Existing Home Sales Show Glimmer of Hope
Jan 28th, 2009 | By Wayne Burritt | Category: Featured, Housing
While I wouldn’t be popping the champagne on a recovery in the dismal U.S. real estate market yet, the latest news does point to some improving trends. And as I’ve said here time and time again, a lousy real estate market got us into this mess and an improving one will get us out. Take a look for yourself…
As you can see from this chart, existing home sales in December shot to the upside. In fact, compared to November, home sales were up 4% in the Midwest, 7.4% in the South and a stunning 13.6% in the West. And while the Northeast took a bit of a hit, all told home sales in the U.S. rose a respectable 6.5%!
Good news? No doubt about it. Rising home sales mean that buyers are coming back into the market. And that means that one of the biggest investments out there for most people — buying and paying for a house — is showing signs of health. Now, factor in the ripple effect sparked by home sales transactions — including banking business, contractor activity and a boost in tons of home-related products and services — and the news gets even better.
But that’s not all. The latest report from the National Association of Realtors also shows that the supply of existing homes is falling. With about 3.7 million units on hand, current existing home inventory amounts to 9.3 months of supply. That’s the lowest supply level in a year and is significantly off last year’s high of 11.2 months booked in April.
The culprit? No big surprise here: Tumbling home prices. In fact, during December the average home in the United States fetched $175,400, down 15% from the year-ago period’s $207,000. And while that’s painful for home sellers, it’s also the sign of a sector beginning to right itself.
Here’s my point…
Imagine you’re an average retail store owner. You’re managing the store day-in and day-out, and you know that times are tough. Sales are weak and customer flow is just not what it used to be. And while your daily bank deposit isn’t terrible, it’s certainly not what is used to be.
So, what do you do? In a nutshell, you hunker down. You buy the products that carry high-margins — read: high profits — and that are in big demand. You keep inventories lean by buying just enough to keep the store stocked. And for those inventories that haven’t been moving, you make the oldest move in the book to get them off the shelf: You drop prices.
That’s exactly what the real estate market is doing: It’s lowering prices and, as a result, sales are beginning to spark. And while that may seem plain and simple, I don’t have to remind you of markets where, no matter how low the prices fell, no one wanted to buy.
Bottom-line: While the real estate market is hardly out of the woods, the latest data is certainly a step in the right direction. And no matter how you slice it, that’s a positive for the broader economy and the stock market.
Best wishes,
Wayne Burritt
January 28, 2009
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No one truly knows when real estate will turn the corner, but there are a lot of indicators it could still get worse before it gets better.
One thing rings true however, which is that the average household can manage a house four times their combined income. More than that and there will be downward pressure at some point – sooner if housing is built out and most demand is met, later if you have to wait for excessive foreclosures as people find they really can’t afford $600,000 homes.
Real Estate prices here have increased 203% in a market that was undervalued in comparison to other metropolitan areas, but actually only a mark below the historical average of four times household income. The market average resale price for all homes in this area is currently about $60,000 above the historical average, with single-family homes alone $100,000 above. In Calgary the situation is even more skewed, and that is down from a year ago in both metro areas of the province.
I have some interesting discussions with people about buying real estate now, particularly those who bought property prior to the run-up in prices. Canada may not have as much difficulty related to subprime mortgages the U.S. did, but over-burdened homeowners and the possibility (probabability ?) of looming hyper-inflation will surely put enormous pressure on the downside for home prices here.
Or maybe I just know nothing.
Rick Maher
Edmonton AB