Friday, August 21, 2009

The Existing Home Sales "Bounce" Will Be Brief

The existing home sales number released today showed a slightly better than expected number for the month of July. Given that we are in the heart of home buying season, given all of the money pumped into the system by the Fed AND especially given the $8,000 first time home buyer tax credit, we shouldn't be surprised to see a small, seasonal bounce in home sales right now.

As pointed out by Existing Home Sales would have been negative over June if not for the increase in Northeast Condo sales, Single Family Detached sales were DOWN 5000 units June to July, and in the all-important Western region, existing sales were down 10%.

But let's look at the underlying factors and data to understand what is really going on with the "seasonally adjusted" and polished-up-for-public-presentation number released by the National Association of Realtors. Here are the factors we see that will undermine this brief respite from the ongoing housing Depression:

1) The universe of qualified first-time home buyers gets exhausted; 2) Distressed investors step away as the ever-present "shadow" inventory becomes actual inventory (shadow inventory is bank-owned homes and would-be sellers waiting for "a bounce in the market"); and 3) The massive wave of prime mortgage foreclosures will flood the market, putting pressure on prices in every price-segment AND on buyer demand.

First-time home buyers and foreclosure/short-sale buyers - so-called distressed investors - represented 61% of the estimated sales for July. This metric is not a sign of a healthy, sustainable market for a couple reasons. First-time buyers are most likely "pulling" future sales into the present, as the first-time home buyer tax credit of $8,000 is set to expire in December. Home sales drop off anyway after August, so we would expect to see an even bigger drop in the third and fourth quarters, even if Obama extends taxpayer subsidization of first-time buyers.

As for the distressed investor segment, many of these buyers will look to "flip" their "distressed" purchase fairly quickly or they'll be forced to rent out the property to avoid the negative cash flow hit from holding investment homes. But renting will be made a lot more difficult by the record inventory of rentals units currently on the market, and growing. I would expect to see a lot of "investors" look to try and unload their property if they can't rent it out or become nervous about the market.

And finally, the inventory levels are still at unusually high levels. We know for a fact that banks have been withholding foreclosed homes on their books (REO, real estate owned) from the market in an attempt to reduce supply and hold up prices. We also know, as reported yesterday, that the percentage of properties in foreclosure or delinquency hit a record high of 13.2% of all single-family mortgages. What makes this metric even more severe in terms of housing market economics is the large jump in foreclosures in prime mortgages and FHA-insured mortgages.

Up to this point, the lower priced homes, typically bought by first-timers and distressed investors, have been by far the highest component of existing homes sales. With the impending tsunami of prime mortgage foreclosures will be a flood of much higher priced homes, which will ultimately put a lot of pressure on the lower end of the market. Of course eventually these banks will have to put a lot of their foreclosure inventory on the market, which will exacerbate the problem.

Ultimately this brief "bounce" in home sales will run into the problems discussed above and, because the Fed and the Government tried to put a floor under the market, the ensuing next leg down will be even worse than what we went through over the past 18 months. It will be interesting to see if the Government decides to spend some of the trillions of dollars it's printing to become a home buyer of last resort (I say this only half-facetiously because I bet it's been discussed). Let's not forget that the taxpayer now owns outright or de facto General Motors, Fannie Mae, Freddie Mac, Citibank and AIG. So in a way, via FNM and FRE, the taxpayer is already monetizing the housing market.

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