Housing Bubble Watch: Reports Paint Confusing Picture

The usual spate of monthly reports on new home sales, existing home sales, housing starts, and builder confidence were all released recently. Taken together they do little to clarify the state of the housing market.

First out was the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for June. This index results from a survey of builder attitudes that NAHB has been conducting since the mid-1980s. Home builders are asked to express their perceptions of current single family home sales and their expectations for those sales over the next six months as good, fair, or poor and to rate buyer traffic along a six point axis from very low to very high. Scores from each component are used to calculate seasonally adjusted indices where any score over 50 indicates that more builders view the conditions they are confronting as good rather than poor.

In June these indices all fell to their lowest levels in over 11 years. The index for current sales was down three points (since May) to 47, sales expectations dropped from 55 to 50, and perceptions of buyer traffic was at 29 compared to 33 the previous month.

The decline in builder confidence registered in every region but builders in the West scored at 61, only one point lower than May, while the Midwest was down four points to 25.

The next release, also from NAHB was a surprising report on housing starts. May figures for all starts rebounded from a 13 month low registered in April, increasing by 5 percent with single family starts increasing 2.1 percent to a seasonally adjusted 1.586 million units. Regionally three out of four areas reported increases from 1.7 percent in the Northeast to 15.8 percent in the West. The Midwest which had been up significantly in April dropped 15.8 percent in May.

The President of the NAHB referred to the consistent decline in builder confidence since mid-2005 and suggested that builders have been drawing down on "the backlog of unused permits for houses sold earlier." David Pressley stated that "Many builders have reported that they are offering incentives in an effort to limit the number of potential (building contract) cancellations."

The same report, however, noted a decline in the issuance of new building permits. These were down 2.1 percent for both single and multi family housing units from April levels, continuing a downward slide that started after peak numbers in September 2005. Permits in May were issued at a pace of 1.466 million units and 466,000 multifamily permits (annualized) were pulled.

The U.S. Census Bureau in conjunction with the U.S. Department of Housing and Urban Development released data on the sales of new residential property in May. Again a pleasant surprise. The preliminary April estimate was revised upward to 1,180,000 and preliminary figures showed that May was sailing along at a level 4.6 percent higher than those revised April figures. This was down 5.9 percent from figures a year earlier but still an indication of a strong market for new homes.

The median price of new homes sold in May was $235,300 and the average was $294,300. These were both down from April 2006 figures of $238,500 and $298,300 figures respectively.

There is currently a 5.5 months supply of new homes on the market at present absorption rates, compared to 5.8 months in April. In May one year ago, however, the supply was 4.2 months - a year-over-year increase of 31 percent.

The final report was the National Association of Realtors� monthly survey of sales of existing houses. Total existing home sales, including single-family houses, condominiums, co-ops, and townhouses were off 1.2 percent to a seasonally adjusted annual rate of 6.67 million units in May. The April figure was 6.75 million units and one year ago the pace was at 7.14 million. Thus year over year sales are down 6.6 percent. In the West, however, sales were down 13.5 percent since last year.

Prices, however, continued to move upward, although at what NAR called a "near normal rate." The national median price for existing homes (all types) was $230,000, an increase of 6 percent from May 2005 when the median was $217,000.

At the end of May 3.60 million existing homes were available for sale - a 6.5 month supply at the current rate of sales. This is a 5.6 percent increase in unsold units over last May.

Condos and co-ops were selling at an annual rate of 852,000 units, 1.9 percent higher than in April but 6.6 percent below the 912,000 pace one year ago. Single family house sales slipped 1.5 percent since April to an annual rate of 5.82 million which was 6.6 below sales in May 2005 and the median single home price was $229,700, up 6.4 percent from the same month in 2005.

NAR President Thomas M. Stevens said the survey results should be kept in perspective. A yearly sales rate of six million units was unheard of until 2003, "so the current level of home sales is still pretty healthy by historic standards. Housing is continuing to support the overall economy by providing a sound foundation for other sectors to grow - the normalization that is taking place in the housing market is good for the long-term health of the industry."

Reading the three surveys with their contradictions is sort of like watching the swirling around the water does as the tide changes. For a few minutes it looks like the ocean is unsure in which direction it is headed; however, it forever and always decides to reverse direction. It could be that the housing market is only resting for a bit before it continues to plunge ahead.