2/26/2010
By David Urani, Research Analyst

There has been a lot of housing news so far this week, and overall you'd have to say that it's all been disappointing. The Case Shiller report showed that prices in December were flat to slightly down month to month. It was a sign that even though the nationwide tax credit for new home buyers was extended and expanded, the demand for housing may have hit a snag. Home prices were down in most regions across the country, which has been a trend for the past few months, except surprisingly in some of the hardest hit regions (California, Nevada). These regions are likely benefitting from rock bottom pricing and high amounts of bargain buying firming up those markets slightly.

The latest demand data points show that housing demand has certainly stalled its improvements from previous months. Firstly, mortgage applications showed an 8.5% decline week to week last week, representing the third week in a row of decreases. The worst part of the release, however, was purchase applications which fell by 3.6% and hit its lowest level since 1997. This scary piece of info came along with the new home sales report, which showed an 11% decrease month to month in January and hit a new record low of 309,000 sales annually. It was surprisingly bad, especially considering the Street's consensus (and we) were looking for a modest increase as the tax credit extension came back into effect. The new home sales report also showed more falling prices and a bump higher in supply.

The latest existing home sales report showed a 7.2% annually adjusted decline month to month in January. The poor sales results included declines of 10.9%, 6.9%, 7.4% and 5.2% in the Northeast, Midwest, South and West, respectively. Like the new home sales report, existing home sales seem to have hit a significant downtrend in recent months, despite the deadline, and subsequent revision, of the nationwide tax credit. The one semi-silver lining to the existing sales report is inventory, which posted a slight 0.5% drop from December to January. It is vitally important that foreclosures do not overtake demand again and flood the market. The good news is that even though sales are weakening again, the market is keeping its head above water. Nonetheless, we have to wonder if sales can get any slower before inventory begins to build up. In addition, there are still many potential hazards in place on the foreclosure side and all the data so far suggests the problem has not been resolved at all yet, even with the Obama Administration's $75 billion mortgage modification plan.

Now that we've gotten the horrendous sales data out of the way, its time to turn to what all could have gone askew in these releases. The purchase applications is concerning, but we should note that cancellation rates on home sales have been improving, indicating that although there might have been fewer inquiries for new homes, a higher percentage of them are being converted to sales. Turning to the new home sales data, it is certainly worrisome, but it should be noted off the bat that the report has a 14% margin of error. The number could easily be revised higher next month, although it will still surely still show a decline. Secondly, seasonal adjustments are very hard to get a finger on. On a non-seasonally adjusted basis new home sales decreased by only 3,000 month to month, which is not as much of an end-of-the world figure as the headline result may suggest. It's a similar story for existing home sales.

In the end, it's hard to see any of this data in a positive light. One factor I am considering is the idea that perhaps the initial November tax credit deadline caused a pull-forward of a large amount of home demand. In essence, its possible that most of the people who were planning on purchasing a new home did so before the first tax credit deadline, and the extension may only be running on fumes. That's on top of a continually weak employment situation. Still though, we have to wonder what will happen when the deadline expires again in April. Many believe there will be a significant drop-off in sales but at this point, but considering the consistent drop in demand that began in November, I am inclined to think that maybe we have already squeezed out most of the extra demand with the initial tax credit program. Another extension may not be much of a help unless we make it bigger and better, but that would just be reckless.

Therefore, we suspect that housing demand will stay subdued for several months with the exception of a bump higher in April as buyers finalize sales before the last deadline (assuming it's not extended again). In order for sales to truly make a large-scale comeback, we are going to need employment to return, and so far it appears we are still a ways off from that happening. Meanwhile, there are still many hurdles in the way in terms of foreclosures and pricing, including the Obama mortgage modification plan that may simply be delaying a large amount of foreclosures that are going to go into the pipeline in the coming months. Therefore, prices are likely to fluctuate, but be somewhat flat over the next several months as sales and foreclosures mostly balance each other out on the supply side. However, investors be cautious; the latest round of reports smells eerily like a double dip recession.

David Urani
Wall Street Strategies