Mark Vitner, Senior Economist
Anika R. Khan, Economist
Unusually harsh weather and tight credit underwriting put a damper on the key spring home buying season. Overall sales fell 3.8 percent in May, following a 1.8 percent drop the prior month. Inventories rose slightly.
Severe Weather Likely Held Back Home Buying
Sales of existing homes fell 3.8 percent in May, following a 1.8 percent drop the prior month. Sales of single-family homes fell 3.2 percent, while sales of condominiums and co-ops tumbled 8.1 percent. Both also declined during the prior month. The weather was unusually harsh in April and early May, with tornados, severe thunderstorms and flooding all keeping buyers away. The weather cleared in late May and this should lead to higher sales in June and July.
We have doubts as to whether it was merely the weather that held back home sales in May. Foreclosure sales have plummeted in many judicial states, which led to a sharp pullback in distressed sales. Foreclosure sales, short sales and bank sales accounted for 31 percent of all transactions, down from 37 percent in April. The decline helped push prices slightly higher in May. The median price of an existing home rose to its highest level since December, rising by $5,400 from April to $166,500. That still leaves the median price 4.6 percent below its year-ago level, however, and prices will likely fall once again after the pace of foreclosure sales picks up.
The overhang of foreclosures continues to weigh on sales. LPS Applied Analytics reports that there are currently 2.2 million homes in the process of foreclosure and another 1.8 million homes with a mortgage more than 90 days past due. Actual foreclosure sales, however, have slowed to a trickle, as lenders are sorting through changing regulations and other issues. With so much potential supply, appraisals are coming in extremely conservatively, which is making it less attractive for many homeowners to put their homes on the market. Mortgage underwriting has also become more restrictive, with larger down payment requirements and higher credit scores needed to qualify for new loans. These restrictions are not likely to meaningfully change until a significant portion of the foreclosure backlog is cleared. This could push the housing recovery out until the second half of 2012 or later.
Sales Should Improve, at Least Modestly, Later This Year
While the outlook for housing remains disconcerting, we expect to see at least some modest improvement during the second half of the year. Job growth has improved, household formations are rising and affordability is near an all-time high. The National Association of Realtors said it expects the May sales figures to mark the low point for the year. This seems plausible. Existing home sales have averaged a 5.044 million-unit pace through the first five months of this year. Our current forecast, from our May Housing Chartbook, calls for sales to average 5.314 million units during the remainder of this year, which is 5.4 percent above the most recent pace. The gain would be even larger if not for the downturn in homeownership, which we expect to continue for the next few years.
Source: National Association of Realtors, U.S. Department of Commerce and Wells Fargo Securities, LLC