MBA Finds that Home Sales Appeared to Have Peaked

November 10, 2005

Current Housing Activity

Home Sales and Housing Starts

Total existing home sales were unchanged at 7.28 million in September (seasonally-adjusted annualized rate). Single-family sales increased by 0.6 percent, while condo sales fell by 4.7 percent. Year-to-date total existing home sales were 5.4 percent ahead of last year. Sales increased by 3.7 percent in the South and 0.8 percent in the Northeast, while decreasing by 3.0 percent in the Midwest and 4.1 percent in the West. Although Hurricane Katrina decimated the sales market in New Orleans and other affected areas of the Gulf Coast, some displaced households and businesses bought homes on the periphery of the damaged areas, resulting in a net increase in sales in the South.

New home sales increased by 2.1 percent to 1.22 million units (seasonally-adjusted annualized rate) in September. The Bureau of the Census revised August sales downward by 3.0 percent, however. Although sales were flat compared with last September, year-to-date sales continued to be stronger than last year's pace by 6.4 percent. With only a modest gain in September, the third quarter average was down slightly from the second quarter.

Regionally, signs of slowing are evident in the Northeast and the West. Sales in the Northeast declined by 20.0 percent -- the second consecutive month of large declines. Similarly, sales in the West decreased by 11.8 percent, also the second consecutive double-digit decline. Sales in the Midwest picked up by 24.9 percent, reversing three consecutive months of declines. While sales in the South increased by 5.6 percent, the impact of Hurricane Katrina is still not entirely clear. The Census Bureau noted that Katrina only affected a few of the sampled areas and thus the data may not reflect the true impact of Katrina.

Total housing starts jumped by 3.4 percent in September to 2.11 million units (seasonally adjusted annualized rate) from an upwardly-revised 2.04 million units in August -- their strongest pace since reaching a 21-year high in February. The unexpected increase in September as well as the upward revision to the August figure pushed the third quarter average above the second quarter pace. Both single-family and multifamily starts increased by 2.6 percent and 7.8 percent, respectively, in September. Year-to-date single-family starts are ahead of last year's by 6.3 percent. With the upward revision in multifamily starts for August, multifamily has increased in each of the past two months. Multifamily starts in the first nine months of this year were 3.0 percent higher than those in the same period last year. There was little evidence of a disruption from Hurricanes Katrina and Rita, with the South seeing the strongest increase in total starts of 6.9 percent. Starts increased by 1.9 percent in the Midwest and were flat in the Northeast and the West.

Inventory of Homes

The months supply (inventory/sales ratio) of total existing homes -- a measure of supply and demand balance -- was unchanged at 4.7 in September, the highest since November 2003. However, the number of homes available for sale continues to rise, increasing by 19.6 percent from a year ago. Condo inventories rose by 36.6 percent from a year ago, with the months supply increasing to 5.3 from 4.3 a year ago. These numbers are consistent with anecdotal evidence in the latest Beige Book -- a summary of reports of regional economic activity by the Federal Reserve's 12 regional bank districts -- noting that "homes are taking longer to sell" in some markets. The Beige Book also states that reports of slowing demand for homes "have become somewhat more common."

Inventories of new homes on the market increased by 3.1 percent in September to a record 493,000 units. The months supply (the inventory/sales ratio) remained elevated at 4.9 -- the same as in August and the highest since December 1996. It may be that either banks are more reluctant to finance spec construction or builders have exercised caution, however, as three quarters of the increase in inventory during the month consisted of homes on which construction has not yet started. Regardless, this implies that builders could pull out a large portion of the increase in inventory if demand were to soften.

Home Price Appreciation

House price gains continue to be high in September but decelerated from August. The median total existing house price rose by 13.4 percent from a year ago, slowing from 15.8 percent in August. A relatively larger buildup of condo inventories is slowing the condo price appreciation by more than that for single-family homes. After four years of outpacing single-family appreciation, year-ago condo price gains slowed to 8.9 percent from 13.0 percent in August. This marks the first single-digit year-over-year gain since September 2001 and the third consecutive month that single-family home price appreciation has outpaced that for condos.

New home price appreciation has slowed since the spring and continued to be softer than that for existing homes in September. The median price for new homes rose by only 1.9 percent from a year ago.

Housing Market Projection

Expectations that the Fed would be more aggressive in raising interest rates into next year coupled with uncertainties over the inflation-fighting credentials of the next Fed Chairman (Ben Bernanke) caused long-term yields to rise over the past month. In addition, technical factors from mortgage hedging in a rising-interest-rate environment triggered an additional increase in the 10-year Treasury yields to a year-to-date high earlier this month. We expect the yield on 30-year fixed-rate mortgages to average about 6.4 percent in the first quarter of next year -- 10 basis points higher than the October forecast.

Leading indicators for home building activity are positive, suggesting that home building will stay strong in the coming months. Home builders are reportedly more optimistic in October, with the National Association of Home Builders Housing Market Index reversing a three-month decline. The employment report suggests that rebuilding activity following the hurricanes should boost economic growth in the coming quarters. The construction industry created 33,000 jobs in October -- the bulk of the total job gain. In addition, aggregate hours worked in the construction industry also increased strongly by 1.3 percent. This suggests that construction spending in October likely increased for the fourth consecutive month. For all of 2005, we expect total starts to increase by 5.0 percent from last year, largely a result of an increase in single-family starts. Homebuilding activity will remain robust in 2006, helped by reconstruction efforts. We expect housing starts to decline modestly by 3.5 percent next year.

Home sales appear to have peaked, however, according to the recent trend in the Mortgage Bankers Association purchase application index -- a leading indicator of home sales -- which declined by nearly five percent in October from September to the lowest reading since March. Although the level of purchase applications remains strong, the most recent week's purchase applications for early November dropped below their 2004 level for the first time in six months. Given the strong home sales activity so far this year, both new and existing home sales for all of 2005 are projected to set the fifth consecutive annual record, with total existing home sales at 7.03 million units (3.7 percent increase) and new home sales at 1.26 million units (4.4 percent increase). Deteriorating affordability conditions resulting from continued rising mortgage rates through next year should drive home sales to decline moderately by about three and a half percent in 2006.

Given the strong pace of existing home price gains so far this year, we expect the median price gain to accelerate to 11.4 percent this year from 9.3 percent last year. Continuing the trend that started at the beginning of the year, the gain in new home prices is projected to moderate significantly to 3.6 percent in 2005 from 13.3 percent in 2004. With the modest projected decline in existing home sales in 2006, existing home price gains should remain healthy at about 5-6 percent. Katrina is expected to put an upward pressure on construction material costs. Thus, we expect new home price gains to rebound to about 5 percent in 2006, similar to projected existing home price gains next year.

Mortgage Market Projection

Record pace home sales should combine with very strong home price appreciation to propel purchase originations to about $1.50 trillion -- an increase of 14.5 percent from last year's record level. We project that refinance originations will decline by 12.5 percent this year to $1.28 trillion. Overall, this year's mortgage originations should be roughly the same as last year's $2.78 trillion.

With only a projected modest decline in home sales in 2006 and a still-healthy home price appreciation, purchase originations should decline only modestly next year. With mortgage rates rising, however, refi originations will drop off significantly. We expect total originations to decline by 18.6 percent, with refi originations declining by 38.7 percent and purchase originations declining by 1.5 percent.

Source: Mortgage Bankers Association of America

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