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U.S. new and existing home sales move in opposite directions in April

05/24/2011 by Alex Carrick, RCD Canadian Chief Economist

U.S. new home sales in April increased 7.3% versus March, according to a joint press release from the Census Bureau and the Department of Housing and Urban Development. This is the second month of solid gain, following on the heels of March’s 8.3% climb month over month.

However, the annualized rate of monthly sales still remains precariously close to only 300,000 units, a historically low figure that the market has had great difficulty rising above for more than two years. Year-over-year new home sales in April were still deeply depressed at -23.1%.

The number of unsold single-family new homes in the latest month was -19.4% year over year and -2.8% month to month. The inventory of unsold homes is shockingly low at only 175,000 units. The number of unsold new homes divided by the current monthly sales rate yields a number-of-months inventory figure that has adjusted downward closer to where it should be.

The latest number-of-months inventory level of 6.5 is the second lowest since the housing market crisis began in 2006. It was only lower a year ago in April 2010 at 6.2. Even a minor gain in sales would bring the number-of-months inventory back to a historical norm of 4.5.

In the existing homes market, April’s sales “slipped,” according to the National Association of Realtors (NAR). They fell 0.8% month to month to settle at 5.05 million units, seasonally adjusted and annualized. In the latest month, they were nearly 13% below last April. However, last year at this time, a generous home-buyer tax credit was helping stimulate demand. The number-of-months inventory of resale homes has risen to 9.2. In March, it was 8.3.

NAR says two factors are keeping existing home sales lower than they need be: 1) ultra-conservative credit restrictions imposed by lending institutions; and 2) real estate appraisals that are being calculated below agreed-upon sales prices, leading to many cancellations of contracts. 

Current impressions to the contrary, there are several positives to note about the U.S. housing market. Prices may still go a little lower, but they are near to presenting all-time bargains. This becomes clearer when one considers the cost of new home construction is set to increase.

With capacity reductions in the forestry sector, prices could move up on little provocation. Canadian lumber producers are selling product to China and other countries in the Far East. Plus there will soon be larger orders placed to help with Japanese post-tsunami reconstruction.

Interest rates will never be lower. The Federal Reserve’s attention is being increasingly focused on the dangers of inflation should it continue with too-lax monetary policies. The experience of the early 1980s taught central bankers to be leery about ever repeating that set of circumstances.

Another positive is the interest in U.S. properties shown by foreign buyers – except the ongoing problems in Europe are providing a respite in the downward spiral of the U.S. dollar. Unresolved deficit and debt problems in Washington should be pushing the U.S. dollar down, especially with interest rates remaining so low while they are being increased almost everywhere else.

Instead, the problems of the euro are flaring up again. The consensus of investors seems to be that restructuring Greece’s debt will make it impossible for that country to borrow in any normal fashion for five to ten years. Therefore, either more austerity will be needed, which will prove hugely unpopular with the populace, or there must be a wide-scale sell-off of government assets.

In Spain, recent local elections were an opportunity for the common man to express resentment over government belt-tightening measures. The ruling Socialists lost a lot of ground. The newly elected may reveal that some local government financial situations are even worse than thought. Plus it will now be harder to take further steps to save money while unemployment exceeds 20%.

Some aspects of the U.S. housing market will be the subject of serious academic study in the years ahead. For example, what role has “no recourse” played in destabilizing the market? This is the practice whereby, in many states, lenders are not allowed to go after delinquent mortgage payers for the difference between the selling price of the house and the outstanding loan amount.

Typically, no-recourse loans (since they are riskier) are granted only for lower loan-to-value ratios, such as 50% to 60%. They are big in commercial markets. In residential markets, they almost always appear only in first mortgages, not seconds. Nevertheless, the out-sized drop in home prices (-33% nation-wide) has brought them attention in the latest housing market cycle.

There has been some correspondence between large price adjustments and “non-recourse” states. Some of the latter with “no recourse” are Arizona, California, Washington D.C., Washington State, Oregon, New Hampshire, Nevada and Texas (only to some degree for the latter two).

One must acquire legal expertise in these matters, depending on where one lives. “Anti-deficiency statutes” in some states determine the degree to which lenders do or do not have “recourse” against borrowers. Another factor also plays a role in determining the financial commitment of the homeowner - whether or not the state requires judicial foreclosure (i.e., court action) or non-judicial (only requiring public notices that follow legislated guidelines.)

“No recourse” may have played a significant role in setting the stage for the housing market collapse. Since it limits liability, it promotes bidding wars, leading to speculative price bubbles.

While it is hard on lenders, it does provide a cushion to many individuals and families. In “no recourse” states, it can sometimes be clearly to the homeowner’s advantage to mail in the keys if they are not able to make the monthly payments. Such actions are labeled “strategic defaults.”

There can be huge savings in monthly payments. Furthermore, administrative detail and a reluctance to take action have left some delinquent homeowners in their houses an extra eight months. This may be a partial explanation for how U.S. retail trade has come back so quickly.

U.S. new home inventory - April 2011
U.S. new home inventory - April 2011
Based on seasonally adjusted data (single-family housing).
Data source: U.S. Census Bureau and U.S. Department of Housing and Urban Development.
Chart: Reed Construction Data - CanaData.
U.S. new homes sold - April 2011
U.S. new homes sold - April 2011
Based on seasonally adjusted data (single-family housing).
Data source: U.S. Census Bureau and U.S. Department of Housing and Urban Development.
Chart: Reed Construction Data - CanaData.

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