Existing-House Sales Spike in April

If you want to sell a product, price it correctly. That theory at long last appears to be working in the U.S. housing market.  The National Association of Realtors (NAR) reported that sales of existing homes rose 3.4 percent in April when compared with March.  One reason is that asking prices were remarkably affordable.  The interest rate on a 30-year fixed-rate mortgage was 3.79 percent, the lowest since record-keeping began in 1971, according to Freddie Mac.  The Realtors’ index of affordability hit a record high in the 1^st quarter and factors in sales prices of existing homes, mortgage rates, and household income, which is gradually strengthening as the labor market improves.

The average sales price was 10.1 percent higher when compared with one year ago.  That has the potential to lure buyers who decide they can’t wait for even cheaper prices.  “Today’s data provide further evidence that the housing sector is turning the corner,” said economist Joseph Lavorgna of Deutsche Bank Securities.  The numbers could see more improvement in coming months.  Action Economics Chief Economist Michael Englund said that “The existing home sales data generally continue to underperform the recovery in the new home market and other indicators of real estate market activity.”  But, he added, “the trend is upward.”

Owner-occupied houses and condominiums dominated the market, a change from all-cash deals by investors snapping up distressed properties.  Employment gains and record-low mortgage rates may make houses affordable Americans, eliminating a source of weakness for the world’s largest economy just as risks from the European debt crisis rise.  “We are making incremental progress,” said Millan Mulraine, a senior U.S. strategist at TD Securities, Inc., who correctly forecast the sales pace.  “People are becoming more confident about job prospects and about taking on mortgages.  This is all positive for the economy.”

Even with this uptick, sales are well below the nearly six million per year that economists equate with healthy markets.  The mild winter encouraged some people to buy homes, which drove up sales in January and February, while making March weaker.

First-time buyers, a key segment critical to residential recovery, rose in April and accounted for 35 percent of sales, up from 32 percent in March.  “First-time homebuyers are slowly making their way back,” said Jennifer Lee, an economist at BMO Capital Markets.  “That is still below the 40-to-45 percent range during healthy times, but the highest in almost half a year.”  Homes at risk of foreclosure accounted for 28 percent of sales.  That’s approximately the same as was seen in March sales statistics, but down from 37 percent of sales in April 2011.

Wall Street analysts expressed caution about seeing the increase as a sign that home values are about to make a big comeback.  NAR’s price calculations may have been skewed by larger homes coming onto the market, analysts said.  According to NAR economist Lawrence Yun, seasonal factors might have played a role in the price increase because families tend to buy in the spring, which means bigger homes comprise a larger share of total sales.  “It does echo the message sent by most other related measures that have shown house prices stabilizing or firming,” said Daniel Silver, an economist at JPMorgan.  Home prices, according to the S&P/Case Shiller composite index, have fallen by approximately one-third since the middle of 2006.  “Although the data seem to imply that there is a relative good balance between buyers and sellers, it is unlikely that home prices can recover on a sustained basis until the number of distressed properties is more significantly reduced,” said Steven Wood, chief economist at Insight Economics.

The housing inventory climbed 9.5 percent to 2.54 million, representing a 6 ½-month supply.  CoreLogic estimates that the shadow inventory — homes that aren’t on multiple listing services that are either seriously delinquent, in foreclosure or real-estate-owned — totaled 1.6 million units as of January.

CNBC’s Diana Olick is unimpressed with the price spike.  “The median price of an existing home that sold in April of this year was $177,400, an increase of just over 10 percent from a year ago.  That is the biggest price jump since January of 2006.  The difference between now and then, though, is the 2006 price jump was real, this latest spike is not.  As we reported here on the Realty Check last month, a lack of distressed supply, that is foreclosures and short sales, is pushing overall home sales lower.  That’s because the majority of the sales action for the past few years has been on the low end of the market.  Now, as banks try to modify more delinquent loans to comply with the recent $25 billion mortgage servicing settlement, and as investors rush in to buy distressed properties and take advantage of the hot rental market, the distressed market is drying up.  The share of home sales in the $0 — 250,000 price range made up over 73 percent of all sales in February; that has already dropped to 67 percent in April.  If you look at sales by price category, you see the most startling evidence of this shift in what’s selling on the low end out west.  Sales of homes $0 — 100,000 dropped over 26 percent out west in April, but rose 21 percent in the $250 — 500,000 price range.”