by Calculated Risk on 6/27/2012 11:57:00 AM

In the Pending Home Sales report this morning, the NAR analysts noted:

Low inventory results partly from underwater homeowners who are unwilling to list their homes, which would require a lengthy short sale process, or additional cash to complete the transaction. NAR estimates 85 percent of homeowners have positive equity, with 15 percent in an underwater situation.

Zillow chief economist Stan Humphries has been discussing this: The Connection Between Negative Equity, Inventory Shortage and Increasing Home Values: Why the Bottom Won’t Be as Boring as We Expected

What markets like Miami and Phoenix may now be showing us is that negative equity has another very powerful effect on the supply side beyond increasing the flow of foreclosed homes onto the market: all the households that we predicted would be trapped in their homes and unable to buy new ones are similarly unable to sell their current homes, severely decreasing the overall supply of homes on the market.
...
And negative equity may well be so constraining the supply side of the housing market that it’s creating acute inventory shortages that are bidding up prices.
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What does all of this imply for the housing bottom? Our emerging hypothesis is that, instead of a long, flat bottom with price appreciation constrained by weak demand and elevated foreclosures, we might end up in an environment in which constrained supply (due to negative equity), together with robust demand from investors and first-time home buyers (not weighed down by negative equity), combine to create cycles of home value spikes followed by cooling periods. These cooling periods are created once local home values have risen enough to free some homeowners from negative equity at which point some of these resurfacing homeowners attempt to sell their homes, thus creating additional supply which tempers price appreciation.

CR comment: Negative equity is probably contributing to the lower levels of inventory, but I think there are other factors too.

One key is the substantial increase in investor owned single family homes. These are not "flippers", but cash flow investors - and these investors will not sell just because prices have risen a few percent (I've talked with some of these investors, and they many are making 8% to 12% cash-on-cash after expenses - and they have no intention of selling in the near term). Economist Tom Lawler discussed this back in February, and concluded that a significant "share of the decline in the share of homes for sale reflects the acquisition of SF (and condo) properties by investors as multi-year rental properties".

Another key driver of lower inventory is price expectations. As I noted: "When the expectation is that prices will fall further, marginal sellers will try to sell their homes immediately. And marginal buyers will decide to wait for a lower price. This leads to more inventory on the market. But when the expectation is that prices are stabilizing (the current situation), sellers will wait until it is convenient to sell."

So there are several factors pushing down inventory - and it looks like inventory was flat or declined in June too. The recent NAR report was for May; below are some numbers for June, and it is possible inventory has already peaked for the year.

According to the deptofnumbers.com for (54 metro areas), inventory is off 22.0% compared to June 2011. Unfortunately the deptofnumbers only started tracking inventory in April 2006.

This graph shows the NAR estimate of existing home inventory through May (left axis) and the HousingTracker data for the 54 metro areas through June.

Click on graph for larger image.

Since the NAR released their revisions for sales and inventory, the NAR and HousingTracker inventory numbers have tracked pretty well.

On a seasonal basis, housing inventory usually bottoms in December and January and then starts to increase again through the summer. So inventory still might increase a little over the next couple of months, but the forecasts for a "surge" in inventory this summer were clearly incorrect. It is even possible that inventory has already peaked for the year.

The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker.

HousingTracker reported that the June listings, for the 54 metro areas, declined 22.0% from the same month last year. So far in 2012, there has only been a small seasonal increase in inventory.

Whatever the reasons - negative equity, investor owned properties, "price expectations", or other reasons - this decline in active inventory remains a significant story.

by Calculated Risk on 6/27/2012 10:04:00 AM

From the NAR: Pending Home Sales Up in May, Continue Pattern of Strong Annual Gains

The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 5.9 percent to 101.1 in May from 95.5 in April and is 13.3 percent above May 2011 when it was 89.2. The data reflect contracts but not closings.

The index also reached 101.1 in March, which is the highest level since April 2010 when buyers were rushing to beat the deadline for the home buyer tax credit.

The PHSI in the Northeast increased 4.8 percent to 82.9 in May and is 19.8 percent above May 2011. In the Midwest the index rose 6.3 percent to 98.9 in May and is 22.1 percent higher than a year ago. Pending home sales in the South increased 1.1 percent to an index of 106.9 in May and are 11.9 percent above May 2011. In the West the index jumped 14.5 percent in May to 108.7 and is 4.8 percent stronger than a year ago.

This was above the consensus of a 1.2% increase for this index.

Contract signings usually lead sales by about 45 to 60 days, so this is for sales in June and July.

by Calculated Risk on 6/27/2012 07:05:00 AM

From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey

The Refinance Index decreased 8 percent from the previous week. The seasonally adjusted Purchase Index decreased 1 percent from one week earlier.

“Refinance volume fell last week due largely to a fall-off in refinance applications for government loans, which had more than doubled the prior week,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “The large swings in activity were due to the implementation of FHA’s new premiums on streamline refinances, and borrowers timing their applications to lower their premiums.”

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.88 percent from 3.87 percent, with points decreasing to 0.40 from 0.49 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

Click on graph for larger image.

The purchase index is mostly moving sideways.

Refinance activity has been increasing, and the decline this week followed the surge in FHA streamline refinancing last week. With mortgage rates near record lows, refinance activity will probably stay fairly strong.

by Calculated Risk on 6/26/2012 09:25:00 PM

The two day European summit starts on Thursday, and there will be more pre-meeting position statements tomorrow. Here was some "positioning" today:

From Reuters: Merkel buries euro bonds as summit tension rises

Two days before a crucial European Union summit, European Council President Herman Van Rompuy released a seven-page report on closer fiscal and banking union envisaging a euro zone treasury that would issue common debt in the medium term.

Merkel immediately stamped on the idea of mutualising debt - favored by France, Italy and Spain - at a meeting of lawmakers from her Free Democratic coalition partners in Berlin, according to people who attended the closed-door session.

"I don't see total debt liability as long as I live," she was quoted as saying, a day after branding the idea of euro bonds "economically wrong and counterproductive".

From the Financial Times: Monti lashes out at Germany ahead of summit

Mario Monti has set the stage for a tough fight with Germany at the EU summit this week, insisting that he will continue to push Italy’s proposal to use eurozone bailout funds in an attempt to stabilise financial markets.
Excerpt with permission

I don't expect much from this summit except an extension for Greece. I'm keeping an eye on Europe, but not watching too closely!

On Wednesday:
• At 7:00 AM ET, The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index.

• At 8:30 AM, Durable Goods Orders for May will be released by the Census Bureau. The consensus is for a 0.4% increase in durable goods orders.

• Also at 10:00 AM, the NAR will released the Pending Home Sales Index for May. The consensus is for a 1.2% increase in the index.

Earlier on house prices:
• Case Shiller: House Prices increased in April
• Real House Prices and Price-to-Rent Ratio
• House Prices to increase 10%?
• All Current House Price Graphs

by Calculated Risk on 6/26/2012 05:54:00 PM

Some earlier releases ...

From the Richmond Fed: Manufacturing Activity Eased in June, But Expectations Remained Upbeat

Manufacturing activity in the central Atlantic region softened in June, following six months of moderate expansion, according to the Richmond Fed's latest survey.

In June, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — lost seven points to −3 from May's reading of 4. Among the index's components, shipments declined two points to −2, new orders dropped thirteen points to end at −12, and the jobs index moved down eight points to 8.

Three out of four regional manufacturing surveys have been below expectations in June.

And from the Conference Board: The Conference Board Consumer Confidence Index® Declines Again

The Conference Board Consumer Confidence Index®, which had declined in May, fell further in June. The Index now stands at 62.0 (1985=100), down from 64.4 in May. The Expectations Index declined to 72.3 from 77.3. The Present Situation Index, however, increased to 46.6 from 44.9 last month.

This was below expectations of a decline to 63.5. It seems the only "good news" these days is from housing!

Earlier on house prices:
• Case Shiller: House Prices increased in April
• Real House Prices and Price-to-Rent Ratio
• All Current House Price Graphs