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.

New home construction logs unexpected gain

The number of new housing projects that builders broke ground on in February rose sharply, defying economists' forecasts for yet another drop in activity.

The Commerce Department reported Tuesday that construction of new homes and apartments jumped 22.2 percent from January to a seasonally adjusted annual rate of 583,000 units. Economists were expecting construction to drop to a pace of around 450,000 units.

February's pickup was led by a big increase in apartment construction.

By region, all parts of the country reported an increase in overall housing construction, except for the West, which led the housing boom and has been hard hit by the bust.

Some economists said the new housing figures offered a glimmer of hope.

"While it may be premature to call an absolute bottom in residential construction, we are clearly getting close," said Adam York, economist at Wachovia.

Overall housing construction activity fell to a pace of 477,000 units in January, according to revised figures. That was a little higher than first reported but still marked a record low.

Applications for building permits, considered a reliable sign of future activity, also rose in February by 3 percent to an annual rate of 547,000. Economists were expecting permits to fall to a pace of 500,000 units.

Even with February's rare burst of activity, housing construction is down a whopping 47.3 percent from a year ago.

"This is a temporary rebound, not a recovery," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

The collapse of the once high-flying housing market has been devastating to the United States' economic health.

Its spreading fallout has contributed to big pullbacks by consumers and businesses alike, plunging the economy into a recession now in its second year.

The Obama administration has announced a $75 billion program to stem skyrocketing home foreclosures, which have dumped even more properties on an already crippled market.

More than 2 million American homeowners faced foreclosure proceedings last year, and that number could soar as high as 10 million in the coming years depending on the severity of the recession, according to a report last month by Credit Suisse.

Home mortgages are harder to come by because of the credit crisis and unemployment is at a quarter-century peak of 8.1 percent, factors that will make it difficult for the depressed housing market to snap back to full health.

Builders aren't optimistic that will happen any time soon.

The National Association of Home Builders' housing market index was flat in March at a reading of nine. That was one point above the all-time low reached in January. Readings lower than 50 indicate negative sentiment about the market. The index has been below 10 since November, reflecting the toughest market conditions in a generation.

Tighter lending standards for home mortgages, rising defaults and fear about the housing market's future have sidelined buyers, an absence felt acutely by homebuilders such as D.R. Horton Inc., Pulte Homes Inc. and Centex Corp.