Housing: Is the Slowdown Slowing Down?

A relatively upbeat Case-Shiller reading and the slowing pace of home price declines point to hope that the housing market is nearing its bottom

By BusinessWeek, Standard & Poor's, and Action Economics staff

The U.S. consumer may be feeling a bit more optimistic, but the state of the housing market remains dismal, based on data released Aug. 26. Still, it appears the pace of declines for U.S. home prices is moderating, and the glut of unsold homes is easing—offering some reason for cheer.

New U.S. home sales jumped 2.4% in July to a 0.515-million-unit annual pace, but after a downwardly revised 0.503 million rate in June (from 0.530 million) and below the 0.525 million expected. May's pace was also revised down to 0.514 million from 0.533 million previously. The months' supply of homes for sale declined to a still-high 10.1 from 10.7 in June. The median sales price rose to $230,700 from $230,000, though it's still down 6.3% over last year.

"The weaker than expected July sales rate, together with downward revisions in May and June, will likely add to market fears that the housing correction has further to go," wrote S&P senior economist Beth Ann Bovino.

Miller Tabak strategist Tony Crescenzi wrote in an Aug. 26 note that "inventories are now at their lowest level since February 2005, 154,000 below the June 2006 peak of 570,000, and not all that far from normal levels of about 350,000. The supply of new homes is controlled by home builders and is not subject to the direct influence of foreclosures, which explains why the supply of new homes is falling and the supply of older homes is continuing to rise."

Decelerating Declines

The U.S. S&P/Case-Shiller 20-city composite home price index fell 0.5% in June to 167.69, a new record low. However, 11 of the 20 cities posted month-over-month declines, while 13 posted month-over-month declines in May. Phoenix (–2.6%) led the pace of declines, followed by San Francisco (–1.8%), Miami (–1.7%), and Las Vegas (–1.6%). The June index was down 15.9% on a year-over-year basis, after a 15.8% decline in May. All 20 cities saw year-over-year declines, with 10 cities seeing double-digit percentage declines. The biggest year-over-year declines were in Phoenix, Miami, and Las Vegas, down 27.9%, 28.3%, and 28.6%, respectively.

"[T]he monthly pace of decline is slowing rather dramatically from the hefty 2.1% to 2.6% monthly declines over the November-March period, which may mark the maximum rate of collapse for the U.S. real estate market in this cycle," wrote Action Economics analysts in an Aug. 26 Web site posting.

"The bubble markets, such as California, Florida, and Arizona, which are struggling with excess inventory and rising foreclosures, continue to lead the decline in national home prices. On a positive note, home prices in some non-bubble markets are declining at a slower pace or even increasing," wrote Lehman Brothers (LEH) economist Michelle Meyer in an Aug. 26 note.

The U.S. Office of Federal Housing Enterprise Oversight home price index was flat in June, after declining 0.4% in May (revised from –0.3%). On a quarterly basis, prices fell 1.36% in the second quarter, less steep than the –1.68% in the first quarter. The home price index was down 4.80% in the second quarter a year ago, below the –3.03% year-over-year pace in the first quarter.

"The deceleration in the pace of declines over the past three months, together with the better than expected Case-Shiller reading, may give markets hope that the housing market is nearing the bottom," wrote S&P's Bovino in a separate note.

Consumer Confidence

U.S. consumer confidence improved to 56.9 in August after edging up to 51.9 in July. The index was better than the 53.0 economists had expected, though well below the 105.6 reading seen a year ago. The present situations component dipped to 63.2 from 65.8 as geopolitical risks and uncertainty over the future of government-sponsored enterprises Fannie Mae (FNM) and Freddie Mac (FRE) weighed on sentiment.

However, expectations climbed to 52.8 from 42.7, helped by lower commodity prices. The labor differential (jobs plentiful minus jobs hard to get) declined further to –18.9 from –16.6, as job concerns increase.

"We continue to see the jumbo confidence declines in 2008 as mostly reflecting soaring gasoline prices, just as the current bounce reflects the oil price reversal," wrote Action Economics analysts on Aug. 26.

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