Number of New Home Sales 12-Month Moving Average Declines 16.5 Percent From July 2010 to July 2011 — Current 299,000 Annual Average Versus 1 Million Normal

New home sales continue in the doldrums as July 2011 tallied 298,000 on a seasonally-adjusted annualized rate (SAAR) compared to July 2010’s 279,000 rate.  Recall, however, that June 2010 was the end of the $8,000 homebuyer tax credit, which both increased sales and cannibalized future sales.

A better way to look at trends is to average for the prior 12 months the SAAR sales rate.  The first graph below shows the monthly SAAR while the second shows the 12-month moving average level.  The moving average seems to indicate that at least the number of sales has stabilized—and that is an initial requirement for recovery in the housing market.  

New home prices appear to be trending up slightly, however.  The monthly median prices are shown in the first graph below, while the 12-month moving average is in the second graph.  The 12-month moving average of median prices rose 5 percent from $208,800 in July 2010 to $218,500 in July 2011.

Finally, in comparing existing and new home prices, the following graph shows the 12-month moving average of both new and existing median home prices.  Note that new home prices now have greatest premium over existing home prices since 2002.  Rather than concluding that new home prices are increasing, I believe it is merely the declining price levels of existing home prices due to foreclosures and short sales. 

The bottom line is that new home sales remain at less than a third what typically is normal.  Slight price increases in new homes indicates that builders have likely shed their own distressed inventories.   New home sales, however, will not return to the 1 million sales per year normal pace until the 4 million distressed existing homes that are more than 90 days in default are either short-sold, foreclosed on or receive loan modifications.   And until consumer confidence and job growth returns, we will continue in these doldrums. 

And right now, there is nothing on the horizon that would indicate any positive change in the economy.

Darn.
 

The Mortgage Bankers Association just released their latest forecasts for the remainder of 2011 and 2012 and there is both good news and bad news.  Good news is that the MBA has raised their forecast for refinance activity lending volumes for the remainder of 2011.  Bad news is that total lending in 2011 is forecast to decline from $1,572 billion in 2010 to $1,109 billion in 2011 and decline to $931 billion in 2012 (the lowest level since 1997). 

And there is really nothing on the horizon today portending any significant gains in lending volumes or sales of existing homes and new homes. 

The table below also includes what I term Effective Lending which is the sum of purchase lending plus 60 percent of refinance activity.  Given the reissue credits in title insurance for refinance loans and that typically a refinance transaction does not include an owner’s title policy, Effective Lending gives a better look at probable title premiums and revenues – hence a more apples-to-apples comparison.  Essentially, an increase of $100 billion of purchase lending equates to a greater level of title revenues than a $100 billion in refinance lending.

Good news is that purchase lending is forecast to increase in each and every quarter in 2012 when compared to 2011.  This is based on a very slight increase in home sales and the stimulating effect on refinance lending volumes arising from all-time record low interest rates we are seeing today.  The following table below shows the MBA forecast for both new and existing home sales.  Note, however, that normal existing home sales are in the 5.5 to 6 million homes per year and new home sales normal is 800,000 to 1 million, so the anticipated level of lending volume for the next year and half is pretty grim. 

While purchase lending is forecast to increase by more than 28 percent from 2011 to 2012, refinance lending – even with the all-time record low rates – is expected to decline more than 42 percent.  Total 1 to 4 lending in 2011 is expected to be down 29.5 percent and then off another 16.1 percent in 2012.  Effective lending is forecast to decline 26.7 percent and 7.2 percent for 2011 and 2012, respectively.

Refinance percentages as shown above are heading down for several reasons.  First, rates are at an all-time low and likely cannot decline further (but I have said this for two years now and have been obviously incorrect).  Second, new lender underwriting standards now exclude homeowners that just a few years ago could qualify for a refinance that no longer can do so.  And finally, fully 23 percent of U.S. homeowners are underwater on their mortgages and thus cannot refinance.  [We should allow every homeowner that is current on their loan today to refinance at current rates (no cash out) and that would, without increasing the Federal debt, get us out of this recession within 24 months.  To be discussed more in detail in future writings.]

There are several caveats for these forecasts from the MBA.  In the past, total residential lending forecasts by Fannie Mae, Freddie Mac and the MBA have changed by more than $1 trillion within a 12 month period.  And obviously, these expectations are based on a dismal go-forward economy that can improve significantly or decline dramatically in less than a year.  Nor is the MBA in consensus with other forecasters.  Freddie Mac, for example, has an estimated $1.2 trillion total lending volume for 2011 (versus the MBA’s $1.1 trillion) and in 2012 Freddie expects $850 million of total lending volume (versus MBA’s $931 billion).  Fannie Mae’s forecast for 2011 is $1.1 trillion in total lending and drops to $935 billion in 2012.

The bottom line is that expectations for residential lending are for a shrinking market in 2012.  That said, expense controls by those in the real estate transaction industries become even more crucial as does productivity.

Batten down the hatches, the storm is not over. 
 

July 2011 Existing Home Sales Up 21 Percent From July 2010 at 4.67 Million SAAR — But Were Down 3.5 Percent Sequentially From June 2011 — Median Price Down 4.4 Percent Year-Over-Year at $174,000

Year over year home sales rose 21 percent from July 2010 to July 2011 (just as I had forecast last month in my blog, “Also expect an increase year-over-year in July due to the June 2010 cannibalization effect of housing sales from the $8,000 tax incentive. “)  What I had not forecast, however, was a continuing deterioration of an already feeble housing market as sales dropped 3.5 percent sequentially from June 2011 to 4.67 million Seasonally Adjusted Annualized Rate (SAAR) despite a continuing drop in interest rates.

I do believe that any further decline in interest rates will have no effect what-so-ever on home sales as we are truly in a classic liquidity trap (to be discussed later this week).  

The first graph shows the monthly SAAR while the second shows the 12-month moving average of the SAAR existing home sales rate.  

I am once again sticking with my forecast of 4.9 million homes (the 12-month moving average of 4.8 million still has some hope of hitting that level).  Recall, however, that I believe that 2002 was the last truly normal period, so even if my forecast hits, U.S. housing markets remain 11.3 percent below normal.   Yet Washington, D.C., still is doing nothing material to change consumer confidence and the Federal Reserve is down to firing blanks as far monetary policy is concerned.  

 
Prices continue to erode as supply still runs in the plus-9 month inventory level (that is to say, there are enough current listings available for sale to cover 9.4 months of sales assuming that the sales rate of the last 12 months remains the same).  The second of the median price graphs below is the 12-month average of the prior 12 months of median home prices and shows the continuing decline in home values.  On a year-over-year basis, July 2011 home prices are down 3.1 percent (again—the 12-month moving average) and are off 25.3 percent from the peak in 2006.

While there is no such thing as a national real estate market, the aggregate medians and average statistics of existing home sales data points to continuing slight erosion in home values.  However, until job growth rebounds and consumer confidence rises, it looks like the doldrums of the dog days of summer of a residential real estate market continues to go on.  

These graphs also show that the $8,000 homebuyer’s tax credit was merely a hiccup in the voyage of the housing market.  

Perhaps history is costing more to make than it is worth…..

Existing-Home Sales Down in July but Up Strongly From a Year Ago- Realtor.org

Please give me your thoughts and comments.

Two weeks ago I spoke at the California Association of Mortgage Professionals (formerly the California Association of Mortgage Brokers) in San Jose regarding the economy, housing issues and trends.  It was a great break from the heat (which previously that week when I left Wichita, Kansas was 111—so weather in the 50s was almost chilly). 

California continues to crawl out from under the hangover of get rich quick in housing.  Good news is that housing sales are finally recovering some from the lows seen in 2007 and 2008—and getting all of the excess inventory off the market and back into the hands of owners either paying cash or making payments is the first step in a recovery.

Good news is that California is finally seeing some job growth, having added 28,800 jobs in June 2011 and 109,800 since the beginning of the year.  Bad news is that the state is still down 1.134 million jobs since the peak in July 2007.  At the current pace of job growth it will take more than three years just to get back to where the state was in July 2007.  Hopefully the rate of growth accelerates quickly.  While the weather temperature in California is great, the business temperature is downright cold.   The Tax Foundation (and Washington, D.C. non-profit) ranks California 49^th out of 50 states for being business friendly based on tax policies. 

 The National Association Realtors® data (which are provided by the California Association of Realtors®) show that in the second  quarter of 2011, existing home sales were at a pace of 439,600 (seasonally adjusted annualized rate –SAAR).  While up significantly from the 300,000 +/- level seen in late 2007 and early 2008, this remains 22.4 percent less than the average of 2002 (which I believe was the last normal period in housing following the recession of 1991 and prior to the stupidity of the subprime debacle of 2004-2007).  The current rate of sales is also 28.7 percent less than the peak reached (on a SAAR basis) in the second quarter of 2005.  

From another perspective, the DataQuick housing sales data for California (which includes the 15 most populated counties which make up approximately 74 percent of the State’s population) shows a decline in housing sales through June 2011 since the expiration of the $8,000 homebuyer tax credit in June 2010.  The table below is the average number of home sales for the prior 12 months.  By doing the 12-month average, eliminated any seasonality issues in the data series, allowing a clearer picture on trends. 

I prefer the DataQuick numbers over those from the Realtors for two reasons.  First, these data are available each and every month.  And perhaps more importantly, DataQuick’s numbers are all deed recordings at the respective courthouses regardless of the reason of sale (foreclosure, short sale or arms-length transactions).  Part of the decline in sales, however, is likely from the intermission on foreclosures, which are off nationwide in the first six months of 2011 by 84 percent in cities with more than 200,000 people across the country.

 Prices are down significantly.  The first graph below is based on data from the NAR and the average of the median prices in six metropolitan statistics areas including Anaheim-Santa Ana, Los Angeles-Long Beach, Riverside-San Bernardino-Ontario, Sacramento-Arcade-Roseville, San Diego-Carlsbad-San Marcos, San Francisco-Oakland-Fremont, and San Jose-Sunnyvale-Santa Clara.  The second graph shows DataQuick numbers and are based on a 12-month moving average of monthly data.  That said, prices are down roughly 40 percent from the peak but do not appear to still be in a decline.  Perhaps California housing prices have finally hit bottom and stabilized. 

Building permit activity, which currently is running at a 50,000 total dwelling unit pace per year, likely is not keeping pace with the population growth which translates to even more absorption of the current housing supply—and that is good news also. 

The bottom line is that both the California economy and housing markets appear to be stabilizing somewhat—and that is the first step towards returning to a normal market.

USA Today reports that delays in paperwork are holding up potential foreclosures on 1.7 million homes according to CoreLogic.  As a result, 178 of the largest 211 metropolitan areas showed reduced foreclosure activity.  The Chicago Tribune noted that foreclosure activity in the first half of 2011 was down 84 percent from the same period in 2010 in metropolitan areas with 200,000 or more residents.  

In states where the court plays a large role in the foreclosure process saw the largest declines in activity. The top 20 markets with the largest declines (all judicial foreclosure states) were:

•    New York
•    Maryland
•    Florida
•    New Jersey
•    Connecticut
•    Massachusetts
•    Illinois

The 10 cities with the highest foreclosure rates were all located in California, Arizona and Nevada.  

In Las Vegas-Paradise, Nevada, more than 5 percent of all households had received a foreclosure notice in the first half of 2011—the highest rate in the country.  Second was Phoenix-Scottsdale, Arizona, with 3.6 percent of the households having received a foreclosure notice in the first six months of 2011—even though foreclosure activity levels were down almost 17 percent from the same period in 2010.  Modesto, California, had one in 30 homes receiving a foreclosure notice.

Job losses are significantly impacting foreclosure rates as homeowners struggle in this challenging economy.

The Street reports that as lenders work their way through this logjam, they have turned to an increasing use of loan modifications and short sales.  Many lenders are now offering homeowners in default and underwater incentives to extract themselves from the financial nightmare.  JPMorgan is now running 5,000 defaulted per month through a fast-tracked process resulting in just 30 days to approve the short sale.   Citigroup has increased incentives to defaulted owners from $3,000 to $5,000 a year ago to $12,000 today.

Although the time varies significantly from state-to-state, RealtyTrac reports that it now takes 318 days from the time of notice to completion of the foreclosure.  New York averages 966 days, New Jersey 944 days and Florida 676 days.  This explains the tilt towards short sales and loan modifications with CoreLogic reporting a tripling of shore sales in the past two years and an anticipated 25 percent increase in 2011. Greatest short sales volumes are seen in California, Arizona, Colorado and Florida.  

The bottom line is that we are looking at several additional years of short-sales, loan modifications and foreclosures.

Liquidity is finally returning to commercial real estate and it’s not just distressed properties.  CoStar reports that May 2011 sales are more than 150 percent greater than May 2010—with a nearly doubling of the average sales price.  May 2010 saw an average price of what CoStar refers to as investment-grade real estate of $16.9 million compared to $33.2 million this May.  General commercial property average price rose from $1.65 million to $1.7 million.  

The dollar volume of investment grade real estate was up 191 percent and represented 79.2 percent of total sales while general real estate was up 62 percent.   

A year ago CoStar reported that just five office markets accounted for 70 percent of all office sales. See post from July 8, 2010.  That has changed significantly as investors are chasing yields and expanding to other markets.  This past May saw the top 10 markets accounting for just 37.8 percent of total commercial sales.

Distressed property represented 28.3 percent of all sales in May 2011, down from 29.4 percent in April.  The greatest distressed property segment was hospitality (37.8 percent) followed by multifamily (30.9 percent), office (27.1 percent) and Industrial (23 percent).

The bottom line is that commercial sales volumes continue to rise as investors and liquidity returns to the commercial property sector.