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The Housing Market is So Screwed Up

Check out these headlines from today’s news: May Existing Home Sales Continue Rising Trend and U.S. Home Prices Drop 6.8 Percent in April as Foreclosures Rise.  These headlines seem to be contradicting each other.  Well, not exactly.  What is happening is a serious supply and demand problem - more of a supply problem than demand.  Until this is corrected the housing market will remain screwed up.

There is one segment of the housing market that is doing well: first-time home buyers.  This is due to low mortgage rates and relatively low prices in many areas of the country.  First time home buyers are essentially driving the market and make up the bulk of the existing home sales.

Sales of existing homes showed another gain in May, benefiting from favorable affordability conditions and a first-time buyer tax credit, according to the National Association of Realtors®. May’s increase was the first back-to-back monthly gain since September 2005.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 2.4 percent to a seasonally adjusted annual rate1 of 4.77 million units in May from a downwardly revised level of 4.66 million units in April, but remained 3.6 percent below the 4.95 million-unit pace in May 2008.

Lawrence Yun, NAR chief economist, expected an improvement. “Historically low mortgage interest rates clearly drew buyers into the market, and housing remains very affordable even with a recent uptick in rates,” he said. “First-time buyers also are being drawn off the sidelines by the $8,000 tax credit, which is helping to absorb inventory. However, the increase in sales is less than expected because poor appraisals are stalling transactions. Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan.”

But here is the problem: where are the upgrade buyers - buyers who are able to sell their existing home at a decent price and turn around and buy another home at same or higher price?  Right now these type of buyers are non-existent.  Until these upgrade buyers return to the market, the housing market will continue to languish.

Where are these upgrade buyers?  Well, the problem is that they can’t sell their home either because a lack of offers or because the home prices in the area are too low.  U.S. Home prices dropped 6.8% in April and foreclosures increased.  A person has to be able to pay off his/her existing mortgage and have a little money left over to put a down payment on the new house.  This is not happening because prices are too low.

Why are prices too low?  Too much inventory.  Currently, according to NAR, 3.8 million units on the market.  This is a decrease from previous months and a decrease from the all-time high of 4.57 million in July 2008.  But it is still high and there is talk that many banks have not listed many of their foreclosed properties which would result in even higher inventory. 

There is a good indicator that measures inventory levels that Calculated Risk is tracking and it is called: Existing Home Sales - Months of Supply (nice graph).  According to this indicator Current Months of Supply is 9.6 months.  In a normal market, Months of Supply should be about 6 months.  So, we have a long way to a “normal” market. 

Bottom line: until you or I can sell our home and have a little money left over after paying off the mortgage to put down on a new home - the situation will still be screwed up in the housing market.

Good luck.