US Existing Home Sales Jump – Markets Taken by Surprise

Existing homes sales had been expected to drop in February. Instead they jumped by 3.9% and that was after a gain of 2.7% in January. What’s up? Housing starts were off sharply in January then up in February but existing home sales are subject to different forces as well as some of the same dynamics. Weather was deemed to have been a factor for housing starts. Admittedly weather is more of a factor for house-building than buying. Moreover existing home sales are on a different timeline. Starts and new home sales book at the time of the transaction’s inception. Existing home sales book at the transaction’s completion. Since about 70% of the population owns homes, you probably know what this means, first hand. The lag on existing home sales depends on the length of time from the initial signing of the contract through to the closing, a period that requires appraisals, much document preparation and eventually a bank completing a credit decision and a meeting with all interested parties. So we had expected existing home sales to reveal conditions more like January than like February. WRONG!

Perhaps the larger surprise was that existing home sales were strong across the nation. Sales were flat in the West and up everywhere else on the month. Over periods of three months and six months, growth rates for existing home sales are firm to strong. Year/year, three of four national regions show sales lower but the Northeast (a region where bad weather is most likely to be a depressing factor at this time of year) oddly is up (3.4%). The Midwest is barely lower at -1.9%. The South is off by 4.4% and the West by a much larger 9.6%. (see table below).

At the same time, prices have been softening. While using February as an end point probably exaggerates the trend decline in prices over the past 20 months, prices are falling at a 3.3% annualized rate for that period. But the point is that prices have been softer and lower prices have not seized up the market but rather lubricated it.

Existing home prices remain weak across regions. For housing starts and new home sales (the latter not yet available for this month) builders have a cost element and a margin they try to protect and so prices may not have so much flexibility. But with the run-up in house prices over the last 5-6 years or more, homeowners have a lot of equity, in general, and that gives them the flexibility to make deals. And if you are a seller/buyer this does not really hurt you. A seller/buyer is an existing home seller who is also looking to buy somewhere else – as most are. This sort of transactor learns quickly that what you lose on your house sale (compared to the profit you might have made when house prices were at their peak) you make up for when you buy and get a good deal on the ‘other end’. So the drop in the price for existing homes probably exaggerates the ‘pain’ being inflicted on sellers.

Different strokes for different folks…Diminishing weakness for starts and permits but outright strength for existing home sales.

Prices of land in Japan rose 0.4% from January 1, 2006, to January 1, 2007, according to a report issued late Thursday in Japan by the Ministry of Land, Infrastructure and Transport. This is the first increase in land prices since the year to January 1, 1991, that is 16 years. Over that period, land values fell by more than half, by 52.1%, to a level last seen in 1982. The latest increase is, of course, hardly anything, but this long, excruciating decline seems to have ended, in still another sign that the Japanese economy, however haltingly, may be making further progress toward sustained expansion.

Commercial business sites showed the largest gain, up 2.3%, with a substantial 9.4% rise in the Tokyo market. These prices had also risen last year in Tokyo, by 1.0%. Residential land throughout Japan edged higher in the latest year, this by just 0.1%, with Tokyo up 3.6%, Osaka 1.8% and Nagoya 1.7%. While these three major metropolitan areas are seeing renewed strength, prices of residential sites in "local districts" were still down, by 2.7% on average. Values of so-called "prospective housing land" were also still weak, down 4.3%, implying that not much enthusiasm for new housing development has emerged. And industrial building sites, too, are still declining in value, although the decrease of 1.8% to January 1, 2007, is the smallest reduction since 1992; these values did increase in the latest reading for the three main metro areas that the Land Ministry reports. Further, property values for light industry, or "quasi-industry", did rise, also due to gains in the big cities.

Back in the 1980s, land prices were skyrocketing, and owing to the organization of Japanese real estate holdings, it was thought that the "tradable" supply of land was so small and demand for land in the vibrant Japanese economy so large that property prices might never fall. But the tight money policies in 1989 and 1990, meant to curb stock speculation as well as that in real estate, did result in a downturn in land values. Over time, it seemed the persistent cuts in property values would then, ironically, never end. But apparently they have. This is uneven, as we have seen, and has yet to pick up in the outlying, "local districts". But the first forward steps have been taken.