Home Sales: Worse Than You Thought

December 21, 2011, 10:32 AM EST By Timothy R. Homan

Dec. 21 (Bloomberg) -- Fewer existing homes were sold since 2007 than previously estimated, painting an even bleaker picture of the industry that precipitated the U.S. recession, a report from the National Association of Realtors will show today.

“Although there are downward revisions for total sales in recent years, there is little change to previously reported monthly comparisons or characterizations based on percentage change,” Walter Molony, a spokesman for the group, said in an e-mailed statement last week. He said the revisions will include comparable reductions in inventories and no change in prices.

CoreLogic Inc., a real-estate analytics company, released a report in February showing that 3.3 million existing homes were sold in 2010, less than the 4.91 million tallied by NAR. Today’s report will also show that purchases increased to a 5.05 million annual rate in November from 4.97 million the prior month, according to the median forecast of 71 economists surveyed by Bloomberg News.

The range of November estimates, from a low of 4.38 million to a high of 5.25 million, was wider than normal because some economists factored in assumptions for the NAR revisions while others didn’t.

Housing, which helped trigger the 18-month recession that ended in June 2009 when subprime borrowers defaulted, is showing signs of stabilizing as builder confidence improves and construction picks up. Nonetheless, another wave of foreclosures will probably push prices down further as more marked-down properties come on the market.

‘Steep Correction’

“Housing’s done an incredibly steep correction,” said John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston. “In general, demand for houses is still pretty weak. We have a big supply, a big shadow inventory.”

The NAR data are due at 10 a.m. in Washington.

Figures from other trackers of home sales show a slower pace of purchases compared with NAR. CoreLogic, based in Santa Ana, California, monitors sales figures through property records at local courthouses, while NAR follows sales through the multiple-listing services used by real-estate agents.

NAR tallies in recent years may have been overstated because the consolidation of listing services could have caused distortions in the data, according to Lawrence Yun, chief economist at the Realtors’ group. He said estimates of direct sales by owners may also have been overstated.

Market Strains

“The benchmark revision to the NAR data should be watched extra carefully by long-term investors, as we expect the revision to reflect the ‘strains’ in housing markets that we find in” figures from Fannie Mae and Freddie Mac, Herrmann, who is projecting demand will be revised down by about 9 percent, said in a research note this week.

The median value of an existing house fell to $162,500 in October from $170,600 a year earlier, according to NAR data. The value plunged from a July 2006 record of $230,300 to a low of $156,100 in February.

There are signs the industry may be stabilizing. Builders broke ground on more houses in November than at any time in the past 19 months and construction permits climbed to the highest level since March 2010, Commerce Department data showed yesterday.

The National Association of Home Builders/Wells Fargo index of builder confidence rose in December for a third straight month, reaching the highest level since May 2010.

No Slowdown

“November is a time that historically sales slow down,” Larry Sorsby, chief financial officer at builder Hovnanian Enterprises Inc., said on a Dec. 15 call with analysts. “And this year we’ve not seen as dramatic a slowdown as we have in recent prior years. The market feels a little bit better than we would have expected.”

The Standard & Poor’s Supercomposite Homebuilder Index of 12 builders surged yesterday after a report showed housing starts climbed. The gauge jumped 6.4 percent, compared with a 3 percent increase for the broader S&P 500 Index.

The Obama administration this month started a new version of the federal Home Affordable Refinance Program, or HARP, after the original plan helped less than a quarter of the people targeted to lock in lower mortgage rates.

Federal Reserve policy makers reiterated at a meeting this month that they will keep the benchmark interest rate near zero until at least mid-2013. The central bank in September decided to reinvest maturing housing debt into new mortgage-backed securities instead of Treasuries.

--With assistance from Chris Middleton in Washington. Editors: Carlos Torres, Scott Lanman

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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Housing Horror Show: Worse Than You Think

Unfinished homes and empty lots in a subdivision near Homestead, Fla. Joe Raedle/Getty Images

By Roben Farzad

You might be tempted to believe that after four years of brutal declines in home prices, the worst of the crisis is over. The Standard & Poor’s/Case-Shiller 20-city index of prices has fallen back to where it was in 2003. Housing prices in Phoenix are at 2000 levels, and Las Vegas is revisiting 1999. Lower prices have made homes more affordable than they’ve been in a generation, and sales have gone up in six of the past nine months. “It’s very unlikely that we will see a significant further decline” in prices, Housing and Urban Development Secretary Shaun Donovan said in a July 3 appearance on CNN. “The real question is, when will we start to see sustainable increases? Some think it will be as early as the end of this summer or this fall.”

Doug Ramsey of Minneapolis investment firm Leuthold Group is a student of asset bubbles, from tech stocks in the late ’90s to commodities in the late ’70s and railroads in the 19th century. His outlook is very different from the HUD Secretary’s. Ramsey calculates that single-family housing starts would have to soar an unprecedented 60 percent to 70 percent from their current half-century low of a 419,000 annual rate just to hit the average low of the past six housing busts since 1960 (650,000 to 700,000).

Ramsey says every housing statistic he tracks, including new and existing home prices and the performance of homebuilding stocks, has so far matched the pattern of prices after the bursting of other bubbles, including the Dow Jones industrial average following the crash of 1929 and Japan’s Nikkei after its 1989 peak. It starts with a steep decline lasting three or four years, followed by a brief rally that ends in years of stagnation. The Dow took 35 years to return to pre-crash levels. The Nikkei trades at less than a third of where it peaked 22 years ago. “The housing decline,” he says, “will be a long, multiyear process, and the multiplier effect across the economy will be enormous.”

Others are equally gloomy. “It’s still a vicious cycle of foreclosures, prices falling, and buyers remaining on the sidelines,” says Jonathan Smoke, head of research for Hanley Wood, a housing data company. With the homeownership rate possibly headed to its pre-bubble level of 64 percent from 69 percent at the peak, Smoke calculates that the nation needs 1.6 million fewer homes that it now has. “We’ve gone through a period when we should have been tearing down houses,” he says. “The supply of total housing stock is beyond what is necessary.”

Scott Simon, a portfolio manager who heads real estate analysis for bond giant Pimco, says because this housing bust is so much worse than previous ones, it’s hard to tell when it will end. “There are all these things going on that we have never seen before,” he says. “No one knows how or what to model.”

Simon has been traveling the country with a 28-page PowerPoint presentation for clients that illustrates the dire state of today’s housing market. Three of 10 homes, he notes, are now sold for a loss. American homeowners have equity (market value minus mortgage debt) equal to 38 percent of their homes’ worth, down a third since 2005 and half what it was in 1950. A lot of the decline is attributable to people who have negative equity—they owe more on their mortgages than their homes are worth.

Simon also points to the affordability index, which measures the ability of a family with the median national income to buy a median-price home at current mortgage rates. The index is near an all-time high and double its level in 2006 at the peak of the bubble—meaning buyers should find many more homes within their budgets. “I would never have believed this index could get so high,” he says. A rise in affordability should have spurred purchases, boosting prices and keeping a lid on the index. “What this instead means to me is that the credit is not available to most people,” he says. “Houses aren’t cheap if you can’t get the loan.” Simon worries that the problem will get worse in October, when Fannie Mae, Freddie Mac, and the Federal Housing Administration drop the maximum mortgage they will buy to $625,000 from $729,750 as a temporary increase expires.

The crux of Simon’s analysis is that the loose lending practices seen during the housing bubble allowed 5 million renters to become homeowners, and that the market is in the protracted process of evicting this group. He believes housing prices will decline 6 percent to 8 percent nationally, with 6 million to 7 million more foreclosures yet to come.

If these predictions are right, the economy will be missing a key driving force for years—and the nation will keep paying the price for what Ramsey calls the “illusory prosperity” of the housing boom. “Think about local tax revenues—what the housing bubble contributed to coffers across the country,” he says. “The ripple effect for the economy was enormous: washers, dryers, carpeting, construction jobs.” The housing wealth that has now evaporated gave Americans false expectations about economic growth and rising standards of living. Asks Ramsey: “What was real and what was never meant to be?”

The bottom line: Despite intermittent signs of recovery, the housing market may be in the midst of a slump that could last a generation.

Bloomberg Businessweek Senior Writer Farzad covers Wall Street and international finance.

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