Kauai Real Estate > Housing Market Recovery

Has The Housing Market Hit The Bottom?

August 2009

Housing Recovery

Has the housing market finally hit bottom? The answer is finally YES and Wall Street, to their credit, has been forecasting this for months.

Pending home sales, a forward-looking indicator based on signed contracts, rose in June for the fifth straight month. And in April, pending home sales had their biggest monthly jump since October 2001. Existing home sales rose a larger than expected 7.2% in July to a seasonally adjusted annual rate of 5.24 million homes. July marks the fourth consecutive monthly increase in existing home sales and it was the largest monthly gain since recordkeeping began.

U.S. home prices in 20 cities declined at a 15.4 percent annual pace in June -- a considerably smaller decline than May's annual pace, according to the S&P/Case-Shiller U.S. National Home Price survey. Economists surveyed by Bloomberg News had expected the S&P/Case-Shiller Home Price Index to fall 16.4 percent in June, on a year-over-year basis. The index fell at a 17.1 percent pace in May and 17.9 percent in April. Further, home prices in the 10-city index declined at a 15.1 percent annual rate in June, compared to a 16.8 percent annual rate in May. After 16 consecutive months of record annual declines, beginning in October 2007 and ending in January 2009, the indices have now shown five consecutive months of an improvement in annual returns. Equally significant, only two cities, Detroit and Las Vegas, registered price declines in June: 18 cities registered price increases.

The National Association of Home Builders / Wells Fargo housing market index rose one point in August to 18. It was the highest level since June 2008. The combined construction of new single family homes and apartments in July decreased 1% to a seasonally adjusted annual rate of 581,000 units. This follows a 6.5% increase in June. However, construction of new single family homes rose 1.7% in July to a seasonally adjusted annual rate of 490,000 units.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications for the week ending August 14 rose 5.6% to 527. Purchase volume rose 3.9% to 277.7. Refinancing applications increased 6.9% to 1,982.5. The refinance share of mortgage activity increased to 53.3% of total applications from 52.3% the previous week.

The index of leading economic indicators, designed to forecast economic activity in the next three to six months, rose 0.6% in July after a revised 0.8% gain in June. It was the fourth straight monthly increase and an indication the recession might be nearing an end.

The producer price index, which tracks wholesale prices, fell 0.9% in July, following a 1.8% increase in June. Compared with a year earlier, wholesale prices were down 6.8%, the most since a 5.3% decrease in August 1949. This indicates that inflation is still under control and is not expected to rise significantly any time in the near future.

About one in three homes sold in June was a foreclosure or distressed sale, down from the 40% to 50% seen earlier in the year. This has dragged down the median price to $173,000, which is 16.8% below a year ago. The median price of an existing home has fallen 26% from the peak reached in July 2006.
In response to the troubled housing market, the Federal Reserve has moved aggressively to push down mortgage rates by buying as much as $1.75 trillion of housing debt and Treasuries this year. This policy has been successful. Rates on 15-year and 30-year fixed-rate mortgages are hovering at historic lows.
Homebuyers often fail to consider the savings that come with low interest rates, particularly over the life of the loan, or even the partial life of the loan. For example, on a 30-year fixed-rate loan amount of $200,000 at 5%, the interest paid over the life of the loan is $186,512. That brings the total loan payments to $386,512. At 6%, the amount of interest paid rises to $231,676, a 24% increase. At 7%, it’s $279,018, a 49% increase. So it is important to remember that with all these indicators suggesting the market is stabilizing what might be gained from a further drop in housing prices could easily be lost by a rise in interest rates.

What does all this mean? Bottom line: The stabilization we needed to see in the housing market has become clear and therefore I feel confident that we can finally declare a recovery has begun.