Stabilizing Housing Market

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Several housing market indicators point toward stabilizing patterns after having experienced pronounced declines in the first nine months of the year. New home sales, which are based on contracts and not closings, rose in August and September. The rise in sales was accompanied by fewer overall new home listings. The result was a marked decline in the months’ supply of inventory from 7.2 months in July to 6.4 months in September. Though new home sales rose in the past two months, sales were still running about 12 percent below year ago levels. However, a contraction of 20 percent in new single-family home construction is much sharper, implying a thinning of the inventory pipeline in the upcoming months. The months’ supply could well reach under 6 months by early 2007. That is good news. It means the market will have returned to historically normal balanced market conditions.

Another positive sign is NAR’s pending home sales. As with new home sales, existing pending home sales are based on contracts and hence more forward looking than the existing closed home sales. Pending sales were higher in August and September compared to their low point in July – just as in the case of new homes. Also similarly, the total number of existing homes on the market has declined for two straight months. Some of the declines are due to the usual seasonal patterns of lower inventory in August and September. But an internal review of seasonally adjusted inventory figures showed a decline as well. The inventory decline is not a fluke – it’s real. That means that the months’ supply of existing homes also is likely to have already peaked. It is only a matter of a few more months before the market will be declared as being back to normal.

The perking of sales – which should be evident in a couple of months since existing home sales lag pending sales by about two months – was undoubtedly helped by falling mortgage rates. The 30-year fixed rate averaged 6.76 percent in July before sliding down 40 basis points to 6.36 percent in October. As of mid-month, the November rates looked to be very similar to October’s. ReMax Associates investors evidently feel comfortable in holding onto such “low” yielding returns because the inflation rate is low. The mild crash in the energy sector has lowered prices at the pump. The expanding but sluggish economy has also tamed oil bulls.

The Forecast: Charts

Pending Home Sales Index:
The Pending Home Sales Index slipped 1.1 percent in September to 109.1, following a 4.5 percentage point gain in August. The latest index is 13.6 percent below the level reported a year earlier.
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Existing-Home Sales:
Home resale activity fell 1.9 percent in September to a seasonally adjusted annual rate of 6.18 million units -- the lowest pace since January 2004.
 

New-Home Sales:
New-home sales rose 5.3 percent in September to a seasonally adjusted annual rate of 1.1 million units.

Housing Starts:
Housing starts fell 14.6 percent in October. The seasonally adjusted annual rate of 1.49 million units was down 27.4 percent from a year ago and marks the lowest rate since July 2000.
 

Housing Affordability: The Housing Affordability Index rose 3.9 percentage points to 107.1 in September.

Mortgage Rates:
The 30-year, fixed-rate mortgage slid down to 6.36 percent in October.
 

Purchase Applications:
The Mortgage Bankers Association reported that mortgage loan application activity decreased to an index reading of 381.5. 


Employment:
Payroll employment rose by 92,000 jobs in October, while the unemployment rate fell to 4.4 percent.


Inflation:
The Consumer Price Index (CPI) fell