MARKET RECAP
Glad tidings were in short supply in housing this past week. Existing home sales posted at a Dickensian 4.43 million annualized units in October, a 2.2 percent decline from September's figures. The median national sales price (admittedly, a meaningless number to most of us) slipped to $171,100, while the average price (equally meaningless), likely reflecting firmness at the top-end of the market, edged two tenths higher to $218,700. Inventory eased to a 10.5-month supply.
Unfortunately, the news on new-home sales was even more Scrooge-like than that for existing-home sales. New-home sales fell 8.1 percent to a much lower-than-expected annual rate of 283,000 units. The median price of a new home sank 13.9 percent to $194,900, posting the lowest level in seven years, while the average price fell 8.0 percent to $248,200. Supply remains heavy – at 8.6 months – and not because of the number of new homes on the market, which at 202,000 is the lowest in 42 years, but because of a dearth of buyers. There are simply too many good bargains elsewhere.
The foreclosure market remains the go-to bargain bin. CoreLogic reports that the shadow inventory of residential properties, as of August 2010, reached 2.1 million units, or eight months worth of supply, while total months’ supply of unsold homes was 23 months, up from 17 months a year ago. Typically, a reading of six to seven months is considered normal, so the current total months’ supply is roughly three times the normal rate.
Nonetheless, we continue to believe home prices have stabilized and that the foreclosure overhang will be dealt with in an orderly manner. We also continue to remind everyone that real estate markets are local markets, and much of the national data is still skewed by the truculent cold spots (namely the warm, dry environs of the Southwest). If the big picture is considered, the housing market after the post-April plunge has actually clawed back significant chunks of lost ground.
We think more lost ground will be reclaimed if the trend in the unemployment ranks continue. Applications for unemployment benefits fell more than forecast last week to the lowest level since July 2008, adding to the evidence that the labor market is healing. We are encouraged by the fact that we are seeing consistent job gains in the private sector. If the trend continues, good tidings will assuredly spill over to the housing market.
At least the mortgage market offered some good cheer this past week. After the recent rate spike, the holiday-shortened week was marked with stable rate quotes. We doubt it will last, though. Given the uncertainty surrounding the Federal Reserve's quantitative easing strategy, we expect rate volatility to rise, with a bias to moving higher.
Very Important. November's unemployment trend portends a higher-than-expected increase in payrolls.
Will the Wealth Effect Work?
Federal Reserve Chairman Ben Bernanke claimed, in a Washington Post op-ed, "higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending." Mr. Bernanke was referring to the “wealth effect,” which posits that the wealthier we feel, the more we will consume and invest.
There is some truth in the theory. We experienced the wealth effect in the housing market in the early-to-mid 2000s (also in the late 1990s with technology stocks). More money and lower interest rates pushed home prices perceptibly higher, so people felt wealthier and spent more. Of course, there was a downside: People wound up feeling too wealthy and too self-assured that the upward price trend would continue unabated. It didn't, and the fallout hasn't been pleasant.
The Fed's agenda to boost asset prices by inflating the money supply is always tricky business. Nevertheless, there could be an upside for us: We deal in nominal (post-inflation) prices and the Fed is in an inflationary mode, which should help stabilize housing prices in nominal terms. The downside is that the more money that's injected into the economy, the more unpredictable lending markets can be, which is why the risk of waiting to borrow or to buy continues to grow.