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Another Sign Bottom is Behind, House Sales Contracts Rise 14%

Contracts for the sale of existing homes rose 15.1% month to month in February, according to data reported today by the real estate brokers lobbying organization. Sales were 14% above the level of February 2011, continuing the rebound in housing market sales.

To keep this in perspective the number remains down 37% from the peak February level reached in 2005 at the height of the housing bubble. In addition reported contract failure rates around 33% in February were well above the 9% reported in 2011. Buyers are still having trouble running the financing approval gauntlet, with the result being that the gain in final sales will be much smaller than the 14% year to year gain in contracts. These contracts will settle mostly in April. When the final sales numbers for April are reported in May, the gain should be in the 8-10% range year over year if the fallout rate is similar to the February rate.

At the same time, cash sales are running 33% of total sales. Demand from buyers who do not require or use financing is helping to stabilize prices and even push them higher in some markets. For example, median February closed sale prices of single family houses in Florida, the poster child for the bubble and collapse were up 7.2% year to year. Condo and townhouse prices rose 15.9%.  Deny that, bottom deniers. Florida also saw huge increases in contract volume in February. You can’t credit or blame the weather for that. It’s Florida, after all. February is always nice in the state’s biggest markets.

As usual, the mainstream media continue to report only the meaningless and misleading seasonally massaged data, which showed a 0.5% decline nationally month to month. I am only interested in the actual numbers. In that regard, the actual February gain of 15% compares favorably with the 11.3% gain in February 2011 and 10% gains in 2008 and 2009. In 2010, the government was running a  taxpayer hosing boondoggle that resulted in a 20% February gain, that was followed by a sales collapse when the giveaway ended in April. Except for that, the February 2012 data is the best February in 11 years and probably longer. Even during the bubble years, no February was as good. So it is hard to understand how the seasonally fudged data manages to come out as a decline. It’s worthless garbage.

A benefit of the higher rate of sales and a trend of sharply falling active for-sale inventory is that the inventory to contracts ratio has fallen to 5.4, which is the lowest February level since 2006. The reduced inventories have had an impact in causing prices to firm up over the past 12 months.

Existing Houses Inventory to Sales Ratio Chart- Click to enlarge
Existing Houses Inventory to Sales Ratio Chart- Click to enlarge

A large part of that was probably due to the unusually warm weather (except in Florida and other sunbelt states). This may have stolen demand from March and April. It will be interesting to see if the numbers for those months hold up. If they do, it would be more evidence that housing has bottomed. However, even if it has, we should be under no illusion that housing will ever recover to its past bubble levels in the biggest bubble markets. But it would not be surprising to see transactions rise in value at or above the inflation rate. And some markets where inventories are tighter will see new highs.

A caveat, applying mostly to sellers, is that transaction volumes will remain low by historical standards. This is a much smaller market now and will remain smaller for years to come as full time employment barely grows from low levels.

This smaller, historically depressed market will mean that mortgage portfolios will be far slower to respond to improvement. Foreclosed and delinquent mortgages will continue to weigh heavily on a financial system that refuses to write mortgage values down to appropriate levels. Fannie and Freddie will continue to hand off billions in losses to US taxpayers year in and year out for a generation.

Meanwhile, most of the much feared shadow inventory will become increasingly non marketable as it deteriorates physically, or is concentrated in areas where virtually no market exists. For most markets in the US, shadow inventory is not a threat. It is a threat primarily to the institutions that hold it, Fannie and Freddie in particular, which means that we, US taxpayers, will be footing the bill for years to come. _______________

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  1. Mark H

    You are really going to make a bottom call with more stimulus hitting housing dead-on than ever before. A lot of people didn’t believe the 2010 tax credit was creating non-durable incremental and pulled forward demand. Then, sales literally fell off a cliff. With rates sub 4% very little of today’s housing market activity is durable in my opinion. It’s a dash-to-trash we are experiencing by first timers and investors who are afraid of being put out of business by relentless headlines of new HAMPs, HARPs, HAFA’s, servicer settlements, and bulk REO to rental schemes. The weather was only one of many transitory benefits this winter.

    Funny, this housing market’s supply demand fundamentals have been so manipulated for so long, people don’t even recognize transitory stimulus any longer.

    The next big housing market “oh crap” will come soon when everybody realizes at once that the very “distressed” inventory they have been trying to keep off the market for the past four years is the only type of supply that investors and first timers — who control this housing market — want. It will be interesting to hear the rationalizations for why no inventory led to the next leg down in housing sales volume and prices.

  2. Lee Adler

    Let’s say prices go up 3-4% per year. You really think that’s going to bring inventory out of the woodwork? Not a chance. Every time prices pop, the inventory will come out and we’ll get a decline, but my bet would be higher lows and higher highs at very low rates of increase. But if the Fed goes balls to the wall and lets inflation run wild, housing could surprise and outrun the naysayers and skeptics.

    That’s my gut talking. I’ve been around real estate for a long time first working in the business in 1971, so there’s lots of information packed away in my subconscious. Time will tell whether it’s right or not.

  3. Kirk Kinder


    In your last comment, you said housing could surprise if the Fed lets inflation run rampant. I guess you are assuming wages will keep pace with inflation. Otherwise, inflation, and rising rates, would decrease affordability.

    Good article though. I don’t know if housing is improving, but it does look as if we have a stabilization taking place at the very least.

  4. Lee Adler

    There are a lot of ways this could break. As long as the market is reduced in size, prices can continue rising even if wages don’t keep pace– to a limited extent. Again, I’m envisioning very slow increases in a jagged trend, with some areas holding up better than others. My guess would be that wages do pick up. A lot could go wrong. Even, God forbid, I might be dead wrong, and the market could ratchet lower. That’s just not my guess at this point based on the incipient trends now under way.

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