After a remarkable recovery in housing, even the perma-bulls are throwing cold water on the outlook for the next six months.
Because much of the recovery has been driven by two factors, both of which are likely coming to an end:
- The expiration of the tax credit, which was extended to April and probably won’t be extended beyond that (though anything’s possible in an election year)
- Rising mortgage rates, as long interest rates rise and the Fed eventually stops subsidizing mortgage rates and actually starts selling mortgage-backed securities back into the market (driving mortgage rates higher).
It’s possible, of course, that neither of these things will come to pass. The desperate Congress could extend the voter bribe tax credit until November 5th, and deflation might yet take hold and drive mortgage rates to new lows, a la Japan. But for now, it looks as though we’re coming to the end of the gravy train.
Before we starting whimpering, though, it’s worth reviewing how remarkable the recovery in sales velocity has been. Check out the charts below from Northern Trust:
First, the velocity of existing homes sales. We’re back at normal levels (perhaps even above normal):
Next, inventory, as measured by months of supply: We’re below normal.
Lastly, prices: The rate of year-over-year price declines has slowed mightily over the past six months.
And now for the bad news.
Calculated Risk lays out the case for a slowdown in sales velocity, a spike in inventory months, and further price declines. He also notes that, above a modest level, existing home sales don’t really help the economy.
The recent spike in existing home sales was due primarily to the first time homebuyer tax credit…
Months-of-supply will now increase sharply as sales plunge. Do not be fooled because months-of-supply is close to “normal” levels. This is primarily because sales were distorted by the tax credit.
Excess inventory includes existing home inventory, rental units (vacancy at record high), and various shadow inventory. This is still near record levels.
House prices are now falling again – and this will show up in the Case-Shiller index soon.
This is probably the end of the “good” housing news for a while. Read more here >