Going Organic!: Organic Home Sales March 2009

With all the speculation of a quick end to the economic decline and numerous “bottom” calls for the nation’s housing markets it’s almost possible to forget the severity of our current predicament.

One notable development that appears to be boosting hopes has been the recent trends in new and existing home sales.

As I have noted in prior posts, I don’t believe that any flattening to existing home sales (i.e. rate of decline slowing) or the brief historic low for new home sales earlier in the year (followed by sequential increases) equates to a bottom in any way shape or form.

Both markets have elevated inventory, obviously declining prices and commonly occurring distressed products all working to suppress any real substantive turn around.

But what would be indicative of a “real substantive” turn around anyway?

I would argue that probably the most important indicator of real healing to the housing markets would be to see a trend, as “Mr. Mortgage” Mark Hanson puts it, “Organic” sales.

These would be sales between real typical home buyers and sellers… not “in the family” sales, “investor sales”, “quick flips” or “condo-izations”… or as S&P/Case-Shiller (CSI) puts it… “Arms Length” transactions.

So, a key to methodology of the CSI is that only “arms length” transactions are included in the formulation and S&P (or actually Fiserv) specifically vets each transaction to ensure that the “arms length” criteria has been met.

To that end, we can get a very good sense of real “organic” sales by looking at the “Sale Pair Counts” published by S&P for each of the metro areas.

I think you can see quite clearly from the charts below (click for super cool interactive charts!) that although the National Association of Realtors existing home sales (fraught with foreclosure and distressed sales) is registering a flattening to overall home sales, “organic” home sales are STILL in sharp decline in many markets.

NO BOTTOM for New Home Sales

This is an update to my prior post further detailing my NO BOTTOM in new home sales call.

Again, the purpose of looking at the months of supply and overall inventory level is to see how imbalanced the new home market is.

So long as there is too much inventory, prices will fall.

Whereas in other markets (stocks, potatoes, etc.) falling prices can tend to lure in buyers, it appears that in the housing markets (new and existing) steadily declining prices may (at least for a time) tend to depress sales as buyers either become opportunistic for better deals or leery of buying into a large loss.

OR simply everything is playing out in the context of a weak economy where job market instability and flat to declining real incomes keeps buyer sentiment low… there are many ways to read it… certainly there are many different vicious circle cases to be made.

In any event, new home inventory levels are still too high for a convincing bottom in new home sales.

Study the following chart (click for larger) as it clearly illustrates the current imbalance.

Although in past “new home sale bottoms” the seasonally adjusted annual sales rate of new homes hovered around 400K units, the standing inventories were typically 100K units less resulting in a monthly supply of somewhere around 10 or less.

Today though the seasonally adjusted annual sales rate almost exactly matches the standing inventory level resulting in a seasonally adjusted 12.2 months of supply (12.0 unadjusted).

This obvious imbalance must defeat any sense of urgency (a key component of any home selling scam) for new home buyers particularly in areas where new homes dominate.

The extra inventory most likely appears obvious as certainly does the declining prices leaving even the most passive buyers logically sidelined for better deals and the new home market with continued declining sales.