April showers bring May flowers, but April home sales may just bring more rain. If you're a housing-data junkie, you know already that the National Association of Realtors announces home sales on May 25, and you're probably not expecting much improvement.
Even the NAR has lowered its expectations after remaining steadfastly upbeat throughout much of the national residential market correction. On May 1, the group reported that home sales would remain soft throughout April and possibly into May, diverging from the usual strong spring trends. The NAR's Pending Home Sales Index, a forward-looking indicator based on contracts signed in March, 2007, fell 10.5% from March, 2006, to the lowest reading since March, 2003 (see BusinessWeek.com, 5/2/07, "No Spring Thaw for Housing").
This news was no surprise, especially after existing-home sales fell 8.4% in March, 2007, from a year ago, the sharpest year-over-year drop in 18 years. Housing economists have been taking the bad omens to heart. On May 9, the NAR went as far as to revise its earlier forecast, citing the detrimental impact of tighter lending on market demand. Existing home sales are expected to be down 6.6% in the second quarter of 2007 and 2.9% for the full-year, vs. the previous predictions of declines of 6.1% and 2.2%, respectively. New single-family sales will decline 21.5% in the second quarter and 17.8% in 2007, the NAR predicts.
Flat, Not Frozen
"Obviously, if you're a subprime borrower and you want to buy a home, you're pretty much being shunned by lending institutions," says Moody's (MCO) Economy.com Senior Economist Zoltan Pozsar. "That's a drag on home sales, both new and existing."
Moody's Economy.com is forecasting both new and existing home sales to remain essentially unchanged in April from March, meaning comparisons to last year's numbers would be equally poor.
In addition to stricter lending, buyer psychology is hurting sellers. "Everyone's now on the sidelines waiting for a discount," says Pozsar. "If I wanted to buy a house in Florida, I wouldn't do it now, I would wait a year. The market's not frozen, but if you bought a house in '05 or '06, you're either flat or underwater."
New vs. Existing
New-home sales are almost always upstaged by the NAR's more reliable and more telling existing-homes data. Existing homes represent a much larger segment of the market—about 85% of total sales—and they're recorded at the settlement, or once the keys change hands.
New homes, on the other hand, account for the other 15% of sales, and are recorded when a contract is signed. If recent housing-starts data and homebuilders' earnings announcements are any indication, new-home sales in April declined at a much faster rate than existing-home sales did. On May 9, luxury-home builder Toll Brothers (TOL) said their quarterly revenue and profit would fall short of expectations, due in part to an unusually high amount of contract cancellations (see BusinessWeek.com, 5/9/07, "Housing's Woes Hit Toll Brothers").
Sure enough, April also proved to be a poor month for new-home construction. Although starts increased slightly, permits fell to record-low levels (see BusinessWeek.com, 5/16/07, "Homebuilders Rebound? April Fools!").
"The existing market is generally much more stable, while new homes are a little more pricey," says NAR Senior Economist Lawrence Yun. "Now, fewer new homes are being built." Yun would not comment directly on April's numbers.
Just a Blip?
What's the good news? Well, the disappearance of speculative buying could benefit the market in the long term. "Housing is first and foremost shelter," Yun says. "People are now buying homes for shelter reasons with the expectation that if they hold onto it for a long period, they can see a modest gain."
Indeed, investor purchases of homes were down 29% in 2006, according to the NAR. Regarding prices, the group is anticipating a 1% drop in the national median home price in 2007.
"After a 50% increase during the boom, that's not a correction, it's a small blip," Yun says. "The word 'correction' implies that there are far fewer sales. We're just back to long-term healthy fundamentals."