Bad News With A Silver Lining

Industry reports suggest the improvement in the housing market has slowed, but there there is more to consider.

The report on existing-home sales released March 21 makes it three for three; it is the third mildly disappointing report of the four housing indicators. The other two concern housing starts and NAHB sentiment. Existing home sales in February were slightly lower than expected instead of higher, but there was an upward revision to January’s number. The number of existing-home sales is not significant; however, NAR’s report that 34% of the sales were of “distressed” properties is telling.

This continues the growing trend of, mostly investors, clearing foreclosed or near-foreclosed properties. The level of overall sales is ok, however, strip out distressed sales to investors and we’re actually left with weak home sales. In fact, the level of sales without this activity would be at historic lows. I made the case a couple of weeks ago that 2012 should be the last of the bottoming cycle, and of course there are Barron’s and Wall Street Journal articles that make the same case. But, examining sales apart from investor activity concerns me a bit. It’s clear demand is not good – not a surprise given the tentative job market and tepid wage growth – but these numbers are very weak.

Silver Lining In The Housing Market?

But you can make the case that this a good news story as well. Once final buyers start to stir again, there will be far fewer homes on the market thanks to investors. Additionally, there will be fewer homes on the market than normal simply because many homeowners, such as those who would normally be entering the trade-up cycle, cannot put their homes on the market because they are underwater on them. Certain areas are already seeing this play out. Multiple offers are now commonplace in desirable and established neighborhoods in California. Prices are still sharply lower than five years ago, but drill down to the zip code level and you’ll see price gains in the past year. Perhaps home prices in distressed areas could surprise us to the upside someday, but this isn’t going to happen with this low level of real, final demand.

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March 28, 2012

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