Submitted by Steve Peterson, Posted by Tim Lampe.

The big topic at the moment is the debt fiasco in Greece--specifically, the increasing likelihood that Greece may have to default on some of its borrowings. This raises all manner of questions and fears among economists, bankers, and politicians...and manages to keep the price of gold coins rising to new heights.

What is of more immediate interest and importance to me is the possibility that the real estate is grinding its way awkwardly through the last phases of its long-term decline. The National Association of Realtors recently opined that the real estate market may realize the bottom has passed when we can examine May and June figures in detail. They may or may not be right, but the take-away here, it seems, is that things aren't quite as bad as many economists have been suggesting they are. Real estate sales are likely to turn north in the near future.

And that's much more enjoyable to think about than whether the Greeks may end up paying down their debts with devalued drachma and, worse, the euro may turn into a failed experiment. That may be the subject of a future update, but it can wait. And that means it may not happen. Knock on wood.

Cheers, Tim Lampe

 

Commentary ~

June 22, 2011

The most-noticed event for the week (outside of the on-going ups and downs of the Greek fiscal drama) was the report that existing home sales fell by 3.8% from April to the end of May. Analysts viewed this as further evidence that the real estate market is once again headed south, but that may be far too simplistic a judgment.

We shouldn’t be particularly surprised that the number of existing homes selling in May declined. The Pending Home Sales Index, estimating the growth or contraction of signed sales contracts in April, had fallen 11.6%—a clear forecast of fewer completed sales in May.

That still leaves the question, however, of why there were fewer sales contracts in April. Lawrence Yun, the chief economist for the National Association of RealtorsÒ (NAR), explained at the time that “the economy hit a soft patch in April from sharply rising oil prices, widespread severe weather with the heaviest precipitation in 20 years, and a sudden rise in unemployment claims.” While this may be true, what was left unsaid was that the real estate market simply wasn’t strong enough to withstand these ephemeral facts.

Yun concluded that the main long-term factor slowing the real estate recovery was tight credit: It is, in his judgment, far too difficult for a credit-worthy borrower to obtain the financing needed to complete a real estate purchase today, in spite of the fact that rates are so low. But what Yun failed to point out adequately was that this factor, the tightness of credit, may itself prove to be temporary. Indeed, as The Economist newsweekly reported recently, there are early signs that financial institutions—who make their living by making loans, not by ruling out an inordinate number of borrowers—are starting to ease their requirements.

Further, there are early signs that sales of existing homes will increase in the next few months. The next Pending Home Sales Index will be released Wednesday, June 29, and the NAR has hinted that, though the computations aren’t complete, the number of signed contracts is expected to rise significantly.

The NAR is currently predicting that we will very likely see the bottom of the 2011 real estate sales cycle in May, with a gradual firming trend from there forward. This may be foreshadowed by the significantly higher number of mortgage applications reported for the week ending June 10. Also hopeful is the decline in the number of new applications for unemployment insurance, which fell from 430,000 to 414,000 over the same week.

Next week will bring us the data for May New Home Sales which, judging by the very weak National Association of Home Builders’ Housing Market Index, may prove to be disappointing. More numerous housing starts in May, though, suggest that the market—even for new homes—may be at the beginning of a mild improvement.

Lastly, a close look reveals numbers that are all over the place—but the reason may be that we’re seeing the formation of a bottom. In that case, older data would be noticeably worse than newer data. This could all change in an instant, but there’s more reason for hope than many economists are now saying.