November 2007. The median price in the Midwest was $142,400, down 11.2 percent from a year ago.

In the South, existing-home sales dropped 10.9 percent to an annual pace of 1.64 million in November, and are 17.6 percent below a year ago. The median price in the South was $154,500, which is 10.6 percent lower than November 2007.

Existing-home sales in the West declined 4.3 percent to an annual rate of 1.12 million in November but are 17.9 percent higher than November 2007. The median price in the West was $242,500, down 25.5 percent from a year ago.

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      Housing Prices Fall Below Replacement Costs

      Housing consultancy Global Insight reports that nationwide, housing prices are now 3.8 percent undervalued, based on total market value. It says values fell at a faster pace in the third quarter after stabilizing earlier in the year.

      According to Global Insight's calculations, prices are now 6.5 percent below their 2007 peak. They fell at a 6.9 percent annual pace affecting 241 of the 330 metropolitan areas analyzed by Global Insight. That's up from 150 metro areas affected in the second quarter.

      Contraction is most severe in the Southeast and Southwest with only the Pacific Northwest remaining overvalued, Global Insight says.

      Home prices fell more than 10 percent in the third quarter in nine central California communities. The Central Valley communities of Merced, Stockton, and Modesto have seen property values fall to less than half their 2005 value. Twenty-nine metro areas in California, Florida, and Nevada - at one time among the most overvalued - have seen price declines in excess of 30 percent. Similar steep price drops are occurring in Michigan, northeast Ohio, the southern metro areas from Charlotte to Atlanta, as well as in New England.

      "Weak economic conditions and wary consumers continue to hold the housing market back. Although many areas are seeing home sales increase, it is largely due to foreclosure homes being snapped up at significantly discounted prices. As the inventory of these homes is removed from the market, prices will remain on a downward path," predicts Jeannine Cataldi, senior economist and manager of Global Insight's Regional Real Estate Service.

      Source: Global Insight (12/03/2008)