Closing in on a Bottom in 2009

Signs are beginning to emerge that suggest sales of new and existing homes are moving toward a bottom. Actual sales figures took a positive turn in February and mortgage applications for the purchase of a home have increased in recent weeks as mortgage rates have tumbled. We expect sales to bottom this summer and look for some modest improvement during the second half of the year. Such a turn of events would be consistent with past recessions, which saw home sales turn around approximately six months before the broader economy did.

Home sales have turned up around the country, particularly in the hardest hit markets, where short sales and foreclosure sales account for a large proportion of transactions. The National Association of Realtors (NAR) estimates that distressed sales have accounted for 45 percent of existing home sales in recent months, which is one reason why prices have fallen so sharply. The combination of falling home prices and lower mortgage rates has made home ownership much more affordable. The NAR Housing Affordability Index has surged more than 50 points over the past 6 months and is at an all-time high.

Home sales bottoming out does not mean sales are about to turn decisively higher. While housing affordability has improved and investor sales (to investors rather than speculators) have increased, we doubt home sales will turn up in a decisive way until employment conditions improve. Our latest forecast has the unemployment rate rising through the middle of next year. As a result, we do not see any real strength returning to the housing market until late next year or in 2011.

New home construction is in virtual free fall and we expect housing starts to contract a bit further as builders continue to work off excess inventories. The continued slide in residential construction reflects extremely tight credit conditions and builders’ desire to bring inventories back in line with sales. Residential construction outlays are expected to have declined at a pace of at least 35 percent or more in the first quarter and are expected to fall at a 25 percent pace in the current quarter.

The plunge in homebuilding has brought the pace of single-family starts roughly in line with new home sales, which is something that has not happened in the history of these two series. While this might seem intuitively odd, new home sales include a narrower definition of transactions than housing starts by excluding houses built for rent, owner-built homes and houses that are built by a general contractor on the owner’s land. In contrast, all of these are included in single-family starts.