By Dean Baker
July 29, 2009
Vacancy rates fell for ownership units because more units were listed as rentals.
Recent data on the housing market have been more positive than generally expected. Existing home sales were up 3.6 percent in June and are now 8.9 percent higher than their January low. New home sales jumped by 11.0 percent last month, putting them 16.7 percent above the January trough. Even housing starts rose in June, increasing by 3.6 from the May level and 21.5 percent from the April low. In addition, the Case-Shiller 20-City Index showed the first increase since July of 2006 and the vacancy rate for ownership units fell to its lowest level since the third quarter of 2006.
While these items indicate that the free fall in prices is likely over – prices had been falling at more than a 20 percent annual rate in the Case-Shiller 20-City Index – it would be wrong to imagine that we have hit a turning point in the market. There is still an enormous oversupply of housing, which means that the direction of real house prices will almost certainly continue to be downward.
Starting with the vacancy rates, the decline in the rate for ownership units is misleading. While there were 250,000 fewer vacant ownership units in the second quarter of 2009 than the second quarter of 2008, there were 400,000 more vacant rental units. Obviously, many people have given up on selling their homes for the moment and have placed them on the market as rental units. In the event that they perceive a pick-up in the market, many of these rental units are likely to reappear as ownership units.
This story is consistent with the decline in the inventory of existing homes. The inventory has shrunk by more than 750,000 from its peak last July, even though the annual sales rate has averaged just 4,750,000 over the last 11 months. Obviously many homeowners are putting off selling their homes until they perceive an uptick in the market.
Even the price data in the Case-Shiller index are not as positive as has been reported. While the unadjusted index did rise by 0.5 percent, the seasonally-adjusted index actually fell by 0.2 percent. While several cities did show healthy gains, such as a 2.8 percent rise in Cleveland and 0.7 percent increases in both San Francisco and Washington, D.C., several other cities are still experiencing sharp declines in house prices. For example, prices fell by 0.9 percent in Los Angeles, 1.1 percent in Miami, 1.7 percent in Phoenix, and 3.1 percent in Las Vegas.
There continues to be a sharp divergence in prices by market segment. An un-weighted average of the price movements for the Case-Shiller series showed that prices for homes in the bottom tier fell by an average of 0.8 percent in June, while prices for homes in the top tier rose by 0.2 percent. Prices for homes in the middle tier fell by 0.6 percent. In Los Angeles, Los Vegas, and San Diego, prices for homes in the bottom tier are still plunging, falling by 2.8 percent, 3.6 percent, and 3.7 percent, respectively.
Prices in the bottom tier will continue to be depressed by foreclosures for the foreseeable future. The current annual rate of 2 million foreclosures in a market that is absorbing just over 5 million new and existing homes a year will continue to depress prices overall, especially in the lower tier of the market.
It is likely that the housing market received somewhat of a boost in this period from the fall in mortgage interest rates, which bottomed out in April. Houses contracted in April would likely have been sold in May and June, so the current data reflects houses contracted during this peak period.
It is unlikely that there will be any sustained uptick. With interest rates having edged up and the labor market continuing to weaken, there is little basis to support any substantial upturn in the demand end of the market. This analysis is supported by the continued weakness in the Mortgage Bankers Association’s Purchase Mortgage Applications Index, which remains near its low for the slump.
Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.