July 2, 2008 (Housing Market Monitor)
Existing Home Sales Show Rise in West
July 2, 2008
By Dean Baker
"Distressed builders may feel more pressure to lower prices to clear inventories."
Existing home sales in the west rose by 2.0 percent in May from their April level. More importantly, this was the second consecutive month that the sales rate hit at least a million after falling as low as 880,000 last October. This indicates that the upturn in sales is likely real and not just a quirk in the data.
However, this is a market that is still far from recovering. New home sales in the West continue to plummet, as do starts. New home sales in the West for May were reported at 114,000, a drop of 11.6 percent from the April level. This is a decline of 68.2 percent compared with the 2005 average.
There are similar sharp drops in the region reported for starts. Starts in the West in May fell by 10.3 percent overall and 18.0 percent for single family units. Compared with 2005, housing starts in the West are down 57.0 percent. Starts of single-family units are down by 69.0 percent compared with their 2005 average. The residential construction sector in this region has gone through an incredible contraction in a very short period of time.
This is consistent with the virtual free-fall that we are now seeing in prices in the area. The Case-Shiller data released last week showed the Western cities having the most rapid rate of price decline, with the exception of Miami. Prices in Las Vegas were declining at a 36.8 percent annual rate over the last quarter. San Francisco and Phoenix, both had 35.6 percent rates of price decline. Prices were falling at 33.7 percent annual rate in Los Angeles.
This was the bubble at its worst, with the possible exception of Florida. Enormous overbuilding has led to a shutdown of the construction industry. In addition, banks in the area have severely tightened lending requirements. The positive part of the story is that this pace of price decline will quickly bring prices back to their trend levels. If the rise in existing home sales in the region suggests that sellers are accepting that the bubble is over (or, alternatively, that banks are dumping foreclosed properties), it will hasten the adjustment process and bring forward the date where the housing market in the West becomes stabilized.
Elsewhere, the situation is not quite as bleak. Existing home sales for May rose by 4.6 percent in the Northeast and 5.5 percent in the Midwest. The South was the only region in which sales dropped with a 0.5 percent decline. This put existing home sales in the region 17.0 percent below the year ago level, the sharpest year over year decline for any region.
In new home sales, the South is doing comparatively well, with a 0.5 percent rise in May putting it second to the 5.1 percent increase reported for the Midwest. Still, these regions have seen year over declines in new home sales of 35.0 percent and 42.3 percent, respectively.
One striking item in the new homes data is the continuing increase in the median period between completion and sale. This rose to 8.5 months in May from 7.9 months in April. It had stood at just 5.6 months in May of 2007 and averaged just 4.0 months in 2005. This indicates that builders are holding very large inventories of unsold homes. This will impose an increasing burden on their finances, especially if interest rates continue on an upward path. Distressed builders will feel more pressure to unload their inventories, which will put further downward pressure on prices.
Mortgage interest rates did edge down slightly last week according to the Mortgage Bankers Association, from 6.39 percent to 6.33 percent on a 30-year fixed rate loan. With inflation likely ticking up in the months ahead, it is more likely that the direction will be higher in future months. With mortgage rates rising and the economy almost certainly continuing to shed jobs in the months ahead, it is very hard to see any basis for the housing market improving any time soon.
Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. (www.cepr.net). CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.