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Markman: Housing Market Still Sluggish

Jobs and real estate locked in a downward dynamic


We learned in the past week that new home sales in the U.S. fell less than expected in May, but the market remains horribly depressed. Home sales sank 2.1%, after leaping 16% the prior two months from near-record lows. The year-to-year growth rate rose for the first time in 13 months.

Before you get all excited, keep in mind that at 319,000 homes annualized, sales remain a touch below last year’s average and well below levels warranted by long-run household formation, which is 800,000-plus a year. That’s a lot! Storms that beat up the South and Midwest were not really the main problem as sales fell in the other regions of the country as well.

Despite soft sales, inventories finally abated a bit to 166,000 homes due to the lack of homebuilding activity. With lots to choose from in the home resale market, at 9.3 months supply, BMO analysts say we should not expect new home demand to rebound anytime soon. In fact, the June homebuilders’ survey showed the weakest expected sales outlook on record, and new mortgage applications are mired at 14-year lows.

What about existing home sales? They fell less than expected in May, at a 3.8% rate, to 4.81 million annualized. Much of the differential came from a downward revision in April’s rate, so it really cannot be construed as good news.

Sales are now at a six-month low after tumbling below last year’s average rate, and BMO analysts note that they are under the 5-million-plus level that is needed to make a serious dent in the large inventory overhang.

It’s kind of amazing, really. What a fantastic time to buy a house, with prices down and mortgage rates so low. But the best affordability in at least four decades was no match for slower job growth, high unemployment and tighter lending standards.

Also, don’t forget that storms cut across the South and Midwest, resulting in broad declines in sales in those two regions. Yet that was not the whole story.

Sales also fell in the Northeast, and were flat in the West.

The supply of homes on the market rose to a six-month high of 9.3 months from 9 months, at least two months more than the norm. That is keeping pressure on prices. The median sale price of an existing home sank 4.6% from a year ago, though BMO analysts note that the rate of descent has slowed recently. Housing demand and prices look to remain very weak over the rest of the summer, according to the June homebuilders survey, which showed a record low outlook for new home sales.

Bottom Line:  The U.S. housing market remains in recession or worse — no two ways about it. And this is one part of the U.S. economy’s “soft patch” that is not directly related to the supply chain disruption stemming from the Japan earthquake and tsunami.

As long as long as this remains the case, employment will also remain under pressure. But there’s a chicken-and-egg problem — as long as employment is weak, home construction will stay week. Hmm, that sounds like an impasse. The only good news in this sphere was that if you use heating oil to warm your abode, it got cheaper this week. (Now if oil prices will only stay that way until winter.)

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