Jul232012

Prime season existing-home sales plummeted 6.9 percent in West in 2012

The consensus among economists for June home sales was that sales volumes would continue to increase. Proving their fallibility, the consensus of economists was wrong — very wrong. June and July are typically the best months for sales volume in the prime selling season, and sales volumes dropped in every region in the US. A large decline in existing home sales is further evidence that the house price bottom the consensus of economists is also predicting is in jeopardy. Nominal prices are moving higher, but it isn’t based on the strength of demand, it is due to the restriction of supply. And with millions of homes in shadow inventory, weakening demand is not a good sign for the housing market. The consensus of economists may turn out to be right with their bottom call, but not for the right reasons. Further, there is a real chance, the consensus could be very wrong again.

If you can stomach a few minutes of NAr spin and bullshit, Lawrence Yun is below.

June Existing-Home Prices Rise Again, Sales Down with Constrained Supply

WASHINGTON (July 19, 2012) – Existing-home prices continued to show gains but sales fell in June with tight supplies of affordable homes limiting first-time buyers, according to the National Association of Realtors®.

The NAr spins endlessly. Notice they started on a positive note about increasing prices, then they dropped the bomb that sales volumes dropped. Further, after delivering the bad news, they immediately went into spin mode making excuses for the poor sales performance.

Total existing-home sales1, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, declined 5.4 percent to a seasonally adjusted annual rate of 4.37 million in June from an upwardly revised 4.62 million in May, but are 4.5 percent higher than the 4.18 million-unit level in June 2011.

A 5.4% decline in sales volumes in June is huge. I recently asked, Will dwindling housing supply cause resale prices to rise or sales volumes to fall? I think we have our answer.

Lawrence Yun, NAR chief economist, said the bigger story is lower inventory and the recovery in home prices. “Despite the frictions related to obtaining mortgages, buyer interest remains solid.”

Bullshit. All-cash investor interest for low-end properties remains strong, but demand among owner occupants using financing is dismal and showing no signs of improvement.

But inventory continues to shrink and that is limiting buying opportunities.”

The lack of bank REO inventory being cleared out at reasonable prices is the main reason sales volumes have plummeted. When lenders were processing foreclosures at the maximum rate of market absorption, both first-time homebuyers and investors were eagerly buying up properties. Now that the inventory these two groups were buying is not being put on the market, sales volumes are plummeting. And sales volumes will continue to drop until this inventory returns. Cashflow investors will not raise their prices significantly because the rate of return doesn’t make sense at higher prices. First-time homebuyers won’t raise their bids because most of them can’t.

“This, in turn, is pushing up home prices in many markets,” he said. “The price improvement also results from fewer distressed homes in the sales mix.

Prices are moving up slightly as evidenced by the dollars-per-square-foot measures I rely on. The median is rising considerably more because the lower priced homes are not in the mix.

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to a record low 3.68 percent in June from 3.80 percent in May; the rate was 4.51 percent in June 2011; recordkeeping began in 1971.

As I noted in the post Monthly cost of home ownership down over 50% from 2006, the dramatic decline in interest rates is creating the payment affordability buoying the market today.

The national median existing-home price2 for all housing types was $189,400 in June, up 7.9 percent from a year ago. This marks four back-to-back monthly price increases from a year earlier, which last occurred in February to May of 2006. June’s gain was the strongest since February 2006 when the median price rose 8.7 percent from a year prior.

This year’s seasonal rally was the first one which actually took us above last year’s dismal performance. The fact that this last occurred in 2006 shows just how long this bust has gone on, and how desperate the NAr is for something positive to spin from this.

Distressed homes – foreclosures and short sales sold at deep discounts – accounted for 25 percent of June sales (13 percent were foreclosures and 12 percent were short sales), unchanged from May but down from 30 percent in June 2011. Foreclosures sold for an average discount of 18 percent below market value in June, while short sales were discounted 15 percent.

Foreclosures do not sell for below market value. Foreclosures establish market value. Whatever a property sells for is market value.

“The distressed portion of the market will further diminish because the number of seriously delinquent mortgages has been falling,” said Yun.

The bullshit above would be true if not for a massive and growing shadow inventory.

The worst part about Yun’s statement is that he likely knows better. He is purposefully misrepresenting the dangers current buyers face because he doesn’t care what happens to them. He just wants to convince them to buy homes to generate commissions.

NAR President Moe Veissi, broker-owner of Veissi & Associates Inc., in Miami, said there’s been a steady growth in buyer interest. “Buyer traffic has virtually doubled from last fall, while seller traffic has risen only modestly,” he said. “The very favorable market conditions are helping to unleash a pent-up demand, which is why housing supplies have tightened and are supporting growth in home prices. Nonetheless, incorrectly priced homes will not attract buyers.”

Moe is a polished bullshitter. First, as I clearly demonstrated in the chart on mortgage originations above, buyer interest is low and unchanged. Buyer traffic which doesn’t become solid offers is meaningless. Further, the whole pent-up demand meme is nonsense realtors throw out whenever they have nothing else positive to say. To suggest that demand is what’s causing the tightening inventory is more bullshit. The demand is unchanged. It’s the supply of REO that has dropped off. He is right to point out that WTF asking prices from discretionary sellers do not attract buyers. Anyone who has looked at the MLS lately has been greeted with scores of ridiculous asking prices. Few of those are selling.

Total housing inventory at the end June fell another 3.2 percent to 2.39 million existing homes available for sale, which represents a 6.6-month supply at the current sales pace, up from a 6.4-month supply in May. Listed inventory is 24.4 percent below a year ago when there was a 9.1-month supply.

A 6.6 month supply is still not a sellers market. The declining sales makes absorption that much slower.

First-time buyers accounted for 32 percent of purchasers in June, compared with 34 percent in May and 31 percent in June 2011. “A healthy market share of first-time buyers would be about 40 percent, so these figures show that tight inventory in the lower price ranges, along with unnecessarily tight credit standards, are holding back entry level activity,” Yun said.

The first-time homebuyer market is the market right now because the move-up market is dead. The first-time market is weak, and the only real strength in the market is from cashflow investors. And as I have pointed out before, this is not a group who will chase prices higher. Also, notice how Yun slipped in the bullshit about “unnecessarily tight credit standards.” Credit standards are necessarily tight to prevent massive taxpayer losses in a housing market completely dominated by government loan guarantees. The NAr keeps repeating this lie in hopes that someone, somewhere might believe it.

All-cash sales edged up to 29 percent of transactions in June from 28 percent in May; they were 29 percent in June 2011. Investors, who account for the bulk of cash sales, purchased 19 percent of homes in June, up from 17 percent in May; they were 19 percent in June 2011.

Investor demand is strong, and unless prices rise significantly or the supply completely dries up, investor demand will remain strong.

Notice below that Yun had to break out his thesaurus to find more words to describe how sales plummeted.

Single-family home sales declined 5.1 percent to a seasonally adjusted annual rate of 3.90 million in June from 4.11 million in May, but are 4.8 percent above the 3.72 million-unit pace in June 2011. The median existing single-family home price was $190,100 in June, up 8.0 percent from a year ago.

Existing condominium and co-op sales fell 7.8 percent to a seasonally adjusted annual rate of 470,000 in June from 510,000 in May, but are 2.2 percent higher than the 460,000-unit level a year ago. The median existing condo price was $183,200 in June, which is 6.9 percent above June 2011.

Regionally, existing-home sales in the Northeast dropped 11.5 percent to an annual pace of 540,000 in June but are 1.9 percent above June 2011. The median price in the Northeast was $253,700, down 1.8 percent from a year ago.

Existing-home sales in the Midwest slipped 1.9 percent in June to a level of 1.02 million but are 14.6 percent higher than a year ago. The median price in the Midwest was $157,600, up 8.4 percent from June 2011.

In the South, existing-home sales declined 4.4 percent to an annual pace of 1.73 million in June but are 5.5 percent above June 2011. The median price in the South was $165,000, up 6.6 percent from a year ago.

Existing-home sales in the West fell 6.9 percent to an annual level of 1.08 million in June and are 3.6 percent below a year ago. The median price in the West was $233,300, up 13.3 percent from May 2011. Given tight supply in both the low and middle price ranges in this region, sales in the West are stronger in the higher price ranges.

Even the NAr acknowledges that the big jump in the median does not reflect the increase in values of individual properties. My $/SF data hasn’t turned positive over last year yet. We are up off the lows, but not by much.

The bottom line is that a significant decline in sales volume is because lenders have withdrawn the only affordable properties from the market. Potential homebuyers cannot simply raise their bids because the product gets scarce, so it isn’t a foregone conclusion that prices must go up. Most people stretch to get the most house they can for the money, and if prices go up, they must either substitute to a lesser quality home or chose not to buy. Right now, many are wisely choosing not to buy, so sales volumes are plummeting. Plus, I don’t see any end in sight. Nothing is changing that will bring more supply to the market. Little or no inventory and super low sales volume is the new normal.

Just in case anyone forgot how I feel about the NAr’s spin machine…