• Dirk van Dijk, CFA
Existing Home Sales Up, But So Are Inventories
The existing home sales report for April showed mixed news, but was largely in line with expectations. Starting with the good news first, sales rose 2.8% to an annualized rate of 4.68 million, and were up in , off 10.5%, followed by the Midwest, down 9.9% and the South which is off 8.9%.
three out of the four regions.
The Northeast fared the best by far on a month-to-month basis with a 11.6% rise, followed by the West, up 3.5% and the South up 1.8%. Sales in the Midwest declined by 1.8%. On a yea- over-year basis, sales were down 3.5%.
The real stand out on a year-over-year basis was the West, where sales soared 19.4%, while the other three regions were down significantly. The Northeast is still off the most on a year-over-year basis
The graphs below are from http://www.calculatedriskblog.com/ and show that existing home sales were largely stabilized for most of last year, before the turmoil of the fall, and have since seemed to have stabilized again at a lower level. Both single-family houses and condos saw more sales in April than in march, although the condo gain of 6.4% in March far outpaced the 2.5% increase in single family houses. On the other hand, on a year-over-year basis, condos are still down 9.4% vs. single family houses down just 2.8%.
The bad news was that inventories jumped by 8.8% to 3.97 million. This brings the months of supply up to 10.2 months from 9.6 months in March. While this is off the highs of a year ago, it is far above a more normal level of about six months (was usually between 4 and 5 months during the bubble), and an increasing months of supply is not the sign of a healthy market.
Some rise in inventories in the spring is normal, but this seems to be larger than one could expect from seasonal factors alone. Also, distressed sales (bank repossessions or short sales) made up 45% of all sales nationwide.
The low end of the market is very active due to these distressed sales, but unfortunately a distressed sale does not start the chain reaction that a normal sale does. The family that got evicted is not a family that is moving up to a bigger house, in turn leading the selling family to move to a still larger house. These sales are ‘one and done.’
The increase in activity at the low end was partially responsible for the 15.4% year-over-year decline in the median price of an existing home, which now stands at $170,200. The effect of these distressed sales has been particularly pronounced in the West, the only region where sales are up year over year, but also the region that has posted by far the biggest drop in median price, off 21.8% on a year-over-year basis.
The next worst region is the South, off 12.8%. The Northeast, where sales are off the most on a year-over-year basis, has also had the smallest decline in median prices at 9.6%.
I do not see this report as particularly good news, nor particularly horrific news. Those expecting housing to come roaring back and lead this economy back to health are likely to be sorely disappointed. On the other hand, the signs of stabilization mean that housing is not going to drive the country into oblivion, either.
The very high level of supply (including lots of shadow inventory of people who would like to sell, but want to wait for a stronger market, and the still very full foreclosure pipeline) means that housing prices will continue to be under pressure for a while. While prices relative to rents and incomes have returned to more rational levels, there is nothing to stop prices from going past fair value on the downside. Certainly there is no reason to expect that the trillions of dollars in housing equity that has been lost over the past few years will come back anytime soon (perhaps not for a decade or more).
Even though consumer confidence is up, I would still be cautious about investing in the Consumer Discretionary area. With the need to replenish their savings (housing equity was a huge part of most peoples savings) for retirement and college funds, people will not be spending freely for a long time. The likely beneficiaries of this would be sellers of inferior goods. In retail that means that stores like Wal-Mart (NYSE: WMT – News), Big Lots (NYSE: BIG – News) and Family Dollar (NYSE: FDO – News) will outperform stores like Saks (NYSE: SKS – News) and Nordstrom’s (NYSE: JWN – News).