Existing home sales decline 5% in West despite low rates

Plagued by affordability problems, the Western US endured a 5% decline in home sales in October 2014.

surpassing_expectationsEver since mortgage interest rates suddenly and unexpectedly rose from 3.5% to 4.5% in May of 2013, the market has been weak. For almost a year prices were flat while sales volumes declined. The spring rally of 2014 pushed prices a little higher, driven mostly by rising rents, but resale volume was very low, suggesting the gains do not represent fundamentally strong demand from an improving economy.

For the housing market to really improve, the fundamentals underpinning the market must improve because manipulating inventory and interest rates are short-term market props, not fundamental drivers of demand. The house price rally in 2012 and 2013 had little or no fundamental support. The housing market needs growth in jobs and incomes because people who get high paying jobs form new households and often buy houses. Although the job market has been steadily improving since early 2010, the rate of job growth has been relatively weak when compared to previous recessions, and the quality of these jobs has been suspect at best, with many being part-time.

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.


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.


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.

Existing-Home Sales Rise in October, First Year-Over-Year Increase since October 2013

Media Contact: Adam DeSanctisunsold

WASHINGTON (November 20, 2014) – Existing-home sales rose in October for the second straight month and are now above year-over-year levels for the first time in a year, according to the National Association of Realtors®.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 1.5 percent to a seasonally adjusted annual rate of 5.26 million in October from an upwardly-revised 5.18 million in September. Sales are at their highest annual pace since September 2013 (also 5.26 million) and are now above year-over-year levels (2.5 percent from last October) for the first time since last October.

Lawrence Yun, NAR chief economist, says the housing market this year has been a tale of two halves. “Sales activity in October reached its highest annual pace of the year as buyers continue to be encouraged by interest rates at lows not seen since last summer,

Sales have held steady since July, thanks mostly to the NAr seasonal adjustments, which provide great opportunities for the NAr to spin the data. On an unadjusted basis, October showed an insignificant bump similar to November 2013, but the trend is still down.


improving levels of inventory and stabilizing price growth,” he said. “Furthermore, the job market has shown continued strength in the past six months. This bodes well for solid demand to close out the year and the likelihood of additional months of year-over-year sales increases.”

LOL! Yun is a master of spin. The likelihood of additional months of year-over-year sales increases is very high, but not because sales are strong or the job market is improving or any of the other bogus reasons he listed — sales volumes will look better Y-o-Y because the sales in late 2013 and early 2014 were terrible. It must be comforting to Mr. Yun that he has upcoming data points he can spin positively.


The median existing-home price for all housing types in October was $208,300, which is 5.5 percent above October 2013. This marks the 32nd consecutive month of year-over-year price gains.

Total housing inventory at the end of October fell 2.6 percent to 2.22 million existing homes available for sale, which represents a 5.1-month supply at the current sales pace – the lowest since March (also 5.1 months). Unsold inventory is now 5.2 percent higher than a year ago, when there were 2.11 million existing homes available for sale.

“The growth in housing supply this year will likely prevent the drastic sales slowdown and coinciding spike in home prices we saw last winter due to low inventory,” says Yun.

liar_syrupThe drastic slowdown in sales had absolutely nothing to do with inventory, despite the NAr’s repeated attempts to spin it that way. Sales dropped because the sudden mortgage rate spike and rising prices forced marginal buyers out of the market. It’s also why sales have remained low despite increasing inventories since then. Also, I have no idea what he’s talking about with the spike in home prices last winter. The price rally ended in June of 2013, and prices have been flat since then.

“However, more housing starts are needed to increase supply, meet current demand and keep price growth in check.”…

Throwing the builders a bone… It’s not accurate, but it makes the builders feel good.

According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage in October dropped to 4.03 percent, its lowest level since June 2013 (4.07 percent), and down from 4.16 percent in September.

This is why sales are not plummeting like last year.

The percent share of first-time buyers in October remained at 29 percent for the fourth consecutive month; first-time buyers have represented less than 30 percent of all buyers in 18 of the past 19 months. A separate NAR survey released earlier this month revealed that the annual share of first-time buyers fell to its lowest level in nearly three decades.

(See: First-time homebuyer participation hits three-decade low)group_failure

Properties typically stayed on the market in October longer (63 days) than last month (56 days) and a year ago (54 days).

When it takes longer to sell a home, the market is weakening. There is no convincing way to spin that, so Yun buried it in a data dump at the bottom of the report and hoped everyone would miss it.

Existing-home sales in the West declined 5.0 percent to an annual rate of 1.14 million in October, and remain 3.4 percent below a year ago. The median price in the West was $296,800, which is 5.0 percent above October 2013.


While the rest of the country may celebrate the tiny statistical bump in home sales in October, the West Coast has less reason for excitement. Sales are weaker this year than last, mostly due to affordability issues, and although declining mortgage rates are helping, what will happen if they go up from 4% to 5% next year?

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