The Economist reports in its latest issue on the improving fundamentals:
Sales of new homes, which had plunged nearly 60% from their average level of 2005, have been stable since March. Sales of existing homes stopped falling last autumn. Julia Coronado of Barclays Capital says that construction of homes built for sale, not counting units that already have a buyer, had dropped to 13% below the level of new-home sales in the first quarter (see chart 1). She thinks second-quarter data, due out on August 19th, will show the gap growing to 18%. That is why the inventory of unsold homes, though still near recent highs relative to monthly sales, has fallen sharply in absolute terms.
By the standards of previous cycles, residential construction should be nearing the bottom. Karl Case, a housing expert at Wellesley College and one of the creators of the S&P/Case-Shiller home-price indices, notes that in three previous housing cycles, residential investment peaked at about 5.5% of GDP and hit bottom at around 3.5%. In the latest cycle it peaked at 5.5% in 2006 and by the second quarter had fallen to 3.1% of GDP, below the troughs of 1975, 1982 and 1991. He does not expect much rebound…
Finally, since home prices have dropped about 18% from their mid-2006 peak (based on the S&P/Case-Shiller composite of 20 cities) and incomes have steadily grown, homes are returning to more typical levels of affordability in some regions. Mr Case estimates that in Los Angeles, the ratio of home prices to annual income per person doubled from 2001-06 to 16, and has since fallen to 11. In Boston, it rose from nine to 12, and has since fallen back to nine.
Bloomberg reported last week that lower prices are improving sales figures in many areas of the country:
Price discounts are spurring buyers in some areas of the country, according to the Realtors report. One quarter of the states had sales increases in the second quarter when compared with the prior three months.
“Once the inventory is drawn down, price pressure will return because the costs of construction are rising,” Gaylord said.
And the Los Angeles Times reports today on a significant jump in sales in Southern California:
Southern California home sales rose last month for the first time in nearly three years, although prices continued their downward spiral, data released today showed.
In July, the region’s median price fell 31% from a year ago to $348,000, the lowest since February 2004, when the local real estate market was in the throes of an extraordinary boom, according to La Jolla-based research firm MDA DataQuick.
The ongoing decline in prices appears to be spurring sales. The number of homes sold picked up in July for the first year-over-year expansion since October 2005. All counties, save Los Angeles County, posted at least a 10% increase from July 2007.
Locally, according to Doug Farmer’s numbers, Bend saw inventory actually decline 10% in July from the same month last year while sales actually increased 10% year-over-year.
Now one month doesn’t make a trend but this combination of declining inventory and rising sales is the first positive sign for the market in a long time and exactly the supply/demand recipe for finding a bottom.
Behind the housing gloom is an improving backdrop
August 14, 2008
U.S. Home Sales Fall to 10-Year Low as Prices Tumble
Kathleen M. Howley and Dan Levy
August 14, 2008
Southern California home sales jump in July
Los Angeles Times
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Market Conditions for Bend, Oregon
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NAHB: Builder Confidence at Record Low
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Bend, OR MSA Real Estate Market Reports, Home Value Info