March 25, 2009 (Housing Market Monitor)

Is a Bottom In Sight?

By Dean Baker

March 25, 2009

The median price for existing homes in the West fell at a 44.9 percent annual rate over the last quarter.

The data on the housing market has improved somewhat in the last two weeks, but is important to keep the recent numbers in context. For example, starts of new homes in February increased by 22.2 percent from the January level. But most of this was attributable to a 79.7 percent jump in building starts of structures with 5 or more units. Starts of single-family homes were up just 1.1 percent from January.

Furthermore, the January level was a sharp decline from December, with starts down by 14.5 percent, so the February level was only slightly higher than the December level. In fact, starts of single-family homes in February were still down by 9.4 percent from the December level. What really has happened over this period is probably best revealed by the movement in permits. Permits fell by a modest 2.9 percent in January, which was reversed with a 3.0 percent rise in February. Obviously, the sharp drop in starts in January and subsequent rise in February was driven by weather (the biggest changes were in the Northeast and Midwest), not market conditions. 

The February existing homes sales data also showed a sharp 5.1 percent jump compared with January, led by a 15.6 percent rise in sales in the Northeast. Here also, the jump reversed a decline from January, with nationwide sales still down 0.4 percent from December levels and sales in the Northeast down by 1.3 percent.

The most remarkable news in the existing home sales data was the rate of price decline.  While prices nationwide rose slightly from the prior month, a three-month average (December – February) shows an impressive rate of price decline compared with the prior three months (September- November). For the country as a whole, prices have declined at a 32.5 percent annual rate over this period. In the Midwest and South they have dropped at a 27.3 percent and 27.4 percent annual rate, respectively. In the West, prices have fallen at an incredible 44.9 percent annual rate over this period. These data do not control for the mix of homes, and undoubtedly the distress sales of a large number of relatively low-cost homes was a major factor in this price decline. The numbers are nonetheless quite striking.

The new home sales data showed the same pattern, with a sharp fall in January that was partially reversed by an uptick in February, although the 4.7 percent uptick in February still left sales 9.2 percent below their December level. It is worth noting that the new home sales data reflects contracts actually signed in the month, whereas the existing home sales data reflects closing on contracts that would have likely been signed the prior month. For this reason, the new homes data is more recent than the existing homes data.

The pattern by region was somewhat different in the new homes sales data. The biggest uptick in February was a 9.7 percent increase in the South, followed by a 6.6 percent rise in the West. Sales fell by 3.3 percent in the Northeast and 9.1 percent in the Midwest. There also was another sharp decline reported in the median house price. The median price of a new home fell 2.9 percent in February after falling 9.0 percent in January. These prices are highly erratic, but the low number for February indicates that the January decline was not an aberration. 

The mortgage applications index shows little evidence of any substantial uptick. Applications for purchase mortgages are up slightly from their lows earlier this year, but remain at very depressed levels. Applications for refinancing have been very strong as homeowners are obviously rushing to take advantage of the opportunity to refinance at a lower rate. 

In sum, it appears as though sales levels may be near a bottom, but prices are still declining at a very rapid rate. The data shows an enormous inventory of both new and existing homes. There is also a large hidden inventory in both areas, which will be put on the market at the first evidence that demand is increasing. In short, prices have a long way yet to fall. 

Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.