Wednesday, September 26, 2007

Crashachusetts Existing Home Sales: August 2007

Yesterday, the Massachusetts Association of Realtors (MAR) released their Existing Home Sales Report for August 2007 again purporting to show “positive” signs of sales and even price strength with single family home sales increasing 6.6% and the median price increasing 1.4% as compared to August 2006.

Along with MARs release, President Doug Azarian continued the typical spin suggesting that the Federal Reserve’s rate cuts and government intervention into the nation’s housing markets will immediately translate to positive growth.

“It is definitely a positive sign to see two consecutive months of year-over-year sales gains to end the summer … Combined with the recent interest rate drop by the Fed and continued legislative action on Capitol Hill, the potential for continued sales growth through the fall is good.”

As usual, The Warren Group’s latest figures were significantly different than that of MARs showing sales down 1.5% and a median price decline of 4.9% as compared to August of 2006.

In a related development, the latest release of the S&P/Case-Shiller index for Boston continued to indicate price appreciation now capping 5 consecutive months of price increases for the index.

So what’s going on here?

I think it’s safe to say that we are at a literal crossroads in terms of information and perception.

First, as you may already know, I believe the MAR numbers are truly untrustworthy.

There have been numerous flaws in past reports with unexplained and conflicting revisions as well as simply the inconsistency that has been shown when comparing MARs results with both the Warren Group and the Case-Shiller data.

That said, I do believe that this selling season showed some positive trends with inventory falling significantly and sales, while slowing, generally keeping pace, or at least not collapsing, as compared to last year.

Additionally, although the S&P/Case-Shiller index for Boston has historically showed a strong degree of seasonality with prices generally increasing as sales volume increases between February and July and then slowing toward the end of the year, this year’s seasonal upward price movement has looked much like any other year also without any collapse.

Lastly, while the Warren Group’s numbers are clearly more accurate than MARs and have generally showed greater sales declines as well as median price declines in-line with the S&P/Case-Shiller, they have not indicated any truly cataclysmic collapse.

By collapse what I’m suggesting is something on the order of the “bottoms away” declines seen during the last housing recession where prices literally dropped off a cliff and fell consistently for roughly two straight years.

Now keep in mind, the most significant structural change for our areas housing market, namely the disappearance of the Jumbo and No-Doc loan, JUST OCCURRED in August and none of the data that we have seen to date accurately reflects the impact of that change.

We are now clearly at a crossroads with the shape and movement of this downturn diverging from what we have experienced in the past and now firmly on its own course.

In fact, you can clearly see the divergence in both of the “then and now” charts I have published in prior posts (see below).

So what’s next for Boston housing?

I think it would be very unlikely that the developments in the mortgage market would have no impact on sales and prices in our area.

I am firmly convinced that prices will reflect the extraordinary changes that have taken place and the adjustment will not be short lived.

Whether this price adjustment occurs slowly over time, buoyed by a relatively strong economy and job market or whether we head for recession and real housing distress is yet to be determined but my money is on significant adjustment one way or the other.

To better illustrate the drop-off in home prices and the potential length and depth of the current housing decline, I have compared BOTH the year-over-year and peak percentage changes to the S&P/Case-Shiller home price index for Boston (BOXR) from the 80s-90s housing bust to today’s bust (ultra-hat tip to the great Massachusetts Housing Blog for the concept).

The “year-over-year” chart compares the percentage change, on a year-over-year basis, to the BOXR from the last positive value through the decline to the first positive value at the end of the decline.

In this way, this chart captures only the months that showed monthly “annual declines” and as we can see, if history is to be a guide, we could be about one third of the way through the annual price declines with the majority of falling prices yet to come.

The “peak” chart compares the percentage change, comparing monthly BOXR values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.

In this way, this chart captures ALL months of the downturn from the peak to trough to peak again.

As you can see the last downturn lasted 105 months (almost 9 years) peak to peak including 34 months of annual price declines during the heart of the downturn.

Notice that peak declines have been more significant to date and, keeping in mind that our current run-up was many times more magnificent than the 80s-90s run-up, it is not inconceivable that current decline will run deeper and last longer.

As in months past, be on the lookout for the inflation adjusted charts produced by for an even more accurate "real" view of the current market trend.

Augusts’ Key Statistics:

  • Single family sales increased 6.6% as compared to August 2006
  • Single family median price increased 1.4% as compared to August 2006
  • Condo sales increased 3.4% as compared to August 2006
  • Condo median price increased 4.8% as compared to August 2006
  • The number of months supply of single family homes stands at 8.2 months.
  • The number of months supply of condos stands at 7.4 months.
  • The average “days on market” for single family homes stands at 127 days.
  • The average “days on market” for condos stands at 124 days.