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Economy in Brief


by Bob Brusca Existing Home Sales S(t)ink May 25, 2007

Existing home sales sank, offsetting their spurt from earlier in the year. But unlike in the new home sales report, existing home prices are much firmer with median prices off by just 0.8% Yr/Yr – not off by 10%.

Price is always a double check on the degree of stress in the industry. And when it comes to existing home sales there is no intrinsic growth rate for the sector that we are looking to achieve with price cuts or any other incentives. Existing home sales do not expand the housing stock; they simply transfer ownership within the existing population. New homes and housing starts contribute to GDP. Starts and construction spending are the direct contributors while new home sales transfer built homes (or to-be-built homes) out of inventory into final sales. For now it is housing starts and new home sales that are strong. Housing permits and existing sales are weak.

Since builders are in the business of building they must make sales to survive. Existing home sales are another matter. Some sellers are testing the waters. Some will sell if they get an unrealistically good price and some are truly motivated and need to sell within some fixed time frame. For these reasons it is hard to gauge what the weakness in existing home sales really means.

It could be the failure of homeowners to cut prices as builders have. It could also be that if you smooth out the early fluctuations you find that nothing really has changed. There is no real acceleration in weakness.

If we combine new and existing home sales and plot them against the Mortgage Bankers purchase applications index, we find that the applications index is swinging up while the sales index has some volatility and looks to be leaning down. But if we use the 3-Mo moving average of home sales the two series give us signals that are much more similar and much more stable (see second chart).

On balance, housing is still quite fickle and its trends are hard to pin down. But the sectors we care about most are the strongest: new home sales and starts. We have already argued that permits weakness is flawed since the permits-to-sales ratio had grown way out of proportion. The current weakness in existing home sales is similarly dispatched but with a moving average that removes the 2007 peak as well as the recent weakness. Once that is done we see the index for mortgage applications ‘to purchase’ is moving higher - an important gauge since applications cost money. Existing home prices are still stable, showing little erosion. New home prices were cut deeply but that helped to move product. On balance, the housing market seems to be functioning well. It is neither strong nor weak and still has its stresses. It is muddling. …and that is an improvement!

Existing Home Sales Summary
(Existing Home Sales: In Thousands -- National Association of Realtors)
Month Total North-East Mid-West South West
Apr.07 5,990 1040 1380 2380 1190
Mar.07 6,150 1140 1390 2410 1210
Feb.07 6,680 1220 1560 2570 1320
Jan.07 6,440 1060 1520 2540 1320
Dec.06 6,270 1070 1460 2490 1250
Nov.06 6,250 1080 1420 2470 1280
Oct.06 6,270 1030 1420 2520 1300
Sep.06 6,230 1040 1420 2520 1260
Aug.06 6,310 1060 1430 2520 1290
Jul.06 6,320 1050 1430 2530 1320
Jun.06 6,490 1090 1490 2550 1360
May.06 6,680 1140 1510 2610 1410
Apr.06 6,710 1140 1560 2610 1410
Percent Changes: Existing Home Sales
Mo/Mo% Total North-East Mid-West South West
Apr.07 -2.6% -8.8% -0.7% -1.2% -1.7%
Mar.07 -7.9% -6.6% -10.9% -6.2% -8.3%
Feb.07 3.7% 15.1% 2.6% 1.2% 0.0%
Jan.07 2.7% -0.9% 4.1% 2.0% 5.6%
3-Mo:ar -28.0% -7.5% -36.8% -25.2% -39.4%
6-mo:ar -8.9% 1.9% -5.6% -11.1% -16.9%
1-Year -10.7% -8.8% -11.5% -8.8% -15.6%
Prices: Median Prices
One Mo: 1.6% 0.0% 3.5% 0.7% 1.0%
One Year: -0.8% -5.8% 1.9% -0.3% -2.1%
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