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Despite the average 30-year fixed mortgage rate falling to 4.45% at the end of July, weak demand from home buyers continues to pressure home sales and prices.
Sales of existing homes dropped in July for the third time in four months, declining 3.5% to a seasonally adjusted annual rate of 4.67 million units, the National Association of Realtors (NAR) reported on August 18. Existing home sales are currently 21% above their level a year ago, but that's due in part to the expiration of the U.S. government's home buyer tax incentives, which depressed sales last July. Existing home sales are now 35.6% below their September 2005 peak.
Existing condominium and co-op sales were flat in July, and single-family home sales declined 4%. First-time home buyers accounted for 32% of sales in July, compared with 31% a month earlier. Cash transactions made up 29% of July sales.
The median home price declined by a seasonally unadjusted 0.9% in July, to $174,000-4.4% below the July 2010 level. Prices increased in the Midwest and West regions, but declined in the Northeast and South. Prices were down in all four regions year over year.
In July, the official existing home inventory declined 1.7% to 3.65 million homes from 3.72 million in June, while the months' supply increased to 9.4 months from 9.2 months in June at the current sale pace, according to the NAR. In addition, distressed sales declined to 29% of total sales in July from 30% in June.
Pending home sales, which usually lead existing home sales by one to two months, were up 2.4% in June and 8.2% in May. As a result, August's existing home sales are likely to pick up, which would be a boon to the struggling housing market.
New Home Sales Drop for the Third Straight Month
The economic slowdown continues to hinder new home sales, which dipped for the third straight month in July. Sales declined 0.7% to a seasonally adjusted annual rate of 298,000 homes, according to the August 23, 2011, U.S. Census Bureau report. The median price of new houses sold in July was $222,000, while the median price of existing homes sold during the same month was $174,000. As a result, median prices on new homes were 28% higher than prices on existing homes in July, which is a higher premium than the historical level of roughly 15%. Meanwhile, the inventory of new homes for sale (165,000 units) in July declined to the lowest level since 1963.
Significant regional variation exists among new home sales. The Northeast doubled in sales on a light volume, and the Midwest had a 2.4% increase. News was not as positive for the South and West, however, which had sales drops of 7.4% and 5.9%, respectively.
Single-Family Starts Fell, While Multifamily Starts Rose
Housing starts fell 1.5% to 604,000 units in July, according to the U.S. Commerce Department. Single-family starts dropped 4.9%, yet strength continued to remain in multifamily housing. Multifamily starts were up 7.8% after surging 21.1% in June. There has been a growing divergence between the multifamily and single-family markets, with starts of multifamily homes up 66.7% over last July while single-family starts are up just 9.8%.
Shadow Inventory "Months to Clear" Estimate Fell for the First Time Since 2009 in Second Quarter
Standard & Poor's Rating Services' estimate of the number of months needed to clear the supply of distressed homes on the market fell in the second quarter for the first time since mid-2009. The current estimate is 47 months, a five-month decline from the first-quarter estimate and the largest quarter-to-quarter drop since mid-2008. While the volume of distressed U.S. non-agency residential mortgages remained extremely high-$405 billion in the second quarter-it has declined every quarter since mid-2010. At the end of the first quarter, the estimated balance of shadow inventory was $433 billion. Also, each of the individual top-20 metropolitan statistical areas that S&P tracks reported lower months-to-clear estimates during the second quarter than the previous quarter.
Despite the improvement, distressed loans continue to loom over the housing market and threaten to further depress home prices. Low liquidation rates over the past two years allowed the shadow inventory to grow as distressed homes have remained tied up in foreclosure proceedings. The shadow inventory may continue to jeopardize the housing market's recovery until servicers are able to improve liquidation times. However, in that event, an influx of homes will likely enter the market, increasing supply and potentially driving prices down further.
S&P includes in its shadow inventory all outstanding properties whose borrowers are 90 days or more delinquent on their mortgage payments, properties in foreclosure and properties that are real estate owned (REO). It also includes 70% of the loans that "cured" from being 90 days delinquent (i.e., loans that once again became current) within the last 12 months because cured loans are more likely to re-default.
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