Due to some recent improvements in seasonal housing data and statistics, a lot of people (Jim Cramer) and media outlets (AP) are beginning to sound the drum for a housing bottom.
I thought it would be worth pointing out that much like the weather, the majority of real estate data is best interpreted in a year over year comparison versus month over month. The reason for this is because real estate is a seasonal industry, much like the weather is. Home values, the number of listings, and the number of sales, are driven by the time of the year.
You don't see weather men or women comparing the temperature in August with that of February, but that is what we are seeing more and more of in the news as the media along with Wall St. are reaching to put a spin on what is an ongoing deterioration of the housing market.
Broadly speaking there are four indicators that represent the health of the housing market; the median sales price, sales, listings or inventory, and the month's supply of housing.
In terms of the median sales price, during the summer month's, when there is more demand for real estate, price typically edge higher. This is because there is more demand. We are seeing this now. According to the NAR, the median sales price in June of 2009 was $181,800. In January of 2009 it was $164,800. Does this mean property values have "appreciated" 10% in five months? No. In fact home values have actually fallen by -15.4% from last year when the median sales price was $215,000.
In terms of home sales, demand for real estate has increased month over month on a "seasonally" adjusted basis for the past couple of months. This is without question good news. The NAR uses a seasonally adjusted basis to "remove" the seasonal impact on demand for real estate and project out an estimated number of annual sales based on the current pace. Interestingly, home sales are still off by -0.2% from where they were last year.
The NAR is reporting that total inventory is down, and it is, month over month by -0.7% and year over year by -14.9%. But much like the banking system, due to massive government intervention in terms of foreclosure moratoriums and loan modifications, it is difficult to get a pulse on exactly how "healthy" the foreclosure market or the inventory really is. Some estimates show a shadow inventory, which represents homes that have already been foreclosed on by the banks but have not yet been listed for sale, as high as 700,000. Additionally, RealtyTrac is reporting that foreclosure filings just set a new record in July and are up 32% year over year. Even Bank of America and Wells Fargo are reporting in their quarterly earnings reports that their number of non-performing assets are surging 21% and 45% respectively, quarter over quarter. The trend is that inventory, over the next 6-12 months will be on the rise.
And finally, the month's supply of housing which represents the relationship between supply and demand. This indicator is down month over month by -4.1% and year over year by -14.5%. The improvement in this indicator is being driven by the decline in inventory, which as I described, is the result of massive government programs to delay foreclosures.
As the number of foreclosures rise and as demand remains weak, the month's supply of housing will increase and this means home values will fall further on a year over year basis.