Distress signals from U.S. housing

February 23, 2012


There was something for everyone in the January existing home sales report. Bulls could point to the level of sales, which reached a 1-1/2 year high, and the decline in housing supply, long an impediment to the sector’s recovery. Bears might focus on the sharp downward revisions to prior months that suggested conditions were improving but from considerably more depressed levels.

But one nugget in the report was unequivocally bad: the proportion of distressed sales surged to 35 percent from 32 percent, a considerable one-month rise. For Michael Meyer, economist at Bank of America-Merrill Lynch, this means existing home sales numbers have become less reliable:

We think that simply looking at existing home sales is an insufficient way to gauge underlying housing demand since the data are heavily affected by investors and distressed sales. The best measure for demand from primary homebuyers is to look at mortgage purchase applications, which have remained sluggish. In addition, we think it is prudent to wait for the spring selling season before making conclusions about underlying housing demand. The winter is typically the slow season for home sales, making the data less reliable. We expect the spring selling season to show some improvement, but we believe it risks disappointing relative to market expectations.

There is also reason for caution about the apparent progress in bringing down high inventories, the glut of supply resulting from the overbuilding of the boom years. Zach Pandl, economist at Goldman Sachs writes:

The ‘months supply’ of homes on the market has declined to the lowest level since April 2006. Although we consider the drop in this measure of inventories a modest positive, we also think it exaggerates the improvement in excess housing supply.

Active listings — which are what the existing home sales report measures — decline if a house is sold, but also if a current homeowner pulls their home off the market. They can also be held down by prospective home sellers who decide not to sell due to weak demand conditions. Available data suggest that the latter two factors may have been an important reason behind the improvement in existing home inventory and months supply.

We continue to think that the appropriate way to measure the overhang in the housing market is through excess vacancies: the number of homes currently sitting empty above and beyond the normal frictional or seasonal level of vacancies. Here we see some improvement, but progress looks much more gradual.

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