Feb242015

Existing home sales hammered; 2015 housing hopes pounded

As houses get more expensive, marginal buyers are priced out, and without toxic mortgage products to help, a depleted buyer pool causes low sales volumes.

prices_too_highTo make people feel good for the holidays and to fill the void in real estate news from November to February, reporters entreat us to optimistic news stories and wild projections of how great the coming year will be for home sales and prices. Each year the usual suspects predict rising sales and prices, even if the optimism is completely unwarranted by market conditions.

In October 2014 I asked Will the CAr 2015 housing market sales forecast be way off? After completely missing sales forecasts for 2013 and 2014 the California Association of realtors actually increased its sales projections for 2015. So far, it looks like they’ve blown it again.

Realtors Report Existing-Home Sales Slumped in January

By REUTERS FEB. 23, 2015anyone_can_do_it_realtor

WASHINGTON — Sales of existing homes in the United States fell sharply in January, to their lowest in nine months, attributable in part to a shortage of properties on the market — a setback that could temper expectations for an acceleration in housing activity this year.

Notice how realtors incorrectly attribute the problem to a lack of inventory. This is a convenient scapegoat.

The real reason sales are off is because prices are simply too high and affordability is becoming a major problem; however, realtors can’t do anything about affordability, and telling sellers to get more realistic doesn’t gain many listings. Further, lower resale prices hurt their commissions, so realtors never discuss problems with pricing and affordability.

If realtors lament the lack of listings, the solution is more listings — which realtors do profit from; therefore, realtors will always scapegoat the problem they can’t profit from in favor of a solution they do profit from.affordability_ceiling

The National Association of Realtors said on Monday that resales declined 4.9 percent, to an annual rate of 4.82 million units, the lowest level since April.

The general tone of this report was weak, and it adds to a wide array of housing indicators that have been pointing in the wrong direction, underscoring continued sluggishness in this crucial segment of the economy,” said Millan Mulraine, deputy chief economist at TD Securities in New York.

For those not drinking kool aid, the problems in housing are apparent, and even near record-low mortgage rates can’t mask them.reflating_housing_bubble

Sales fell in all four regions of the country. Sales slumped last month despite a decline in mortgage rates; the 30-year rate hit a 20-month low. Revisions to sales data going back to 2012 were minor.

Tight inventories are hurting sales by limiting the selection of houses available to potential buyers. The lack of supply is also keeping house prices elevated, helping to sideline first-time buyers.

There is hope that a tightening labor market will spur sturdy wage growth and pull first-time buyers into the market.

That’s a relief. We need to inject some hope into the report, right?

But unless there is a significant pickup in the number of homes available for sale, the housing recovery could remain sluggish. Housing has so far lagged the overall economic recovery.

the_price_is_wrongThis is the same nonsense realtors spouted last year, and when the inventory did increase, sales did not pick up. The increasing inventory did help slow appreciation, but it did little or nothing for sales volumes. The lack of inventory is a red herring.

Economists polled by Reuters had forecast that existing home sales would fall only to a 4.97 million-unit pace last month. Sales were up 3.2 percent from a year ago.

Last month, the inventory of unsold homes on the market slipped 0.5 percent from a year ago to 1.87 million. It was the second straight year-on-year decline.

Inventory is lacking because banks stopped foreclosing on delinquent mortgage squatters and modified as many loans as they could. Many people who might want to sell are trapped underwater in their homes, unable to sell even if they wanted to.

Economists say insufficient equity and uncertainty about the economy’s strength were forcing potential sellers to stay in their homes. A survey by the Realtors group showed homeowners were staying in their homes 10 years on average, instead of the typical seven years. …

This shouldn’t be a surprise with so many underwater and so little equity available for move up.hid_the_houses

There is little hope that supply will increase in the near term. Data last week showed groundbreaking for single-family home projects fell sharply in January. Permits for future single-family home building also declined.

Sales of new homes is off as well; in OC it’s off a whopping 41%!

Last month, the share of first-time buyers fell to 28 percent, the lowest since June, from 29 percent in December. It was the second straight month of decline. Economists and real estate agents say a share of 40 percent to 45 percent is required for a strong housing recovery.

The hopeful anecdote of a few weeks ago was that Millennial first-time homebuyers were finally active. Apparently, that’s not the case, or first-time homebuying would be increasing.

2015 may still turn around because the economy is getting better, and mortgage rates are still low; however, for as dismal as the beginning of 2014 was, 2015 is starting off just as poorly.

Capture

Coastal California housing is the least affordable in the US because the chronic shortages of inventory forces buyers to compete and bid prices higher. These higher prices are hurting both resales and new home sales. Further the market may face serious long-term problems with demand, a weakness not caused by tight mortgage standards. But despite the problems, both rents and resale prices continue to rise, an outcome specifically engineered by the banks whose loan modifications push up rents, and create the cloud inventory phenomenon that pushes up resale prices.

home-sales-1999-2014

Here is another way to visualize the problem:

Purchase Index and US Population

We know the housing market is increasingly mortgage interest rate sensitive, as the chart below demonstrates.

home-sales-mortgage-rates

What was surprising is that falling mortgage rates throughout 2014 didn’t do more to stimulate sales. Higher prices are the real problem. From early 2012 to mid 2013, house prices rose significantly despite weak employment data and flat incomes. If houses get more expensive, marginal buyers get priced out, and without toxic mortgage products to help them, a depleted buyer pool results in low sales volumes.


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