Existing Home Sales Drop In March

On Thursday, the National Association of Realtors reported existing home sales in March fell short of expectations, dropping 3.0% to 4.6 million units, below the downwardly revised level of 4.7 million in February, and 6.1% lower than the March 2008 reading of 4.9 million.

The market's activity has been highly influenced by the government's efforts to relieve the industry by lowering borrowing rates and providing incentives for first-time buyers such as the $8,000 tax credit.

NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, Texas, said first-time buyers are crucial at this stage of a housing recovery. Thus far, they have been driving the market, as an NAR practitioner survey in March showed first-time buyers accounted for 53.0% of transactions, based largely on contracts offered before the tax credit became available.

Teasing out the line between authentic demand and government intervention is difficult, and even irrelevant. "These are real things and are likely to fuel additional demand," argued Forbes Guru John Buckingham of The Prudent Speculator.

"I'm not entirely sure there's a clear distinction because if you sell a house, you sell a house," quipped David Wyss, chief economist at Standard and Poor's.

Though sales appear to be stabilizing, prices are a different matter. "You have to take the figures with a grain of salt, but I think we're starting to see early signs of stability," said Buckingham. "I don't want to say prices have stopped falling, though the rate is slowing."

Wyss concurred: "My personal feeling is we've probably hit bottom in terms of sales," he said. "That doesn't mean homes prices aren't going to continue to decline, because there are a lot of unresolved issues."

Although prices rose from February to March, the NAR reported the national median existing-home price for all housing types was $175,200, down 12.4% from March 2008. The price increase from February to March was 4.2%, which is much higher than the typical 1.8% increase between those two months. Distressed properties, which accounted for just over half of all transactions in March, typically are selling for 20.0% less than traditional homes.

Meanwhile, on Wednesday, the Federal Housing Finance Agency reported prices of U.S. single-family homes rose by a 0.7% in February from January but were down 6.5% from a year earlier.

Among the "unresolved issues" that concern Wyss is concealed inventory, due to banks delaying foreclosures or people not putting their homes on the market. He doesn't expect prices will hit their low until the first quarter of next year, adding that housing starts will probably not pick up until that point.

Star analyst Meredith Whitney warned home prices will fall by more than 66.0% of current bank assumptions in the 10-City Case-Shiller Index. (See "Whitney: Bank Losses Through 2010.") "Increased liquidity drove home prices higher," Whitney explained, "and contracting liquidity will drive home prices lower." She pointed out that 70.0% of homeowners need leverage to buy and stay in their homes, therefore an overall declining mortgage market will put pressure on prices.

The market is also being pressured by nation's eroding labor market. Aside from the increasing number of Americans out of work, countless others who are employed are standing on the sidelines on the fear they might get the ax. "People can afford a home, but are afraid due to job security," Buckingham said.

Incidentally, the U.S. Labor Department reported Thursday initial jobless claims rose more than expected last week, while the number of workers continuing to filing claims for unemployment benefits topped 6.1 million, setting a record for the 12th straight week. The report provides further indication of the persistence of layoffs and weak job market.

Buckingham is optimistic about the housing industry's future, at least in the long-term. "We're not going to go back to the hay-day of the early 2000s, but people need a roof over their head," Buckingham said.

Looking long-term, Buckingham's favorite stocks are DR Horton, as well as KB Home and Toll Brothers, though he added for new purchases, he would prefer to buy them 15% to 20% lower.