Monday, November 23, 2009

Home sales strong



Existing home sales have exploded to the upside in recent months. Undoubtedly, the approaching expiration of the the $8,000 tax credit for first-time buyers had something to do with this. But even if that were the whole story, doesn't it just go to show that the resolution of the housing crisis is a matter of finding the right price? We know that home prices have fallen significantly, and obviously the tax credit makes them more affordable; the combination of the two has been enough to spur the market to levels of activity not seen for over two years. This is a market that is clearing, and this is another sign that we have seen the bottom in real estate.

Take away the tax credit and the level of sales would likely decline, but in lieu of the credit, lower prices (5-10% lower) would apparently be enough to greatly stimulate sales. So if we're not at the absolute bottom we're pretty close. Plus, as this next chart shows, we also have mortgage rates that are very close to all-time lows. The way to fix the housing crisis (i.e., the glut of homes) was always to find the price that would clear the market. The takeaway from all this is that it sure looks like we've found that price.


10 comments:

Beatotrader said...

you forget that the FED holds the mortgage at a rates very very low...

I'm an italian blogger, I find your blog very useful because I find also an optmistic vision vs. many pessimistic U.S. Blogs....
http://lagrandecrisi2009.blogspot.com/
kind regards

Scott Grannis said...

I've posted several times on the issue of whether or by how much the Fed is keeping mortgage rates artificially low. I don't think it is Fed purchases of mortgages that is keeping rates low. I think it is the Fed's stated intention to keep rates at zero for a long time, coupled with the widespread belief that the economy has so much slack that inflation is virtually impossible, that is keeping rates low.

Anyway, it's nice to hear from an Italian! Grazie

Public Library said...

Sounds like the other side of the same coin to me. Either way you slice it, the rates are where they are because of the Fed and not because of where the market would price risk on its own.

Scott Grannis said...

That's a fair observation with which I would have to agree.

Mike said...

I just saw that a junior gold mining company that I like a lot, San Gold reported a new high grade gold discovery near its Hinge project. This article also says that the company is starting to draw comparisons to Goldcorp based on the numerous excellent discoveries the company has recently made. San Gold's stock has performed exceptionally well this year, and while I would not necessarily be a buyer right now given the recent large run up, I would definitely add on a 10-20% pullback. Over the next few years I think the gold price is headed much higher, and San Gold could be a big beneficiary of this.

Игры рынка said...

Just a couple of points:

1. current sales are not followed up by more sales and this is what normally happens, ie homes sales go in chain. It means that current sales are one-off events. They are gone and next month we are back to where we started

2. existing homes sales have close to ZERO effect on economy. As an indicator of economic health they are meaningless. And therefore pricing is meaningless.

3. FHA currently has a market share of close to 100%. It requires 3.5% down-payment. Take this up to 30% like it should be and this market is guaranteed another 20% price drop to even have a hope for the same sales activity

Scott Grannis said...

On the contrary. When sales pick up significantly, that is a strong sign that prices have adjusted to the new realities of the economy. Plus, would-be buyers see the increased activity and the fact that prices stop declining and become more willing to buy.

If FHA sales were to cease overnight (very unlikely) then I would agree that things might slow down. But the fact remains that there are a lot of sales that are going through, and even in the jumbo market, where you need 20-30% down to qualify. Then there are all the other signs of a revival of economic activity all over the world. The pickup in home sales is not an isolated incident and it is not therefore unusually vulnerable to a few things that might go wrong along the way. Of course sales are likely to slow in the following month, but that will not be a sign of any major change in the fundamentals. Look what happened to car sales, which bounced back strongly after the end of the Cash for Clunkers program.

Public Library said...

Игры рынка is correct and Calculated risk hits the existing home sales nail on the head with a John Wooden quote.

"Never mistake activity for achievement."

"What matters for the economy are new home sales, housing starts and residential investment. And there has been little improvement in these key indicators."

http://www.calculatedriskblog.com/2009/11/existing-home-sales-distressing-gap.html

If we want to stick more risky credits in houses, then mission accomplished. The fallout will occur later on down the road.

These people are risky credits for a reason, Fed subsidy or not.

Игры рынка said...

with 3.5% down payment there is little risk to borrowers. There might be many people willing to bet such money. It has nothing to do with prudent lending/borrowing which defines real prices.

The quote from calculated risk is great! 5 words summarize the whole market

Scott Grannis said...

I would argue that buying a home with 3.5% down is a lot less risky today than it was 3-4 years ago. Prices have come way down, incomes have gone up, interest rates are low, and money is generally easy. Indeed, the risk/reward of buying property with borrowed money has shifted sharply in a favorable direction for buyers.