Thursday, January 21, 2010

New and “Organic” Existing Home Sales Agree

As I have noted in prior posts, the S&P/Case-Shiller sale pair counts series are, to my knowledge, the best “organic” existing home sales series as can be found.

The methodology employed by S&P vets out “flips”, new construction and even most distressed sales providing them with a solid base of true “arms-length” sales for which to base their more popular home prices series on.

As has been widely reported, some 30%-40% of all existing sales (as reported by the NAR) are distressed properties resulting in a significant gap between the trends in new and existing home sales.

Existing home sales have been essentially propped up by the high volume of distressed properties resulting in a poor indicator of the true trends for non-distressed typical existing home sales.

Yet, looking at the chart below (click for super dynamic full-screen version) which compares the seasonally adjusted new home sales series and the non-seasonally adjusted S&P/Case-Shiller Composit-10 sale pair count series, both smoothed with a 12 month simple moving average, you can see that there is a great degree of correlation between the two trends.

Further, although both series clearly indicate that the worst of the home sales decline is likely behind us, it’s important to recognize that the formation of the “bottom” during the 90s-era housing bust took roughly two years during which time existing home sales continued to slowly trend down.

A bottom to our current housing cycle will not be defined by a single data series on a single month but instead will be a long slow slog whereby multiple market factors clear in a cumbersome "fits and starts" manner.

In the mean time, don't be surprised if sales (new and existing) continue to trend down even further and prices continue their reversion to the mean.