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Friday, May 23, 2008


existing home sales dismal yet again

via calculated risk:

Months of supply increased sharply to 11.2 months. This follows the highest year end months of supply since 1982 (the all time record of 11.5 months of supply). Inventory is the story in this report.

it looks very much to me that pressure on house prices, rather than abating, is continuing to build along with unsold supply.

looking at the local reporting provided by housingtracker, inventory is approaching its sample high at over 67,000 units, short of the 70,784 from july of last year. but one would expect seasonal inventory growth to push overall listings to a new record high in the next couple months.

it is worth noting, however, that the year-on-year change in inventory growth has slowed into the low single digits from what had been explosive expansion last year. lower prices do seem to be gradually balancing new listings with sales; the question is how this is being done.

sales have been weaker and weaker with each passing month, so one can rule out the idea that sales are starting to pick up. instead, it must be the rate of new listings for sale that are declining.

this would be more understandable in new homes, as we've already seen starts and completions crashing down to meet sales and bringing actual reductions in new home inventory recently (although remaining at a very high level). but in existing homes, no one is building. rather, it would seem that potential sellers are either deciding not to sell (perhaps in hopes of waiting for a better market?) or are taking their house to market outside the realtor community (including perhaps through a foreclosing bank -- chicago is one of the nation's foreclosure capitals).

the effect on prices is clear -- the downward trend is still slowly accelerating. i look at 75th percentile prices as that's what affects me personally, and that measure has fallen from a peak of $455,540 in may 2006 to $426,633, some (-6.3%) (red line). the 12-month rate of change (blue line) is at a new sample low, (-5.0%), demonstrating a stengthening trend. 50th and 25th percentile figures are in yet stronger downtrends, indicating the expected skew.

even if inventory levels off or begins to decline, as noted previously, such turning points typically lead a bottom in prices by 8 to 12 quarters. through 3q2007 per housingtracker, price-to-income ratios in chicagoland remained over 4; and with the advent of recession, incomes are likely to fall. price-to-rent ratios similarly show a very significant negative carry for homeownership remains to be corrected. in short, any notion that house prices are set to stabilize soon looks to be like absolute hogwash. more likely, years of price declines remain.

in the shorter term, the 3-month annualized data (pink line) show that prices tend to rise seasonally, exhibiting their most positive behavior between march and may. but, following may into november, one starts to see seasonal discounting take over through the autumn, usually often bottoming in december. the 75th percentile properties tend to be early in this discounting process, perhaps reflecting a greater market awareness and flexibility in higher-bracket homesellers. that period of discounting lies just in front of us now. it figures to be a frightening period, promising some very disappointing pricing reports. i would not be surprised to see overall chicagoland prices fall by as much as (-10%) in the next six months alone with six-month annualized rates (yellow line) approaching (-20%), and 75th percentile prices perhaps reaching six-month annualized rates of decline of (-15%).

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