Existing home sales plunge amid evidence most houses sold in distress

The National Association of Realtors® announced today that existing home sales dropped a hefty 7% in January, adding further evidence that the resurgence of the housing sector is stalling. Wednesday, we saw a very soft new home sales number. Now, we see more softness in existing home sales as well.

Their press release stated:

Existing-home sales fell in January but are above year-ago levels, according to the National Association of Realtors®.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – dropped 7.2 percent to a seasonally adjusted annual rate¹ of 5.05 million units in January from a revised 5.44 million in December, but remain 11.5 percent above the 4.53 million-unit level in January 2009.

Lawrence Yun, NAR chief economist, said there is still some delay between shopping and closing that affected current sales. “Most of the completed deals in January were based on contracts in November and December. People who got into the market after the home buyer tax credit was extended in November have only recently started to offer contracts, so it will take a couple months to close those sales,” he said. “Still, the latest monthly sales decline is not encouraging, and raises concern about the strength of a recovery.”

Total housing inventory at the end of January fell 0.5 percent to 3.27 million existing homes available for sale, which represents a 7.8-month supply² at the current sales pace, up from a 7.2-month supply in December. Raw unsold inventory is 9.6 percent below a year ago, and is at the lowest level since March 2006.

While you often get the feeling that the NAR likes to put a positive spin on things, it is undeniable that raw unsold inventory has declined. And that’s positive from a home seller’s perspective.

Nevertheless, the drop in existing home sales is based on contracts signed in late 2009. Despite the NAR’s spin on tax credits, there are no indications that sales have picked up significantly since then.  In fact, the snowy weather in February would suggest sales for this month, at a a minimum, will be very weak. Let’s wait and see.

Moreover, I should point out that the canaries in the coalmine in California indicate that most sales are now being done out of distress.

Marilyn Kalfus at the O.C. Register writes:

• Nearly three-fourths of sellers were concerned about the buyers’ abilities to get a home loan, an increase from 54 % in 2008.
• 63% of homes fell out of escrow prior to closing. Nearly 70% of sellers cited “buyer could not get an acceptable mortgage”  and more than 60%  said “buyer backed out” as the main reasons the home fell out of escrow.  Other reasons included: Buyer’s remorse (26%); “lender withdrew and did not fund” (24%); and “home prices continued to decline” (18%).
• Once the home did sell, half of sellers reported escrow did not close on time in 2009, compared with 36% in 2008.
• On average, homes sold for $20,958 less than the original asking price in 2009, while the median difference between the selling and listing price was $32,315.
• The list-to-sold-price ratio was significantly larger between first-time sellers ($30,000 below list price) and sellers who had previously sold a home ($8,000 below list price).
• The percentage of first-time sellers grew to nearly half of all sellers (44%) in 2009, a 33% increase from 2008, and nearly three times the 2007 percentage of 15%.

In fact, she explains that a recent survey by the California Association of Realtors has shown that 67% of California home sellers who sold last year could not pay their mortgages. That’s enormous. Given the impending resets in Option ARM mortgages, it seems reasonable to conclude that distressed sales will continue to drive this market. On the buyer side, transactions in California in particular seem to be driven by a combination of low interest rates and a re-entry of professional and speculative investors. See my post “House flipping back in vogue in North County San Diego.”

My conclusion is that, while the housing sector has stabilized, the fundamentals are still poor. The present 8 months inventory of existing homes is a large number by historical standards. Price-to-rent and price-to-income ratios are still well above the long-term median in most of the previous bubble markets. And finally, the sector is being propped up by a combination of low interest rates and federal reserve intervention in the mortgage markets. In my view, the risk is still to the downside – both for home sales and prices and for the share prices which depend on them.