Are We Seeing Price Capitulation In Existing Home Sales In August 2011?

The old laws of supply and demand may be alive and well in the existing home market.  August 2011 data released by the National Association of Realtors (NAR) showed continuing improving volumes with prices contracting.

At a certain point, sellers may no longer be willing to wait for real estate prices to recover – and resign to recover what they can.

Econintersect review of the data shows volume up 21.3% year-over-year (4.2% month-over-month), while prices are down 4.0% year-over-year (0% month-over-month).

The volumes this month have not been seen in August since 2007 when they were considerably higher.

Lawrence Yun, NAR chief economist, said there are some positive market fundamentals. “Some of the improvement in August may result from sales that were delayed in preceding months, but favorable affordability conditions and rising rents are underlying motivations,” he said. “Investors were more active in absorbing foreclosed properties. In additional to bargain hunting, some investors are in the market to hedge against higher inflation.”

“We had some disruptions from Hurricane Irene in the closing weekend of August, when many sales normally are finalized, along the Eastern seaboard and in New England,” Yun said. “As a result, the Northeast saw the smallest sales gain in August, and some general impact is expected in September with widespread flooding from Tropical Storm Lee. Aberrations in housing data are possible over the next couple months as markets recover from disrupted closings and storm damage.”

Yun said an extremely important issue currently is the renewal and availability of the National Flood Insurance Program, scheduled to expire at the end of this month. “About one out of 10 homes in this country need flood insurance to get a mortgage, and we would see significant negative market impacts without it,” he said.

The NAR press release hit on mortgage availability and again on cancellations causing “poor” numbers.

The biggest factors keeping home sales from a healthy recovery are mortgages being denied to creditworthy buyers, and appraised valuations below the negotiated price. Buyers may be able to find more favorable credit terms with community and small regional banks, and Realtors® can often give buyers advice to help them overcome some of the financing obstacles,” Phipps said.

Contract failures – cancellations caused largely by declined mortgage applications or failures in loan underwriting from appraised values coming in below the negotiated price – were reported by 18 percent of NAR members in August, up from 16 percent July and 9 percent in August 2010.

Maybe there were a bunch of cancellations – and for sure mortgage institutions want a pound of flesh.  But housing is not exempt from the economics of supply and demand – price and demand must come into balance.  This summer’s peak selling season has seen the balance come from lower prices bringing increased demand.

Home prices continue to fall.  Falling prices normally improve sales volumes and that is what we seeing.  Normal market forces are in action.

Econintersect will do a more complete analysis of home prices  when the Case-Shiller data is released.  The situation according to the NAR:

The national median existing-home price3 for all housing types was $168,300 in August, which is 5.1 percent below August 2010. Distressed homes – foreclosures and short sales typically sold at deep discounts – accounted for 31 percent of sales in August, compared with 29 percent in July and 34 percent in August 2010.

According to the NAR, all-cash sales accounted for 29% of transactions in August, unchanged from July.  All cash purchases were 28% in August 2010.

I see little evidence the housing crisis itself is coming to an end.  The unseen amount of homes that likely will come onto the market will continue to keep downward pressure on the market.  The evidence this crisis is ending will be when the year-over-year housing prices start rising.

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