Here is an interesting picture. The S&P/Case-Shiller House Price Index showed prices in the 20 largest cities increased 13.3 percent annually in September, the highest year-over-year increase since February 2006. Yet, existing home sales have slowed a bit and pending home sales have been lower for several months, according to the National Association of Realtors (NAR). How can home prices be rising at a time in which home sales are slowing down? The answer is found in two important numbers.
For one, the percentage of distressed sales is falling as the foreclosure inventory shrinks. Lender Processing Services (LPS) reports that foreclosure inventory is down 30 percent over the past year. Meanwhile, NAR reported last that distressed homes are making up fewer of the total existing-home sales recorded in the past year. Sales of distressed homes—which include foreclosures and short sales—made up 14 percent of October sales, down 25 percent year-over-year. Since distressed homes sell at a significant discount over non-distressed sales, it makes sense that the average sale price is rising. During the height of the housing crisis, the flood of foreclosed homes exaggerated the drop in home prices and on the way out of the crisis, the rise in home prices his now exaggerated by the lower numbers of these sales.
Secondly, we still have a lack of inventory in many markets, especially at the lower end of the market. Housing sales are being held back because of this lack of inventory but at the same time we are not seeing slower housing sales cause downward pressure on prices. If there is more demand than supply, prices will be stable or rise regardless of the number of total sales. What does this mean for the future? If demand continues to rise, housing prices will continue rising or at least stabilize. Theoretically, higher prices will also induce more sellers to list their homes.
The first factor—distressed sales—will become less of a factor in the future as we approach normalized levels of distressed sales. The key is demand. If the economy continues to produce jobs at a decent rate, then we will have a greater demand for the homebuying market. That is what makes December's employment report interesting. Heading into December we had a series of numbers which pointed to a stronger jobs market, including the lowest number of first time claims for unemployment benefits since before the recession started and a strong October report. This made the markets optimistic before the numbers were released. More on that factor in a future column.
Dave Hershman is a top author in the mortgage industry with seven books published, including The Complete Mortgage Management Kit. Dave is also director of branch support for McLean Mortgage. He may be reached by e-mail at [email protected]
or visit www.originationpro.com.