This Week in Housing

by Annaly Capital Management

This was a relatively data-filled week for the housing market. We’ll start with the good news.

The National Association of Realtors (NAR) reported that existing home sales rose more than expected in December 2010, to a seasonally adjusted annual rate (SAAR) of 5.28 million homes. Also reported was the level of existing home inventories for the month, which aren’t seasonally adjusted.

Dividing inventories by sales, the enterprising housing analyst can calculate the months of supply, which is currently 8.1 months (but it’s also reported in the NAR press release, so no enterprise is necessary). However, inventories are not seasonally adjusted, which typically creates a decline in months of supply during the winter months. As you can see in the chart, existing home sales have jumped back to more “normal” pre-bubble levels of a decade ago. Inventories, while improving over the past 3 years, are probably still near double the levels of a decade ago. This oversupply is having a predictable effect on prices, which fell 1% year-over-year. Another explanation was offered by Lawrence Yun, chief economist for the NAR:

“The modest rise in distressed sales, which typically are discounted 10 to 15 percent relative to traditional homes, dampened the median price in December, but the flat price trend continues,”

Distressed sales accounted for 36% of all sales, up from the previous month (33%) and from the year ago month (32%).

On Monday the National Association of Homebuilders (NAHB) released their home builder sentiment index. The reading for January was stagnant at 16, and has basically been bumping along a 3 year bottom. Why, with existing home sales at more normal levels, are the builders still so dire? The following day, we got the answer. On Tuesday the US Census Bureau released data on new housing starts.

It’s no wonder the builders’ confidence has yet to recover; there’s no building to be done. It appears that the oversupply of existing housing is dampening something else besides home prices. Typically the homebuilding sector supplies a natural tailwind coming out of a recession, as evidenced by the many V-shaped bottoms over the previous 50 years. To date, residential construction activity has not enjoyed any recovery to speak of. Building a new house adds to economic activity, while the effect of the sale of an existing home has a much more minute effect.

Next week we will be on the lookout for home price data from S&P Case-Shiller and the FHFA, as well as an update on pending and new home sales. The initial read on 4^th quarter 2010 GDP will be released on Friday, and the expected 3.5% growth likely doesn’t contain much help from the residential housing sector. Justifiably so, it seems.