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Existing Home Sales Flat In May

The following is taken verbatim from the National Association of Realtors press release today. I have read between the lines and translated the press release for the benefit of anyone who might be tempted to take the Realtors words at face value.

May Existing- Home Sales Show Market is Under Performing WASHINGTON, June 25, 2007 – Existing-home sales were essentially unchanged in May, according to the National Association of Realtors®.

Total existing-home sales – including single-family, townhomes, condominiums and co-ops – eased by 0.3 percent to a seasonally adjusted annual rate1 of 5.99 million units in May from an upwardly revised pace of 6.01 million in April, and are 10.3 percent below the 6.68 million-unit level in May 2006.

Lawrence Yun, NAR senior economist, said the market softness is understandable. “I think psychological factors are currently the biggest drag on the housing market, in addition to a disruption from tighter credit for subprime borrowers,” he said.

Rubbish. The problem is one of supply, not demand. Demand is exactly where it should be pricewise given the typical qualifying ratios, and household income estimates I reported in the WSE Pro Housing Market Update (for subscribers only, but to be publicly released in two weeks). Financial pressures are causing a continuing explosion in supply. The level of sales isn’t too bad, but with supply building, prices will break at some point in the not too distant future.

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“Household formation has slowed dramatically since late 2006, implying that many people are doubling-up – they’re adding roommates or moving in with parents.

As was widely anticipated by anyone looking at the data for the last several years. That’s part of the supply issue. By the way, the Census Bureau is reporting year over year increases in vacant rental inventory.


“The market is underperforming when you consider positive fundamentals such as the strength in job creation, economic growth, favorable mortgage interest rates and flat home prices. It appears some buyers are simply waiting for more signs of stability before they get serious about getting into the market.”

In other words, faced with an ever increasing supply of listings on the market and evidence of falling prices, why would anyone buy now if they don’t have to?

The national median existing-home price for all housing types was $223,700 in May, which is 2.1 percent below May 2006 when the median was $228,500. The median is a typical market price where half of the homes sold for more and half sold for less, but there is a temporary downward distortion in the current national comparison because sales have shifted away from many high-cost markets in the past year.

The subprime collapse and tightened standards for subprime borrowers suggest that just the opposite is true, that the low end isn’t holding up, and that therefore, if anything current price data is skewed up, not down.

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 6.26 percent in May, up from 6.18 percent in April; the rate was 6.60 percent in May 2006.

NAR President Pat V. Combs, from Grand Rapids, Mich., and vice president of Coldwell Banker-AJS-Schmidt, said higher inventories are helping to offset an affordability impact from higher mortgage interest rates. “Although mortgage interest rates are trending up, they are historically favorable,” she said. “The good news is buyers have more negotiating power with a fairly large supply of homes available in much of the country. Buyers who’ve been on the sidelines may want to take a closer look at current conditions in their area – if they wait for sales to rise, their choices and negotiating position won’t be as good as they are now.”

And if they don’t wait, they are going to get the short end of the stick for sure from people like Ms. Combs, whose only allegiance as a Realtor is to the seller. Very very few of them sign contracts with buyers to act as buyer’s agents.

Total housing inventory rose 5.0 percent at the end of May to 4.43 million existing homes available for sale, which represents an 8.9-month supply at the current sales pace, up from an 8.4-month supply in April.

This is stunning. May is supposed to be the peak month for sales. Inventory should be coming down, not rising. The 9 month supply, as bad as it sounds, obscures the fact that only the lowest price listings will sell. Those who insist on listing at yesterday’s prices will not sell. For them, the time on market will be infinite. When sellers who have to sell realize that the only way to sell will be to price below their neighbors, the vicious spiral will start in earnest. And watch out for that coming wave of institutional REO sales likely to inundate many markets.

Single-family home sales slipped 0.8 percent to a seasonally adjusted annual rate of 5.20 million in May from an upwardly revised 5.24 million in April, and are 10.8 percent lower than a 5.83 million-unit pace a year ago. The median existing single-family home price was $223,000 in May, which is 2.4 percent lower than May 2006.

Existing condominium and co-op sales rose 2.6 percent to a seasonally adjusted annual rate of 790,000 units in May from 770,000 in April, but are 6.7 percent below the 847,000-unit level in May 2006. The median existing condo price was $228,200 in May, down 0.4 percent from a year ago.

I think the most important factoid amidst all this data is this: The inventory to sales ratio is now 8.9. That means that this month only 11% of those attempting to sell will be able to do so. The other 89% will not sell.

Current price levels are unrealistically high, and in no way represent what an equilibrium price might be. Inventory will continue to grow because at current prices the sales rate will not cut into the glut, and the pressure will continue to be on prices to come down. At some point sellers will be forced to capitulate an prices will break. Only then will the inventory oversupply begin to be absorbed, and only then can we even begin to estimate when a bottom might be reached. As long as inventories are rising there’s no way to know how low and for how long prices might fall.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both analytical and sales capacities. Prior to starting the Wall Street Examiner I worked as a commercial real estate appraiser in Florida for 15 years. I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. My perspective is not of the Ivory Tower. It is from having my boots on the ground and in the trenches of the industries that I analyze and write about today. 

  3 comments for “Existing Home Sales Flat In May

  1. Frothy Conundrum
    June 25, 2007 at 11:36 am

    Nice demolition work, Lee.

  2. CCG
    June 25, 2007 at 2:38 pm

    “‘Buyers who’ve been on the sidelines may want to take a closer look at current conditions in their area – if they wait for sales to rise, their choices and negotiating position won’t be as good as they are now.'”

    Disgusting. Contemptible. Hopefully this crash does to the NAR what 1929 did to Wall Street – namely, force them to apply the disclaimer “Past Performance Is No Guarantee of Future Performance” and muzzle these horses–t “buy now or be priced out forever” fear tactics.

  3. sullymandias
    June 25, 2007 at 11:55 pm

    awesome article.

    here in boston there are plenty of new condo buildings that are just coming on line now.. further and further out into the suburbs.. hundreds of units..

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