Majestic Research

The Wall Street Journal

Economists React: Decline ‘Not Surprising,’ but Size ‘Shocking’

By Phil Izzo
Published: June 23, 2010

–That new home sales would decline in May following the expiration of the home buyers credit is not at all surprising. However, we would be lying if we said the size of the drop was not shocking… While the pace of sales collapsed, pushing up the months supply, the absolute number of homes for sale continues to improve and is assuredly closer to a bottom than ever before. We are not convincingly below levels see at the bottom of other housing recessions and while we do not expect a forceful and imminent turnaround, this is a longer term positive for the sector. –Dan Greenhaus, Miller Tabak

–The report adds further evidence that prospective home buyers pulled out of the market en masse in May after the government homebuyers’ tax credit expired in April. Smoothing through the last year’s credit-related volatility, new home sales have yet to record any significant improvement, settling at 379,000 annualized units in May on a smoothed 12 months average basis, virtually unchanged when compared to a cycle low of 373,000 annualized units in February. –Anna Piretti, BNP Paribas

–While the fall off is exaggerated by the surge in tax-related buying in April, judging from the applications for new mortgages there will be no rebound in June. And we are likely to stay at this depressed level of sales for some period to come… Tough times remain for homebuilders. –Steven Blitz, Majestic Research

–Reinforcing the inference about the role of the tax credits in recent sales, nearly 90% of the sales drop in May from April was attributed to declines in sales of home priced at less than $300,000. (Higher priced homes would generally be either beyond the budgetary means of first time home buyers or not eligible for the credit.) Sales of higher priced homes have been much steadier but also show little improvement over the past year. –David Resler, Nomura Global Economics

–By the fall, we expect the very favorable affordability picture to start pulling people back into the market, but the next few months are likely to be very grim. Note inventory is at a 40-year low, so builders are less exposed to weak demand than at the peak of the cycle. –Ian Shepherdson, High Frequency Economics
–If one attributes March and April’s increase to the tax credit, then only about 11,200 additional new homes were sold because of the tax credit. In an economy that puts up about 1.5 million homes during normal times, these are very small numbers… The report contained one statistical eyesore. The median time to sell a home is still near a record high. For builders (those still standing), market conditions remain brutal. But things should be looking up soon. –Patrick Newport, IHS Global Insight

–Regional trends largely echoed the headline number, though the west region saw the worth of the pain with an unprecedented 53% (!) drop in activity. While the west region represents a relatively small portion of nationwide new home sales, the 2006 - 2007 period solidified the west’s roll as a sort of “leading indicator” in home sales and prices. As a result, the massive one-month drop is rather concerning. –Guy LeBas, Janney Montgomery Scott
–The median home price was reported to have edged down to $200,900 in May from $202,900 in April. The year-to-year rate of change was -9.6% in May. Bear in mind, though, that these price data, which can be erratic, are often distorted on a monthly basis by the mix of homes that were sold, both geographically (where the Northeast and the West have higher priced homes compared to the South and the Midwest) and also by whether more expensive or cheaper homes were sold within each region. –Joshua Shapiro, MFR Inc.

–Beyond this huge recent tax driven volatility in new home sales, underlying fundamentals should support improvement in home sales in the second half. MBS yields have fallen to near their lowest levels ever this week, and 30-year mortgage rates are hitting record lows as a result. With home prices having flattened out in recent months after a prior rebound off the spring 2009 lows, and consumer income continuing to recover, housing affordability remains at extremely high levels, and the improving labor market has started to support a more notable turn in consumer confidence. –Ted Wieseman, Morgan Stanley