Home Sales Are Still Working To Find A Bottom

Home sales fell much more than the consensus estimate, falling 2.6 percent to a 4.86 million unit pace. Our own forecast called for a drop to a 4.87 million unit pace. Prices fell sharply, as foreclosures and short sales made up a larger proportion of total sales. The median price fell 6.1 percent over the past year, falling to $215,100 in June.

Housing May Be Nearing A Bottom But Is Not There Yet

Sales of existing homes fell a larger-than-expected 2.6 percent in June to a 4.86 million unit annual pace. Existing home sales have fallen 15.5 percent from their year-ago level. While sales are still down double digits, the rate of decline has clearly moderated and we continue to believe sales will find a bottom during the second half of this year or early 2009. One complicating factor has been the recent up-tick in mortgage rates. The interest rate on a conventional 30-year mortgage is now around 6.6 percent, which while historically low, is still about a percentage point higher than it was at the start of the year.

Help may be on the way. The House of Representatives passed a housing bill yesterday that will raise conforming limits on mortgages, help around 400,000 subprime mortgage holders refinance into conforming mortgages, and provide additional government backing for Fannie Mae and Freddie Mac. Once the package is passed by the Senate and signed by the President, both which are widely expected, we should see some relief in the mortgage market, both for conventional and jumbo mortgages.

The National Association of Realtors (NAR) noted that sales picked up in many parts of the country where housing is most overbuilt and foreclosures had risen dramatically, including California, Florida, Arizona, and Nevada. Sales have been rising in many of these hard hit markets for a number of months, helped out by a dramatic increase in foreclosure and short sales. Unfortunately, sales are weakening in parts of the country where sales had been holding up relatively well, including Houston, Charlotte, and Kansas City. Clearly, we are not at a bottom just yet.

The median price of an existing home has fallen 6.1 percent over the past year, with the largest price declines in parts of the country where speculative buying had been the greatest (California, Florida, Arizona and Nevada). These markets account for a disproportionate share of the rise in foreclosures over the past year and are now seeing a rise in sales as foreclosures are sold off and short sales are put through. One by-product of this activity is that prices are tumbling in these areas. The median price of an existing home has plunged 17.2 percent in the West and 12.6 percent in the Northeast. These areas account for the bulk of the metro areas in the S&P/Case Shiller 10-City Composite Index, which is one reason the Case Shiller index has fallen so much more than other home price indices.

The financial markets were clearly disappointed by the weaker home sales figures. There was hope that the housing market had bottomed. We continue to believe the bottom will be found in the next year but stress that any recovery beyond then will be extremely modest. Sales are not likely to return to a pace considered as strong for another two to three years.

Wachovia Corporation
http://www.wachovia.com

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