InclineVillage National Real Estate Summary 4/19/2011

U.S. sales of existing homes dropped 9.6% in February to a seasonally adjusted annual rate of 4.88 million units, the National Association of Realtors (NAR) reported on March 21. The decline followed three straight monthly increases, including a 3.4% increase in January and a 12.5% increase in December. Existing home sales are currently 2.8% below their level one year ago, and 33% below the September 2005 peak. In general, slowing sales highlight the slowing recovery in the housing sector.  

Pending home sales were down in both December and January, and as a result, a slight decline in March's existing home sales is likely. Pending sales usually lead existing home sales by one to two months. Median home prices also dropped an unadjusted 1.1% in February, and 5.2% from their February 2010 level.  

Housing prices and sales dropped in all four NAR regions (Northeast, Midwest, South and West) in February.  

Other highlights of the report on February existing home sales included news that:   

• All regions posted declines in sales in February. Sales in the Midwest declined 12.2% and are 9% below February 2010 levels. Sales in the South declined 10.2%, but there was no change year over year. Sales in the West declined 8% in February, but increased 2.4% since a year ago. Finally, sales in the Northeast declined 7.2% and are down 8.3% on a year-over-year basis.
• Existing condominium and co-op sales declined 10% in February.
• The national median home sale price is $156,000, down 5.2% from February 2010 on average, and down across all regions on a year-over-year basis.
• February's official inventory is 3.5% above last month, while the number of months' supply increased from 7.5 to 8.6 months at the current sale pace. This does not include the unofficial shadow inventory, which still remains the key concern for the housing market recovery in addition to the elevated unemployment rate.
• High levels of distressed sales are likely to push home prices even lower. Distressed homes are usually sold at a discount. They accounted for about 39% of all sales in February, up from 37% in January and 35% a year earlier.

U.S. Home Sales Activity Through February

Slowing Starts and Weather Woes
U.S. housing starts fell 22.5% to an annual rate of 479,000 units in February, according to the latest Census Bureau numbers. Housing starts are now 20.8% below the February 2010 rate of 605,000. Single-family starts fell 11.8% to 375,000 in February and are 28.8% down from last February. Multifamily starts plunged 47% over January, though they're still up 54.8% from a year ago. Building permits declined 8.2% from January to 517,000, and they remain 20.5% below the level in February 2010.   Although harsh weather and year-end building code changes continue to make it difficult to read too much into the monthly housing data, the Census report was still a disappointment and adds to worries that the housing recovery is not in place.  

Mortgage Rate Roundup
The 30-year mortgage rate dropped to its lowest level in two months, according to a March 23 Mortgage Bankers Association report. It fell to 4.76% on March 17, down from the previous week's 4.88%, but still well above the all-time low of 4.17% set in November 2010. Mortgage applications increased by 2.7% in the week ended March 18 after decreasing by 0.7% the previous week. The refinancing index increased by 2.7% after rising 0.9% in the previous week and is at its highest level since December 2010, representing 66.4% of mortgage activity. The purchase index was up 2.7% after dropping 4.0% a week earlier.    

Cash Sales Up, Investment Sales Down
More people paid cash for their homes in February, and fewer investors made purchases, according to the NAR. The number of homes bought with cash jumped to 33%, up from 32% in January and 26% in February of 2010. Investors accounted for 19% of transactions, compared with 23% the previous month. On an annual basis, there was no change.  

More Borrowers Choose Adjustable-Rate Mortgages
Citing data from a recent Federal Reserve study, The New York Times reported on March 17 that more homebuyers are now opting for adjustable-rate mortgages (ARMs). The Times speculated that one reason for the growing popularity may be a trend among lenders to introduce more conservative ARMs, including those without "gimmicky" features such as low teaser rates that adjust every six months. A Bank of America spokesperson told the newspaper the bank had nearly twice as many ARM transactions in February as it did the previous year, and that they now account for 10% of its home mortgages. Freddie Mac expects the share of ARMs to rise to 9% this year. Still, ARMs aren't nearly as popular as they once were: They accounted for about 70% of mortgages in 1994.  

Underwater Mortgages Continued to Increase in Fourth Quarter
More than 11 million households (23.1%) owed more on their mortgages than their homes were worth during the fourth quarter of 2010. That's up from 10.8 million households (22.5%) in the July-September quarter. Nevada-with roughly two-thirds of its homeowners having negative home equity-is the hardest-hit state in the country. Arizona, Florida, Michigan and California follow, with as many as 50% of homeowners in those states owing more than their homes are worth. Oklahoma had the smallest percentage of underwater homeowners in the fourth quarter, at 5.8%. Just nine states had an underwater rate of less than 10%.  

Fed Stands Pat
At its policy meeting on March 15, the Fed kept its federal funds rate in the 0%-25% range and reiterated its "extended period" language. It also said that it is maintaining its existing quantitative easing policy and expects to complete its purchase of $600 billion in Treasuries by the end of June. The statement said that the "economic recovery is on a firmer footing and that overall conditions in the labor market appear to be improving gradually." This is more optimistic than its last statement, which said that the recovery is "at a rate that had been insufficient to bring about a significant improvement" in the jobs market. It also said that household and business spending "continue to expand," though it noted that the "housing sector continues to be depressed."   The Fed's "Beige Book" of reports from the 12 Federal Reserve district banks (released March 2) hinted at improved economic conditions across all districts, indicating accelerating growth momentum in early 2011. Only one district noted a slowdown in the pace of the expansion.