The story behind the November 2012 existing home sales data is that the number of months of inventory was less than five months – the lowest since the market peaked in September 2005. Real estate economists generally contend that six months of inventory of existing homes is normal, and that at less than that level, we see home prices rise at a rate greater than inflation. The declining inventory story is well illustrated in the following graph. The number of months inventory is calculated by dividing the number of active listings by the number of homes sold in the prior 12 months, and then multiplying that times 12.
The Seasonally Adjusted Annualized Rate (SAAR) of existing home sales, on a 12-month moving average basis, now rests at 4.62 million dwelling units. This is up 15.3 percent from the low pegged in May 2009 — 4.01 million on a 12-month moving average. The 12-month moving average has risen 17 consecutive months. While still far less than the 7.08 million existing home sales 12-month moving average posted in November 2005, it shows significant and ongoing improvement. Given the now more stringent loan qualifying and underwriting requirements and increased down payments, the 7 million home sales pace seen at the peak in the housing bubble will not be the new norm. I believe that a 5.5 to 5.7 million annual sales rate is more realistic in today’s lending environment. Under that assumption, there remains a 20 to 22 percent upside in the coming 12 to 18 months in the number of home sales.
As inventory continues to decline and the number of home sales accelerates, home values will continue to rise, just as they have for the past nine consecutive months. The November 2012 12-month moving average national median home value was $174,000, up 5.4 percent from one-year earlier. At the bottom of the housing bubble implosion, home values had dropped 29 percent from the peak seen in July 2006. The market has clawed back 6.6 percent of that decline and is now off 22.4 percent from that peak level.
Here are the summary numbers from the National Association of Realtors® (NAR) press release:
- Foreclosures and short sales (distressed properties) made up just 22 percent of November 2012 home sales numbers with 12 percent being foreclosures and 10 percent short sales
- Short sales prices were 16 percent less than non-distressed properties while foreclosures sold at an average 20 percent discount
- All-cash transactions made up 30 percent of all home sales in November 2012
- 30 percent of November home purchases were first-time buyers
- Investors made up 19 percent of all closings in November
- One-third (32 percent) of November homes sold were on the market less than one month, while 1/5th (20 percent) were on the market for six months or longer
Given rising rents, still record-low interest rates and minimal inventory, home prices will continue to rise into 2013, forgoing a leap off the fiscal cliff into another instantaneous recession. In normal times, housing value appreciation has outperformed inflation. From 1992 to 2002 (before the housing bubble), median home prices rose 4.72 percent per year, compounded annually, from $104,000 to $165,000. In that same period, inflation, proxied by the GDP price deflator, rose a compound annual rate of 1.88 percent and the CPI increased at 2.51 percent compound annually.
Why I Use the 12-Month Moving Average
I prefer to use the 12-month moving average as it removes the month-to-month noise in the data and makes the trend (or lack-there-of) more pronounced. The graphs below well illustrate the point. On the first graph of median home prices, the left side shows the raw data as reported by NAR. The right side is simply the 12-month moving average of the prior 12 months of median home prices. The raw data would indicate prices have gone up 10.1 percent since November 2011, but are off 4.3 percent when compared to June 2012. Given monthly seasonality and just the general noise in data, the trend is far more important than the monthly point estimates.
The same is true for home sales—even though NAR reports seasonally-adjusted annualized sales numbers. The following graph shows the seasonally-adjusted annualized rates reported by NAR, while the right hand side is the 12-month moving average of these SAAR sales rates.
To read the entire NAR press release click here.
The bottom line is that housing continues to recover, driven by rising rents, increasing demand, high affordability and minimal inventory. Foregoing a fiscal-cliff inspired recession, home values will continue to rise and sales will continue to increase.
Ted