Good News that isn’t Good Enough

This week we have had some housing information that should have lifted moods on Wall Street and Main Street. Sales of previously-owned and new homes were better-than-expected and the S&P/Case-Shiller home price indexes showed that on a monthly basis, home-price declines in the nation's largest cities slowed in June. Unfortunately, in each case, the news was just not good enough.

The National Association of Realtors said that existing-home sales, which make up approximately 85% of all home sales, increased by 3.1% in July from the previous month to a seasonally-adjusted annual rate of five million units, the highest rate since February. The results were better than the expected 1.2% contraction. Yet on the day of the announcement, the stock market tumbled. The problem was with the swelling number of homes for sale, which has forced prices down. At the current sales pace, there is an 11.2 month supply of homes for sale, which is about twice the inventory-level that occurs in more normal times. Not surprisingly, much of the sales activity is occurring in the areas that have been hardest hit by the housing crisis—Florida and California saw spikes up in sales activity as foreclosed homes flooded the markets and created rock-bottom pricing for bargain hunters.

New Home Sales, which the Commerce Department unveiled yesterday, showed some improvement, due to aggressive price-cutting by homebuilders and a significant retrenchment in new construction. Sales of new homes rose by 2.4% in July to a seasonally adjusted annual rate of 515,000 units after falling to a revised, 17-year low in June. The good news was that inventory levels declined for the second month in a row to 10.1 months' supply at the current sales pace. Again, that’s not quite good enough because the number of unsold homes remains at historically high levels.

In every part of the market, there are still too many units for sale, which is forcing down prices. Proof of that was seen in the S&P/Case-Shiller report, which noted that prices dipped 0.6% on average from the month before after falling by 1% in May. The numbers are an improvement from monthly drops of 2% to 2.5% that occurred earlier this year. But prices in 10 major metro areas in June fell 17% from the year before, though the declines appear to be moderating. The broader 20-city index showed similar patterns.

This is great news if you are in the market as a buyer and rotten if you are a seller. Compounding the housing market’s woes is the fact that the mortgage lending pendulum has swung dramatically. It’s not the rates that are so worrisome, although those have increased to an average of almost 6.5% on a 30-year fixed rate, but the ability to secure a loan has become more difficult. Mortgage lenders have shifted from being far too willing to lend to being tough on every aspect of the loan process. Tighter lending standards, higher interest rates and massive inventory levels do not indicate that a housing bounce is around the corner. Like all bubbles, the rise continues longer than expected and so too does the recovery process.