Monday, September 28, 2009

Has the housing market bottomed (Part I)

One of the multi-billion questions these days has got to be if the housing market has bottomed. Both sides have gathered ardent supporters and have good case.

I found myself swaying for a long time before I started to gain some positive bias this year. There is a list of indicators I look at :

1. Housing data (existing home sales, new home sales, housing starts, months of supply, prices)
2. Other economic data (employment, interest rates/lending, housing affordability, demographic factors)

Housing data
Existing home sales

Year 2009 has generally painted a much more hopeful picture of housing based on housing data. Housing data have generally shown improvement since the end of 2008, especially so in the last five months. Existing home sales, according to the National Association of Realtors (NAR), declined 2.7 percent to a seasonally adjusted annual rate of 5.10 million units in August from 5.24 million in July, but is 3.4 percent above the 4.93 million-unit level in August 2008. In the previous four months, sales had risen a total of 15.2 percent.

Total housing inventory at the end of August fell 10.8 percent to 3.62 million existing homes available for sale, which represents an 8.5-month supply at the current sales pace, down from a 9.3-month supply in July. This figure is still high compared to a more normal level of 6-month supply although unsold inventory totals are 16.4 percent lower than a year ago.

The median price dropped to $177,700 in August from $181,500 in July, down 12.5 percent from August 2008. First-time buyers purchased 30 percent and distressed homes accounted for 31 percent of transactions in August respectively. Both were unchanged from July.

New home sales

Theoretically, new home sales shouldn’t carry as much weight as existing home sales as they carry only 10% of the latter. However, the figure is useful in gauging the homebuilder activity and is clean of complicated interpretations that involve foreclosures/distress sales. New home sales increased by 0.7% to 429,000 units in August from July sales of 426,000 and is 3.4% below August 2008 sales of 444,000.

The inventory in August was 262,000, yielding 7.3 months of supply. Again, the month-of-supply, though has improved significantly from the last year, is still higher than 6-month supply in more normal times.

The median price was $195,200 in August, down from $215,600 in July, and from $221,000 in August 2008.

Housing Starts

Housing starts are directly indicative of the supply side of housing market. Housing starts in August were at a seasonally adjusted annual rate of 598,000. This is 1.5 percent above the revised July estimate of 589,000, but is 29.6 percent below the August 2008 rate of 849,000. Homebuilders have grown cautiously optimistic but are still very careful in bringing new supply to the market. This is conducive to price recovery into 2010.

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