Another Take on Existing Home Sales

Well, there may be a little reason to celebrate the existing home sales numbers. They’re higher than last month. After all, as the NAR reported, existing home sales rose 7.4 percent from a 6.09 million seasonally adjusted annual rate (SAAR) in October to a 6.54 million SAAR in November. So I guess there’s something to be said for putting the water pistol to the figurative head of the $8,500 tax credit for new homebuyers. If you suspect an incentive is going to expire relatively soon, you’re more likely to use it. Maybe that’s the strategy the government will operate under: spurring demand by continuously threatening to end incentives. But that will only work for so long.

But one thing disturbs me about the release. In the data they provide about median sales data, they say distressed sales “continue to downwardly distort the median price.”

Really? We’re still complaining about the dog eating our homework? After 4 years from the peak? De Nile is a river and it’s flowing through NAR headquarters. Still.

While 33 percent of the sales were distressed sales, I think calling them a downward distortion is disingenuous. The fraction of distressed sales compared to overall sales is an indicator of market health. It’s neither good nor bad, just a data point to fill in the moasic of the market. It’s just as telling about buyers as it is sellers. If there wasn’t a perception that a lot of distressed inventory was out there (i.e. supply), you wouldn’t see demand for a lot of distressed transactions.

But there is. And there will be more. Unless the government decides to nationalize housing. Oops, too late, they’re trying to do that with HAMP, HARP and MHA on top of FHA and VA programs. I’d like to offer another: the Crumbling Real estate Asset Plan (CRAP). But still, the foreclosure moratoriums and the alphabet soup of programs out there tells you just how much is sitting out there.

Another way to look at the data – in total – is to combine it and look at it as a measure of housing stock activity. What I did was take the SAAR and multiply it by the median sales price to look at what I call Housing Churn; which measures the level of housing transaction activity on an annually adjusted basis. Think of it as the annual value of housing stock circulating through the economy. This chart should put things into perspective:

In terms of activity, that shows the dollars circulating in the economy related to existing homes, we surpassed the nearest high-water mark in June ’08 and are back to levels we last saw in September ’07.

And we remember that as being such a cheery time, don’t we? At least back then we didn’t have a couple trillion dollars of taxpayer money trying to prop up the market.

The bottom line is this: with foreclosure activty looking to increase, mortgage delinquencies spreading into other asset classes, and moratoriums that might be getting ready to end along with Fed liquidity and tax credits, the bubble gum and chicken wire holding back distressed supply will break and will swamp the market with more supply.

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Filed under finance, government, macro, Markets, Way Forward

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