The report below was originally published at 10:30AM EST by Josh Steiner and Allison Kaptur of our Financials Team, which does the bulk of our firm's work on housing. Below, they provide a detailed update to our 1Q11 Macro Theme of Housing Headwinds Part II. While consensus scrambles to figure out inflation's impact, we think it's worth highlighting a form of deflation that will limit the consumer's ability to absorb price increases in 2011. If you are a qualified institutional investor and would like to hear more about their work on the fins, rates, credit, housing and financial regulation, please email .
Existing Home Sales Fall; Median Price Hits Lowest Level Since 2002
The National Association of Realtors reports that February Existing Home Sales fell -9.6% MoM (-2.8% YoY) to 4.88M. Inventory rose 3.3% MoM to 3.49M, equating to a months supply of 8.6 months. Last month, we highlighted Corelogic's concern with the accuracy of the NAR report. Corelogic believes that NAR sales volume data is overstated by 15-20%. A detailed explanation of this argument is provided below.
Meanwhile, the NAR reported that February saw the lowest monthly median price for Existing Home Sales since 2002 at $156,100, which is down 32.2% from the highest median price ever recorded of $230,300 in July 2006. February's median price fell -5.2% YoY. This number is not seasonally adjusted, and the seasonal pattern shows median prices typically increasing from now until June, which is the typical seasonal peak.
Corelogic Casts Doubt on NAR Data
We have been noting for some time the increasing divergence between Existing Home Sales and MBA Purchase Applications. For example, Purchase Application volume was 24% lower in 2010 vs 2009, but Existing Home Sales volume was only 4.6% lower. Purchase Application volume was 24% lower in 2009 than 2008 as well, but Existing Home Sales were actually 5% higher. We had been attributing this discrepancy to changes in the cash segment of the market, but it appears that the NAR's data may be faulty. According to Corelogic, the NAR data has diverged versus Corelogic, MBA, HMDA, and Census data since 2006, and the gap is widening.
Says Corelogic, "There are several reasons for the divergence, including benchmarking drift, more sales going through MLS systems due to consolidation and a lower share of for sale by owners (FSBO) home sales. Net, NAR’s existing home sales data are overstated by about 15% to 20%." (emphasis added)
The NAR is currently reviewing its analysis, and is expected to restate the last several years of data. The restatement may occur sometime this summer.
What are the implications of a 15% to 20% overstatement of Existing Home Sales? Fortunately, our home price model relies on MBA Purchase Application data as a measure of demand, not NAR Existing Home Sales data, so we conclude that our model is intact. For reference, our demand-based model now suggests 20% downside in home prices from current levels, with a predicted range of 10-30% downside. Any model that relies on NAR volume data may lead to incorrect conclusions.
Joshua Steiner, CFA