6/25/2009
By David Urani, Analyst

The latest round of home sales data is in, and mixed signals were the name of the game for May. Whereas previous months looked decent on the surface but then soured the longer we looked at them, the latest data appeared disappointing at first but perked up upon further inspection. Both new and existing home sales came in below consensus expectations, which was the first thing everybody noticed. In a sense, previous market sentiment that home sales were bottoming has been tempered a bit.  On the other hand, grave worries about the impact of foreclosures and ongoing price pressure have eased; albeit, very modestly.

Existing home sales increased for the second month in a row during May, at a rate of 2.4% annualized to 4.77 million; the consensus was looking for 4.82 million.  Sales were characterized by month to month boosts of 3.9% and 9.0% in the Northeast and the Midwest, respectively, while remaining flat in the South and decreasing by 0.9% in the West; sales of single family units increased by 1.9%. It was somewhat strange to see annual sales decrease in the West, although we should note that the numbers are annualized to take seasonal effects into account; with the extraordinary conditions in the housing market today including tax credits, low prices, other incentives etc., seasonal effects are being mitigated to a certain extent.

On a non-adjusted basis, sales increased by 7.8% month to month, with increases in all regions (including the West). We are somewhat worried about the West in the months ahead though, given that California was seeing a boost from a $10,000 state-enacted tax credit for home purchases; as of June 10, $88.3 million of the $100.0 million program was used up and when it ends, demand may falter.  Given the state of California government's fiscal problems these days, the possible extension of the tax credit is questionable.

We were glad to see inventory come down by 3.5% for the month, especially after increasing by 7.9% in April; there is currently a 9.6 month supply on the market.  Prices showed some signs of firming up, with the average increasing by 3.3% to $215,600, although the number is volatile because of mix changes month to month, and furthermore the nationwide $8,000 tax credit may be bumping up base prices. 

New home sales decreased by 0.6% month to month to an annualized rate of 342,000, falling well short of the consensus estimate of 360,000. It should be noted that the April numbers were revised down to 344,000 from 352,000, so the drop down to 342,000 wasn't as bad as it first looked.  But, still, the Street was looking for an increase, and it simply didn't pan out. That being said, there were some silver linings in the new home sales report. A primary point of interest is that the only region to have lower sales compared to the previous month was the South (declined by 8.5%). Otherwise, the Northeast, Midwest and West increased by 28.6%, 18.6% and 1.3%, respectively. Also, similar to the existing home sales report, supply came down and prices seemed to firm.  However, shifts in geography and other factors can add volatility to the new and existing home price numbers, so we are not quick to rely on those numbers.

When tracking prices, indexes like the Case-Shiller and the FHFA index are generally more reliable, as they are more methodical and adjust for certain variances, although they are a month behind the other data. The FHFA index for April showed prices came down from March by 0.05%, indicating a slowing rate of decline than in previous months. But still, we are not ready to put our faith behind the report given that it only tracks homes with mortgages backed by Fannie Mae and Freddie Mac, plus as we stated earlier, tax credits are largely being applied to such homes which could be inflating the base price.

Combining the drop in new home sales with the smaller than expected gain in existing home sales, and there is a somewhat worrying indication that the demand surge we were seeing in the works is ebbing. A major factor in our opinion is the fact that mortgage rates are on the rise. After sinking below 5.0% for almost three months between March and May, rates are now hovering around 5.5% again. Essentially, when mortgage rates rise, the price of the home goes up, as monthly payments become larger. And, unfortunately, this could put the pressure back on prices heading into this month and beyond.

The main question in our minds heading into the June number releases (at the end of July) will be how much price discounting was needed to maintain the upward momentum in sales? My inclination is to expect more price pressure ahead, especially since mortgage rates are trending higher. Not to mention foreclosure filings in May were still at the third highest rate on record (behind March and April), and this continues to affect supply and consumer confidence.