The National Association of Realtors released the report for Existing Home sales last week and pointed to continued increases in activity to support the forecast that the market has bottomed.
NAR projects a continued recovery through the second half of 2009, projecting that full-year sales will come in at 4.98 million units, a 1.4% increase over 2008.
While the market is demonstrating increased resiliency, I think it is early yet to project a full recovery from the year-over-year declines in home sales.
In terms of the absolute number of existing homes sold in May, sales were down 6.6% versus prior year and are down 33% from the May peak of 2005. (Interestingly, June 2005 was the absolute peak in number of homes sold at 754,000.)
The chart to the right gives a good sense of just how steep the decline has been in home sales, with the 2009 number below the level of 10 years before.
To assess the relative stability of the market, it’s useful to look at the trend in seasonal trajectory of home sales. The performance of the market in May to August is critical to the overall year: historically, 40% of all homes are sold in these four months.
Home sales in May were 75.5% above January, compared to the weighted average of 689% from the past 10 years. May sales were up 9.2% from April, compared to the weighted average of 9.8% for the past 10 years. (April sales gained 15% versus March, a very strong performance.)
NAR’s recent report on pending home sales, which were up versus the prior month, indicate that the current trend in pacing is likely to continue into the summer.
While there are myriad external factors creating noise in the existing home market — the price impact of foreclosure, stricter rules related to appraisals, volatility in mortgage rates and the drag of high unemployment — the rhythm of the market in 2009 is relatively consistent with normal market trends.
If this pattern were to continue, then home sales would end the year at approximately 4.7 million, down 4% from the prior year.
The third chart in this post looks at the quarterly and annual changes in home sales over the past decade. The area graph is useful in showing the impact that disproportionate quarters had on the overall performance of the market. On the upswing, it was a four-quarter period, from the third quarter of 2003 to the second quarter of 2004 that significantly shifted the overall volume of home sales. On the downswing, the correction gained momentum through the third quarter of 2006 to the second quarter of 2008. The intensity of the declines has slowed significantly over the past four quarters. The graph neatly shows that projecting the current levels of performance through the remainder of this year brings the crash, which began at the end of 2005, to a close at the end of 2009.
For perspective, I’ve added included two charts from the excellent blog Calculated Risk looking at existing home sales and inventory since 1994.
A quick glance at the long trend supports the observation that the market has leveled off, albeit at levels of a decade ago.
What does this mean for the economy overall? With the rate of existing home sales reaching year-over-year parity, pricing should begin to firm up and inventories work off at an accelerating, although still deliberate pace. With inventory absorption increasing, new home construction will restart. This outlook is consistent with a recovery in the new home market in 2011.
While it feels a long way off, and challenges remain immediately ahead, it is worth remembering that we’re on the cusp of putting a four-year decline behind us. That is a heartening and energizing realization.