Home sales volume, pricing have stabilized

IRVINE, Calif. – Aug. 18, 2009 – A monthly survey conducted by John Burns Real Estate Consulting covering about 2,000 new home communities (and available for free to all participating home builders) shows that:

• Sales rates have stabilized at about 1.5 sales/month/community;
• Prices net of incentives are relatively flat in California, Texas, the Northeast and the Midwest, and primarily at the lower price ranges in most areas;
• Standing inventory per community has fallen from 6.0 homes last July to 3.2 homes today, and;
• Builders are starting more homes per community than they have in a long time.

However, traffic through the sales offices remains low, and most of the buyers are first-time buyers motivated by the $8,000 tax credit and monthly payments that are comparable to their rent. Without the tax credit, sales and pricing would still be declining.

Our best estimate is that sales slow substantially in December and throughout the first quarter of next year because of the demand "pulled forward" by the tax credit, and that the market stabilizes when job growth turns positive, which will hopefully be next spring or summer. The recovery will be driven by the pace of job growth, mortgage rates and decisions made by the government on whether to continue or discontinue the incentive programs.

While we believe there is another leg down in this recession, we don't believe that the decline will be that much further, so smart investments made with a long-term perspective should pay off handsomely. With plenty of short-term money chasing deals right now, smart investments are tough to find. Longer-term investments tend to be more appropriately priced.

The leading indicators were mixed this month, although many have improved since the beginning of the year. The Leading Economic Index continues to improve, reaching 4.5% in June, which is up from 2.4% in May. Stocks have continued their multi-month rally and, as of the end of July, the S&P 500 had risen 34% from February's lows. Home builder stocks also performed well in July, increasing over 22% in the past month, and have declined just 6% year-over-year. The price of crude oil has trended up since February, but fell 8% in July from June, reaching an average of $64.09 per barrel.

Although the existing home market remains extremely weak, a few indicators improved this month. The seasonally adjusted annual resale activity in June increased 3.6% from the previous month to 4.89 million homes, but remained down 0.2% from one year prior, according to the National Association of Realtors (NAR). The median resale home sale price increased in June to $181,600, according to NAR, but has fallen 15% from one year ago. By comparison, the Case-Shiller index, which tracks paired sales, fell a record 19% in the first quarter compared to the beginning of 2008. The supply of unsold homes fell in June to 9.4 months of supply, yet remains high compared to historical levels. The pending home sales volume remained flat compared to the previous month, but increased nearly 7% from one year ago.

Many indicators in the new home market have improved since last month, but the overall market remains weak. Builder confidence improved in August, following a steady upward trend since reaching bottom in January. The median new home price reversed the gain experienced last month, falling to $206,200, according to the Census Bureau, and has fallen 12% year-over-year. The median new home price can fluctuate greatly month-to-month, as it is dependent on the mix of housing types sold during that period. The seasonally adjusted new home sales volume increased in June compared to May, resulting in 384,000 transactions. The inventory of new homes for sale has trended down since January and is currently at 8.8 months of supply, and the unsold completed homes component of that amount equals 4.0 months of supply.