Despite record low mortgage rates, home sales volumes weakened

The spring rally is over.

Every year prices and sales volumes increase from January through August, then they decline for the remainder of the year generally hitting bottom on the last business day in December. The pattern repeats every year, and it’s not new or surprising. realtors generally take advantage of this phenomenon to call the bottom every year and to stoke fears of being priced out to generate more spring and summer sales. By fall, many buyers stop looking, particularly those with families who don’t want to disrupt their children by moving during the school year. Over the last five years, sales volumes have been extraordinarily low due to the collapse of the housing bubble and the resulting unemployment and trashed credit from millions of foreclosures. During that period, the spring sales peaks have barely matched the previous winter lows. Any increase in sales off these low levels will look impressive on a percentage-change basis.

Housing pundits were eager to call the bottom of pricing this spring, but they have been less eager to call the top of the spring rally. I will. We are seeing the top of sales and perhaps pricing for this year’s cycle. Since interest rates are so low and inventory is so low, we may have carry-over activity into the fall and winter which may make the season decline in pricing less dramatic. Prices may even appreciate if interest rates keep setting record lows although declines are more likely as buying interest wanes.

30 Year Fixed Rate Mortgages in U.S. Hit New Record Lows; Now Below 3.2%

Posted by Michael Gerrity 09/26/12 8:00 AM EST

According to Zillow, 30-year fixed mortgage rates are currently at 3.18 percent, down 16 basis points from 3.34 percent at this same time last week. …

After peaking at 3.35 percent on Wednesday, the 30-year fixed mortgage rate dropped to 3.28 percent and hovered between 3.32 and 3.35 percent over the weekend, dropping to the current rate this morning.

Mortgage rates saw a significant drop this week, reaching an all-time low, as the market continued to digest the significant and sustained impact of the Federal Reserve’s decision to offer a new round of stimulus which unlike prior stimulus plans, does not carry a preset expiration date. The Federal Reserve’s commitment to keep the federal funds rate close to zero into the middle of 2015 also affected rates,” said Erin Lantz, director of Zillow Mortgage Marketplace.

The key difference between this stimulus and the previous tax credit stimulus is the lack of an expiration date. Also, interest rates have room to move even further downward, so the stimulus may actually increase. An unlimited amount of new buying stimulus pledged to remain in place until house prices rebound is going to impact prices eventually. It’s only a matter of time. Given those circumstances, it’s difficult to construction a good bearish argument. Unless the banks lose control of their shadow inventory dispositions, any further price declines will be small.

New Home Sales in U.S. Remain Flat in August Over July Sales

Posted by David Barley 09/26/12 10:49 AM EST

According to the U.S. Census Bureau and the Department of Housing and Urban Development (HUD), sales of new single-family houses in August 2012 were at a seasonally adjusted annual rate of 373,000.

This is 0.3 percent (±9.3%) below the revised July rate of 374,000.

The flattening of new home sales is surprising, particularly in the face of such low MLS inventory. New home sales should be doing better. This is probably the result of the seasonal slowdown, but it warrants careful attention over the coming months to see how much sales weaken.

Pending Sales of Existing Homes in U.S. Fell 2.6% in August

By Michelle Jamrisko on September 27, 2012

Americans signed fewer contracts than forecast to purchase previously owned homes in August… .

The index of pending home resales dropped 2.6 percent after a revised 2.6 percent gain in July that was more than initially reported, figures from the National Association of Realtors showed today in Washington. The reading compared with a median forecast of a 0.3 percent gain in a Bloomberg survey of 40 economists. …

“It’s going to be really difficult for housing to gain much momentum here if the employment backdrop doesn’t cooperate, and that’s exactly what’s happening,” Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York, said before the report. Limited labor market progress and tight lending standards also “will ultimately conspire to put a low ceiling on home sales,” he said.

It isn’t just unemployment. The lack of MLS inventory is prompting many potential buyers to give up. Also, as prices rise, affordability declines, and that will hurt sales as well.

Pending home sales are considered a leading indicator because they track contract signings. Purchases of existing homes are tabulated when a contract closes, typically a month or two later, and made up more than 90 percent of the housing market last year.

The pending home sales drop signals the end of the spring rally.

The Fed has also committed to purchasing $40 billion of mortgage debt a month, which may underpin a housing market that Chairman Ben S. Bernanke said has been “one of the missing pistons in the engine.”

Our mortgage-backed securities purchases ought to drive down mortgage rates and put downward pressure on mortgage rates and create more demand for homes and more refinancing,” Bernanke said in a Sept. 13 press conference after the central bank announced the debt-buying plans.

Bernanke is remarkably transparent in his statements about housing. There is no question that he intends to drive interest rates down specifically to encourage homebuying. Other Fed governors have signaled that the Open Market Committee intends to leave interest rates low until unemployment is greatly reduced. People with jobs buy homes, and lowered unemployment is the ultimate stimulus which will increase sales and put a durable bottom in the housing market.

California Pending Home Sales Down From Last Year; Equity

Posted by Michael Gerrity 09/25/12 12:15 PM EST

According to the California Association of Realtors (C.A.R.), … a continuing shortage of housing inventory sent pending sales lower from the previous year.  Additionally, the lack of supply, particularly of REO properties, sent the share of equity sales to its highest level in four years.

C.A.R.’s Pending Home Sales Index (PHSI) rose 2.7 percent from a revised 115.8 in July to 118.9 in August, based on signed contracts.  Pending sales were down 2 percent from the 121.4 index recorded in August 2011.

August’s year-to-year decline reversed a 15-month trend of higher pending sales than the previous year.  Pending home sales are forward-looking indicators of future home sales activity, providing information on the future direction of the market. …

These are all signs of the end of the spring rally.

California distressed housing market data for August 2012:

  • The share of equity sales – or non-distressed property sales – compared with total sales grew to its largest level in four years.  The share of equity sales in August increased to 62.2 percent, up from 59.5 percent in July.  Equity sales made up 51.7 percent of all sales in August 2011.


At some point, I will celebrate the increase of organic sales as a sign the housing bubble is behind us. Unfortunately, with the enormous overhang of shadow inventory, the increasing share of organic sales is a temporary phenomenon.

  • The share of REO sales statewide contracted further in August, while the share of short sales crept up slightly.  The combined share of all distressed property sales fell to 37.8 percent in August, down from 40.5 percent in July and down from 48.3 percent in August 2011.
  • Of the distressed properties, the share of short sales edged up to 23 percent in August from 22.6 percent in July and from 20.2 percent a year ago.
  • In August, the share of REO sales shrank to nearly half what it was a year ago to 14.4 percent, down from 17.4 percent in July and 27.8 percent in August 2011.
  • The available supply of REOs for sale remained tight in August, with the Unsold Inventory Index standing at a 1.6-month supply in August 2012.  The August Unsold Inventory Index for short sales was 3.7 months and stood at 3.3 months for equity sales.

Equity sales are up because the available REO is down. When REO processing resumes, the share of distressed sales, particularly REO, will increase.

The recovery in sales volumes in 2012 has not been as robust as the mainstream media would lead us to believe.
This is purely due to the lack of REO processing by the major banks in response to the settlement agreement.

Withholding inventory has created many of the signs of a recovering market. If lenders can continue the orderly disposition of their REO, and if the federal reserve keeps interest rates low, market prices will go up from here. In the meantime, we will see seasonal ups and downs and an uneven recovery as lenders struggle to manage their REO dispositions.