New Home Sales As Bad As Existing Homes

New home sales tumbled 26.4% last year, the largest yearly drop on record. Sales were down 4.7% in December, with median home prices dropping 10.4% year-over-year, the biggest 12-month decline in 37 years. These numbers don’t account for cancellations, so actual sales were probably even lower. Furthermore, I guess most sales featured additional incentives, so the prices are inflated, too. The median price of a new home increased a mere 0.2% to $246,900 in 2007 – if incentives were taken into consideration, new home prices would drop as well. The inventory of unsold homes is at 9.7 months’ worth, which is close to a record high, so there’s no light at the end of the tunnel for home builders. An economic stimulus package? Financial innovation, anyone?

Real Estate: Still Gloomy

Housing has been a source of concern for regulators, bankers and consumers for more than a year now, and signs of improvement are nowhere to be seen. According to the latest NAR report, existing home sales dropped 2.2% in December to a seasonally adjusted annual rate of 4.89 million units, compared to 5.00 million in November, down 22% year-over-year. Total existing home sales for 2007 came in at 5,652,000, down 12.8% when compared to 2006 results but still the fifth highest level on record. The inventory of unsold homes currently on the market is more than twice the normal supply. The December level was the highest in history for that month. The median price for a single-family home dropped 1.8% in 2007, the first decline since the NAR started tracking prices in 1968. Looks like it can only get better from now on but who knows, so many problems need to be solved first.

By the way, the latest Fed rate cut has helped bring down mortgage interest rates: on average, the 30-year fixed home loan carried an interest of 5.48% this week, the lowest level in almost 4 years. It stood at 5.69% last week. 15-year fixed-rate mortgages dropped to 4.95%, from 5.21% last week, 5-year adjustable-rate home loans averaged 5.13%, compared to 5.40% a week ago, and one-year ARMs stood at 4.99% this week, compared to 5.26% last week. Lenders are expecting a refinancing boom.

The Perfect Storm

Housing starts dropped 14% in December to an annual rate of 1.006 million, the lowest pace since 1991. Construction fell 25% in 2007, its biggest drop since 1980. Permits dropped to 8.1% in December, and 25% for the entire 2007, the biggest decline since 1974. Construction of single-family homes dropped 2.9%, and multifamily homes dropped 40%. Homebuilders are scaling down construction while they wait for the surplus inventory on the market to sell. Well at least there’s some hope that that will happen. Mortgage rates continued to drop this week, 30-year fixed-rate mortgages averaging 5.69%, the lowest in more than 2 years. 15-year fixed-rate mortgages averaged 5.21%, down from 5.43% last week. 5-year hybrid ARMs carried an interest of 5.40%, compared to 5.63% last week. 1-year adjustable home loans fell from 5.37% to 5.26%. Unfortunately, banks are reluctant to lend money to borrowers. Weak retail sales in December, which dropped 0.4% from the previous month, would suggest that consumers are feeling strapped and unlikely to start house-hunting just yet. This looks like a perfect storm for the economy, and we’ve run out of ideas – and financial innovation.

Little Optimism For 2008

This is the first post for this year. 2007 was tough, and a lot has changed since last January. Many believe the housing and capital markets may never be the same again. There’s hope for improvement later this year, and yet there’s some fear that things may get worse before they get better. November housing data, released at the end of December, gives little reason for optimism. New-home sales dropped 34.4% on year-over-year basis, the largest drop since 1991. The median price was down 0.4% on a yearly basis to $239,100. This number doesn’t account for builder incentives, which means that the actual prices have dropped even more. Sales of existing homes were up 0.4% compared to the month before for the first time since February – this sounds like a piece of good news but it’s hard to classify it as a turnaround point. Fewer homes were sold in November than the previous month: 46,000 homes sold compared to 55,000 in October. The supply of unsold homes currently on the market would take 10 months to sell at the current pace.

Mortgage interest rates ended the year nearly where they started, with the 30-year fixed-rate mortgage averaging a little above 6.1%. This, however, happened after interest rates topped 6.7% in the summer and the Fed lowered its benchmark interest rate by 1% with three consecutive rate cuts. Forecasts for 2008 range from extremely bearish to modestly bullish, but most are pretty cautious and somewhat vague. Happy New Year and let’s hope it’s a good year.

As The Year Ends

2007 is drawing to its end, and between holiday shopping and baking cookies, some are trying to analyze the housing market trends and forecast its future behavior. While predictions range from mildly gloomy to disastrous, the NAR produced an amusingly optimistic home sales forecast for 2008. After reducing their home sales forecasts for 9 straight months, they now revised their 2007 forecast upwards, to 5.67 million from 5.66 million. Chief economist Lawrence Yun said an optimistic job market report and the government’s help for troubled homeowners influenced the improved outlook. The group believes home sales will rise to 5.7 million in 2008. A Global Insight economist forecasts 4.7 million home sales in 2008.

Merrill Lynch predicts a gloomy 2008 for the U.S. economy with high energy prices, weak employment, tight credit and falling home prices. And by the way, Fannie Mae and Freddie Mac are introducing tougher requirements for mortgages they securitize.

Analyst Downgrades Lennar

Deutsche Bank Securities Inc. analyst Nishu Sood cut his rating on Lennar Corp. from “Buy” to “Hold”, citing concern over the home builder’s joint-venture agreements. Tighter credit and a glut of homes on the market have resulted in declining demand and a high rate of cancellations, which eat into home builders’ bottom lines. Sood cut his target price for Lennar stock from $36 to $17. The stock traded at $18.72 on Thursday.

Home builders and sellers, desperate to sell homes, are offering ever bigger incentives, ranging from trips and car leases to exotic pets. Sellers are willing to make deep discounts because they fear that home prices may fall further as forecast. However, the market is so bad right now that the chances to sell a home at all are really slim. And while most owners can afford to sit and wait for better times to sell their houses, home builders are suffering losses every day a new home sits empty.

Mortgage Bankers Association: Record Foreclosures In Q3

Home foreclosures hit an all-time high in the third quarter, according to a report released by the Mortgage Bankers Association. 0.78% of all mortgages nationwide were in foreclosure, up from 0.65% the previous quarter. Delinquency rates increased from 5.12% to 5.59%, the highest level in more than 20 years. 4.72% of subprime ARMs entered the foreclosure process, compared to 3.84% in the second quarter. The association’s chief economist, Doug Duncan, said that the situation is likely to get even worse, an opinion shared by analysts at Moody’s. Moody’s predicts that housing prices will drop 30% before the crisis is over. They believe the recession will last until early 2009 (!), with home prices falling 13%, maybe more if we factor in homebuilder incentives. The hardest-hit markets will see prices drop more than 30%, in the “most severe housing recession since the post-World War II Period”, according to Mark Zandi, chief economist at Moody’s Economy.com. Home sales are expected to hit bottom in early 2008, which makes me wonder what is going to spur sales – maybe buyers will finally get bored of waiting on the sidelines?

Home Sales Dropped in 3Q

Sales of existing homes declined in 46 states in the third quarter of 2007, according to an NAR [National Association of Realtors] report issued Wednesday. Sales dropped 13.7% on average year-over-year, while Nevada, Florida, Arizona and California were hit hardest, with declines of 35%, 32%, 30.9% and 27.8% respectively. Sales increased in Vermont and North Dakota – the only two states to report positive data. Sales were up 0.8% in Vermont and 2.9% in North Dakota, and no sales figures were available for Idaho and New Hampshire.

As for metropolitan areas, 93 out of 150 surveyed saw price increases. However, median prices in Florida and California dropped more than 10% compared to last year. In his statement, NAR’s chief economist Lawrence Yun emphasized the positive news: “Some metro areas are hot while others are experiencing localized problems”. So all Real Estate is local, and the problems are “localized”. And there’s more of the “all is well” rhetoric: “Home prices … are affordable and, perhaps, even undervalued” – I guess foreclosure properties are indeed undervalued.

Home Sales slide in September

Now that the data is in, we can say that September sales did indeed drop dramatically. Total existing home sales fell 8% to a seasonally adjusted rate of 5.04 million units, compared to 5.48 million (revised downwards from 5.5 million) in August. That is more than 19% less than a year ago, when 6.23 million units were sold. Third-quarter numbers, however, were better than expected, with an annual sales rate of 5.42 million, somewhat higher than the NAR’s forecast of 5.38 million (unless numbers get revised again).

We now have a 10-month supply of homes on the market and it seems unlikely that this surplus inventory will be sold before the end of the year. As usual, Lawrence Yun, NAR’s senior economist, provided some comment, which I will not quote, because it is more of the same “all is good talk”, as usually wrapped in shiny complicated terminology that failed to conceal the underlying emptiness. Here’s a link to the press release for anyone interested.

A Rate Cut Seems Likely

As the next Fed meeting approaches, the likelihood of another rate cut seems pretty high, although some doubts remain. The Government is manifestly not concerned about the dollar, as Treasury Secretary H. Paulson vetoed proposals to use the G7 final statement to warn of problems affecting European economies due to a weak dollar. This may mean that the currency will be allowed to fall further, should the Fed decide to cut rates to boost economic fundamentals.

However, another rate cut could accelerate inflation, and with oil hitting the psychological barrier of $90 a barrel, this could be a serious concern weighing on the Fed’s decision. Housing data for September coming later this week will be important for the Fed’s decision, too. There is no doubt that existing-home sales and new-home sales will fall, the question is whether the drop will exceed expectations, and how the Fed will interpret the data.

D.R. Horton reports losses in fiscal fourth quarter

The second-largest homebuilder said orders dropped 39% year-over-year to the lowest level in nearly 6 years in its fiscal fourth quarter. Order cancellations were at 48%, up from 38% in the previous quarter. Chairman Donald Horton attributed the poor results to low mortgage loan availability, which hurts sales. Shares dropped 5.3%.

Market conditions are expected to remain challenging for months to come, according to industry officials. Federal Reserve Chairman Ben Bernanke said that housing will have a negative impact on the economy for the remaining part of the year and at least for some time in 2008. Builder sentiment is at its lowest level since the index was established in 1985. The index fell to 18 from a reading of 20 in September, which means that only 18% of respondents in the survey view market conditions as beneficial.

Rates On Fixed Mortgages move up

According to Freddie Mac’s weekly survey, 30-year fixed-rate mortgages averaged 6.42% in the week ended September 27. 15-year fixed-rate mortgages carried an average interest of 6.09%, up from 5.98% a week ago. Adjustable-rate mortgages declined this week, with the 5-year ARM dropping to 6.15% from 6.21% a week ago and the 1-year adjustable home loans at 5.60%, down from 5.65%. The demand for ARMs has dropped dramatically recently, as consumers try to escape adjusting loan payments and look for the safety of fixed-rate loans. Home loans are mostly used for refinancing, rather than home purchases, and the result is a 7-year low in new home sales in August. According to the U.S. Census Bureau and the Department of Housing and Urban Development, sales of new, single-family homes dropped 8.3% on a monthly basis in August to a seasonally-adjusted annual rate of 795,000.

Financial data for August doesn’t fully reflect the impact of the crisis that occurred mid-month, so we can expect even gloomier results when the business and economic stats for September are released.

Home Sales Dropped In August

Home sales fell for the sixth month in a row in August, with a remarkable 12.8% year-over year drop. The seasonally adjusted annual sales rate was 5.5 million, the lowest figure since August 2002. Economists believe that August sales data does not fully reflect the consequences of the credit crunch experienced by financial markets, so September figures could be even worse. In this context, NAR’s Lawrence Yun did his best to lighten up the mood: “Once we get through these disruptions, we’ll get a better sense of where the actual market is in late fall as conditions begin to normalize”. Thanks, that was funny, you’ll find more on realtor.org. There’s a record 10-month supply of unsold homes on the market, and that is not going away before the end of the year. Analysts are saying that sales will not stabilize until mid-2008, and some believe even that is optimistic.

Amid the turmoil, home builders are feeling the pain, too. Home builder Lennar Corp. reported the biggest quarterly loss in its history, $513.9 million, or $3.25 a share. This was unexpected, because the lowest estimation predicted a loss of $1.21 a share.

Home sales dropped in 2Q

The National Association of Realtors (also known as the infamous NAR) reported that existing home sales fell 10.8% in the second quarter of 2007. Homes sold at an annualized rate of 5.91 million, down from last year’s 6.63 million. The median home price dropped 1.5% to $223,800. However, amid all the news, NAR officials saw reasons for confidence: median prices are going up in 97 metro areas, as compared to 83 in the first quarter. Lawrence Yun, senior economist for the NAR, said that “Recent mortgage disruptions will hold back sales temporarily, but the fundamental momentum clearly suggests stabilizing price trends”. He also didn’t fail to mention that “Although home prices are relatively flat, more metro areas are showing price gains with general improvement since bottoming-out in the fourth quarter of 2006”. So the market bottomed out in 4Q after all? Let’s hope he’s right. I thought we’d all seen evidence to the contrary.

Freddie Mac: home sales will keep falling

Freddie Mac, the second-largest mortgage buyer, paints a bleak picture of the current situation in the housing sector, and makes a rather gloomy forecast for the months ahead.

Just when economists hoped for a rebound in home-buying activity, mortgage rates jumped from 6.15-6.25% to 6.50% and higher, cutting into affordability. According to the mortgage giant, home sales in 2007 will probably drop to their lowest level since 2001, totaling 6.28 million, 7.1% lower than last year. In 2001, home sales totaled 6.20 million. The interest rate on a 30-year fixed mortgage will probably be 6.7% this quarter, up from 6.2% in Q1. Inventory reached a record of 4.43 million in May, while sales dropped to a 5.99 million annualized rate, the lowest figure in four years. According to analysts, the bottom in home sales will probably be reached in 2007, but price declines will continue into 2008.

Freddie Mac is also revising downwards its forecast for gains in the home price index. Last month’s forecast of 1.5% is being revised to an increase of 1% for this year. Housing starts are expected to decline 18% in 2007, to a total of 1.48 million. The percentage of mortgages entering foreclosure is at an all-time high of 0.58%, subprime foreclosures are at 2.43%, the highest level in 5 years, and foreclosures on prime loans reached a record 0.25%. So, don’t expect good news from this part of the economy till the end of the year.

New Home Sales dipped in May

A report issued by the U.S. Census Bureau and the Department of Housing and Urban Development demonstrated that sales of new single-family homes declined 1.6% month-over-month in May. Given the record jump in sales in April, this decline is no big news and hardly indicative of market trends. Sales of new homes have fallen in every month except for April, erasing hopes for a rebound in housing. Interestingly, the margin of error for new-home sales is 10.8%, essentially higher than monthly fluctuations, which means that most of these numbers could turn out to be very, very inaccurate. The median price dropped to $223, 700, down 2.1% from last year.

Freddie Mac’s Treasurer Timothy Bitsberger said the housing slump is “contained”, which is probably the equivalent of “all is well”. The Real Estate market, however, is already threatening the economy at large, after two Bear Sterns hedge funds that had invested in mortgages collapsed. This may or may not cause a revaluation of similar structures and whole classes of securities, but already indicates trouble among large Wall Street investors. The housing slump is more severe than what the public is led to believe, and covering up problems is getting harder and harder.

Existing home sales steady in May

According to the NAR, existing home sales slipped a mere 0.3% in May, compared to April figures. Year-over-year, however, this is a 10.3% drop. Inventory moved up to the highest level in 15 years, but Quicken Loans’ Bob Walters believes that “we’re still in the early stages of a slow developing market stabilization”. What I heard is that the situation will at the very least remain as bad for several months. I wonder what David Lereah would say at this point if he still worked at the NAR.

And if low sales sound “surprising” to Bob Walters, it doesn’t take a scientist to realize that waiting on the sidelines is quite a wise thing for buyers to do. No one wants to spend their last savings on a house and watch its price drop as the “housing slump” gets worse. Why not wait for a month or two and spend less on the very same purchase, knowing that you won’t lose the equity in your home to market fluctuations?

New homes might sell better than the existing ones because builders are generally more desperate to unload houses and willing to cut prices or offer free additions to buyers. We’ll find out how those are doing soon enough.

The week ahead: a Fed meeting, and so much more

The Fed will be discussing financial matters on Wednesday and Thursday, and, although a change in interest rates is unlikely, economists will be paying much attention to the Federal Reserve’s statement, to be issued at the end of the meeting. With inflation at an annual rate of 2.2, chances for a rate cut seem to be non-existent, as the Fed aims to contain inflation in the 1 to 2% range. The official statement, however, will have a considerable impact on the market’s performance.

Other statistics to be reported this week include existing home sales, new home sales, a survey of consumer sentiment, and a revision of the Gross Domestic Product. All this should provide a clearer picture of the current economic situation, and some insight into the housing market’s near future. Most publications indicate serious pessimism in regard to Real Estate and predict that more bad news is on the way.

Home builders Lennar Corp. and KB Home will be reporting quarterly results this week. Home builders are generally suffering losses in the current market, as both sales and prices decline and homes stay on the market for months, so their reports will provide valuable information on housing as well.

A gloomy outlook from the NAR

The National Association of Realtors is adjusting its forecast for the housing market activity in 2007. Due to problems in the subprime lending sector, expectations for existing home sales in 2007 are lowered to 6.29 million, from an earlier forecast of 6.34 million. In 2006, sales reached 6.48 million. A month ago, the NAR predicted the median existing home price to drop by 0.7% this year. Realtors are now adjusting that number to 1%, which will result in a median price of $219,800. An increase of 1.4% is expected in 2008.

The median price of a new home will probably be reduced by $100 to $246,400, as opposed to earlier estimates of a 0.4% increase. New home sales are expected to reach 864,000 in 2007 and 936 in 2008. NAR expects the median new home price to gain 2.2% next year.

NAR believes the slowdown will be moderate, because unemployment is low, and household incomes are up. This “soft landing” will probably be followed by a gradual increase in home sales in the second half of the year, according to the NAR.

Slumping prices and climbing sales

A report issued Thursday, February 15, 2007, indicated a 2.7% slump in home prices in the fourth quarter of 2006 as compared to a year earlier. This marks a record year-over-year price drop in the housing market and comes after a 1.0% drop in the third quarter. This trend is the natural consequence of the current market situation and it is accelerating. I believe prices need to drop even more before the Real Estate business regains its balance, but these numbers already look like good news for consumers and economists – not for agents and home builders though.

Meanwhile, the National Association of Home Builders published its Housing Market index, indicating a 5% rise in builders’ confidence in market conditions since January, when it was 35%. Economists had predicted the index to remain unchanged, but it has reached its highest reading since it was 42 in June 2006. In September, it dropped to 30, a 15-year low. Nevertheless, if the Index remains below 50, this means that the number of builders who view the market as poor is higher than the number of builders who’re satisfied with the current situation.

Well, the index reflects housing dynamics as lower energy prices and mortgage rates, combined with growing employment and household income have caused an increased buying demand. Builders have been cutting prices and offering sales incentives for months, and these measures are finally yielding results, even though the loss incurred by slumping prices is often quite substantial. If unsold inventory is reduced significantly, this will help stabilize both the market and prices. For now, however, the environment is still challenging for all Real Estate and mortgage businesses.