Home Sales Data Disappoints; Recovery Likely Choppy

• The collapse of the housing market was one of the primary drivers of the recession, and the sector’s rebound will be an essential step toward an economic recovery. Recent home sales trends show that the market is improving slowly, but fundamentals remain weak and unlikely to spark a recovery in the near term. Year over year, the median prices for existing and new homes are down 12.5 percent and 11.6 percent, respectively.

• Sales of existing homes lagged expectations in August, falling 2.7 percent. New-home sales rose for the fifth straight month, ticking up 0.7 percent, but current levels are still down 3.4 percent year over year. Demand is expected to remain weak in the fourth quarter due to the expiration of the government’s first-time homebuyer subsidy and the troubled labor market. Soft demand will likely keep prices in their current ranges, limiting new building and construction employment into 2010.
• Inventory levels are contracting but still have a ways to go before reaching traditional equilibrium points of approximately four months to six months of stock. The inventory of new homes has fallen from 12.4 months in January to 7.3 months of supply in August. After peaking at 11 months of inventory last November, the current stock of existing homes is now 8.5 months, although not all foreclosed homes are counted in inventory, skewing this figure.
• While the first-time homebuyer credit has driven some renters to homeownership, the increase in foreclosures has sparked demand for single-family home rentals to a greater degree than apartments. Year over year through the second quarter, the single-family vacancy rate declined 30 basis points to 10.1 percent, while the apartment vacancy rate increased 150 basis points to 7.6 percent. The significant availability of shadow rental stock will continue to apply downward pressure on apartment rents and drive concessions higher.
• Home price declines have pushed down household wealth 12 percent from one year ago. Consumers have reined in spending as a result, causing a drag on retail property conditions. Specifically, retail vacancy is up 110 basis points year to date on negative net absorption of 50 million square feet.