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Looking past the bad news is very hard to do…..

Over the past two days we have been dealt a body blow on the housing front. Sales of existing homes nosedived in January to the lowest level since July 1997 - the NAR said Wednesday that sales of existing homes fell 5.3% to an annual rate of 4.49 million in January, from 4.74 million in December. Importantly, supply of existing homes was 9.6 months at the end of January, up from 9.4 months at the end of December. Single-family home sales fell 4.7%, while sales of condos and co-ops were down 10. In addition, sales of new homes in the U.S. plunged to a record low in January. While inventories of unsold homes fell by 3.1% to 342,000 (the 13th consecutive decline), sales are falling even faster. As a result, the inventory of new homes at the end of January represented a record-high 13.3 month supply at the January sales pace.

The January trends are less encouraging, as opposed to December when sales surged providing some hope that the long-awaited housing market bottom was in sight. This sequential slowdown in home sales is, on the margin, not a positive. The glut of supply combined with the lack of buyers is currently driving prices down, but looking forward, we continue to think that housing prices will bottom by 2Q09 (prices will decline at a lesser rate).

There are a lot of reasons to be sanguine about the real estate market; there are also plenty of reasons to be optimistic. Sure, if more Americans are worried about job security, they are not likely to buy a new home. That being said, it is actually a great time to be buying a home today as prices have declined significantly. Additionally, the combination of low interest rates and the $8,000 first-time homebuyer tax credit in the economic stimulus plan signed by Obama this month should motivate some buyers.

Significant issues still rest with home builders and home building stocks. Today, homebuilders are faced with intense competition from foreclosures, distressed sales of older homes and the supply of new homes on the market. Buyers are facing two opposite forces when thinking about buying a home, with the force against buying currently having the upper hand. Buyers are faced with declining wealth (in both their stock portfolios and their home values) and an uncertain labor market, offset somewhat by lower mortgage rates that are improving affordability. If housing prices do bottom in 2Q09, buyers’ wealth will begin to decline at lesser rate, thereby mitigating one of the opposing forces.

Howard W. Penney
Managing Director