Existing home sales dropped 1.5% to 4.55 million in May from April’s level of 4.62 million, led by a contraction in multi-family sales (condos, co-ops and townhouses). Moreover, a drop in mortgage applications in May suggests that softness will continue in June. The average rate on a 30-year mortgage ticked up slightly in May, only to plummet again in June.
The data on prices were more encouraging, with median prices rising almost 8% from a year ago. Those gains, however, were somewhat misleading as they were more reflective of the mix of sales on the market (heavily weighted in the over $200,000 category) than an actual appreciation in home values. Indeed, the number of first-time buyers and investors fell as a share of the market in May. The primary complaint was a lack of available properties; many homes in foreclosure remain on bank balance sheets and have yet to be listed, while potential sellers remain reluctant to list their homes in what is still a weak market. The inventories of unsold homes dropped more than 20% from a year ago.
The National Association of Realtors (NAR) blamed much of this month’s weakness on a lack of supply. Federal Reserve Chairman Ben Bernanke listed the tightening in mortgage market conditions, however, as a primary concern for the housing market. Indeed, it is hard to imagine that those who have been waiting to list their homes wouldn’t take this opportunity to sell if they thought they could easily clear the hurdles to closing. The NAR stopped reporting the percent of sales lost to cancellations (most cancellations have been because of problems in gaining a mortgage) a few months ago, but anecdotal evidence suggests that the proportion of cancellations is still excessively high. Overly conservative appraisals remain the primary complaint.
Regionally, the biggest percentage declines were recorded in the Northeast, which was hit hardest by financial market losses during the month of May. One has to wonder how many deals may have been cancelled or postponed as the broader stock market indices lost all of their gains for the year during May. The next biggest loser was the West, where realtors are trying to expedite the listing of foreclosures on the market. Sales in the South were essentially flat, while sales in the Midwest edged up modestly.
Bottom Line: The housing recovery continues, but unevenly. The good news is that the market appears to be overshooting; the bad news is that more of the pent-up demand we are seeing is likely to show up in the rental, not the ownership, market as it is still too hard for many buyers to qualify for a mortgage.