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Michael Shenk |

Research Assistant

Michael Shenk

Michael Shenk was formerly a research assistant in the Research Department of the Federal Reserve Bank of Cleveland. His work focused on international topics and housing-market indicators.

09.04.08

Economic Trends

Update of the Housing Market

Michael Shenk

Over the past two weeks, a lot of data on the housing market has been released, giving us a fairly comprehensive look at where the market stands through July. Here’s a brief overview of that data and the picture it paints of the housing market.

Existing single-family home sales—which comprise the majority of home sales in the United States—rose 3.1 percent in July, after falling 3.4 percent in June. Over the past few months, existing single-family home sales have stabilized noticeably. They have increased in four of the first seven months of 2008, compared to a total of just three increases in 2006 and only two in 2007. In fact, so far this year, sales are up an annualized 2.8 percent.

While these reports on existing single-family home sales have been refreshing, it’s difficult to say with any certainty that the market has bottomed out. Remember, we saw a similar period of apparent stabilization from July 2006 to February 2007, but then sales began to decline again in March. Looking at inventories, it’s clear that there is still an oversupply of homes for sale, which could continue to put downward pressure on prices and potentially further slow the pace of sales.

Sales of new single-family homes also increased in July, rising 2.4 percent following a 2.1 percent decline in June. Like the existing-homes market, the market for new single-family homes is showing some encouraging signs. However, those signs are a little more tenuous since the trend has not been as pronounced or as long in duration. Still, over the past five months, new single-family home sales have been essentially flat, a performance that represents the series’ best five-month showing since late 2006. However, the growth rates for the series over longer periods—6, 9, and 12 months—all remain substantially negative and have shown limited improvement in recent months.

The inventories picture for new homes is a little more encouraging. New-home builders continued to work off inventory in July, as the number of homes on the market fell 5.2 percent, the largest monthly decline since 1963. However, given the slow pace of sales, inventories are still elevated, though they have backed off of their recent highs somewhat.

Given the level and direction of inventories, the data for housing starts shouldn’t be a surprise. The decline in single-family housing starts has continued in recent months and shows little signs of bottoming out. The only positive sign is that the pace of the decline, while still rapid, appears to be slowing somewhat, as evidenced by improvements in the 3-, 6-, and 9-month growth rates. However, at −21.5 percent, −27.0 percent, and −34.9 percent (annualized rates), these rates make clear that single-family starts are far from turning a corner.

Perhaps the most important indicator of the housing market’s health, or at least the one with the largest impact, is home prices. According to the national S&P/Case-Shiller home price index, prices continued to fall in the second quarter of 2008 and are currently down 15.4 percent from the second quarter of 2007. As with housing starts, the slowing pace of the decline in home prices is the only bright spot in this report, as the pace slowed somewhat in the second quarter compared to the first. The other major home price index, published by the Office of Federal Housing Enterprise and Oversight (OFHEO), continued to decline as well. While this index gives a more positive picture of home prices, showing only a 4.8 percent decline over the past year, it did not indicate any slowing in the pace of the decline in the second quarter. It should be noted that the S&P/Case-Shiller national index and the OFHEO purchase-only index use somewhat different methodologies and data in calculating their indexes. The major difference is that the OFHEO purchase-only index leaves out loans above a certain limit and tends to give more weight to rural areas than the S&P/Case-Shiller index. These differences likely explain much of the variation in their respective appreciation rates.

All things considered, the housing market’s troubles continued into July. But for those looking for a bright spot, some tenuous signs that the market is getting close to the bottom are emerging. Going forward, the downside risk is that high inventories and financial troubles will continue to put downward pressure on prices, which could result in further declines in sales and construction activity.