James Hamilton is watching the housing market — as long as prices are falling, concerns about the value of mortgage backed securities and financial instruments constructed from them will persist.
Is the worst behind us?
Courtesy of James Hamilton at Econbrowser
A couple of weeks ago we received the encouraging news that retail sales for both January and February were 1.8% above December. On Monday the National Association of Realtors reported that February sales of existing homes were 5.1% above January levels on a seasonally adjusted basis. Today the Census Bureau reported that new orders for manufactured durable goods rose 3.4% in February, with new orders for nondefense capital goods up 7.4%. And also today the Census Bureau reported that new home sales in February were up 4.7% (on a seasonally adjusted basis) relative to January. Is the tide starting to turn?
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The new home sales figure is particularly relevant. Calculated Risk has been emphasizing the discrepancy between the possible turnaround in sales of existing homes and what had up until today been an ongoing slide in new home sales. Much of the strength in existing home sales has come from foreclosure resales. Large numbers of foreclosures coupled with falling sales of new homes do not paint a picture of a healthy housing market. Although the February bump in seasonally adjusted new home sales is encouraging, on a seasonally unadjusted basis, we’d usually expect February sales to be 25% above the seasonal low in December. But the seasonally unadjusted February 2009 number was about the same as was reported for a very weak December and 44% below February 2008.
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Despite the increase in sales of existing homes, the inventory of unsold existing homes unfortunately also increased in February. But the good news is that this inventory remains below the levels seen for most of 2008.
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Here is Calculated Risk’s take on the earlier existing home sales report:
Inventory levels increased sharply in 2006 and 2007, but have been below the year ago level for the last seven months. This might indicate that inventory levels are close to the peak for this cycle. Note: there is probably a substantial shadow inventory– homeowners wanting to sell, but waiting for a better market– so existing home inventory levels will probably stay elevated for some time. There is also the possibility of some REOs [real estate owned] being held off the market.
It is important to watch inventory levels very carefully. If you look at the 2005 inventory data, instead of staying flat for most of the year (like the previous bubble years), inventory continued to increase all year. That was one of the key signs that led me to call the top in the housing market!
If the trend of declining year-over-year inventory levels continues in 2009 that will be a positive for the housing market. Prices will probably continue to fall until the months of supply reaches more normal levels (in the 6 to 8 month range), and that might take some time.
As long as house prices continue to fall, concerns about the true value of mortgage-backed securities and financial instruments constructed from them will still be with us. But a lower bound on how much farther house prices will fall would help significantly to resolve the status of trillions of dollars in these "troubled assets".
On Monday CR wrote:
I think the keys to watch for the housing market are declining inventory levels, a bottom in new home sales, and the gap between new and existing home sales closing.
CR was right on target about the housing peak, so I trust his judgment in calling the bottom. But I take some encouragement in the news of the last two weeks.
