By Stacey Wall
The homebuyer tax credit expired on April 30. To qualify, homebuyers had to sign a contract by then but have until June 30 to close the deal. Typically, closings are scheduled within two months of signed contracts. Whereas new home sales are recorded at the time of contract signing, existing home sales, which comprise more than 90% of total home sales, are recorded at the time of closing. This means we should continue to see relatively robust housing market statistics through the end of July when the June existing home sales report is released. So don’t be fooled into thinking the housing market is recovering, as the data will likely reflect the surge in activity before the tax credit expired.
We’re concerned that despite falling mortgage rates and near-record affordability, a lot of housing demand has been pulled forward. About 40% to 50% of all homes sold have been to first-time buyers. With that pool of buyers temporarily depleted, we’re worried we will see a sharp drop-off in demand, similar to what was observed in December, January, and February. Intentions to buy a home in the next six months fell to a near-record low of 1.9% in May, according to the latest Consumer Confidence report
Joe Kalish, Senior Macro Strategist with Ned Davis Research, says to keep an eye on the MBA Purchase Index over the next few weeks. The index measures applications made to mortgage lenders for home purchases. The index has already declined 36.3% from the end of April to its lowest level since April 1997. “Speculators and investors comprise a significant portion of the remaining demand,” says Kalish. “They will continue to scour the investing landscaped looking for distressed deals, which have been averaging about 15% below fair market value, according to the National Association of Realtors.”
Supply is also a concern. Although the reported available supply is near normal levels, total supply of vacant housing remains at a record. This “shadow supply” remains off the market, much of it on the books of banks. When home prices do rise, banks will have an increasing incentive to put these properties back onto the market, thereby limiting further price increases. With delinquent mortgage rates approaching 10%, roughly five million properties are potentially waiting to be sold. That’s close to the total number of homes that will be sold all year. Therefore, we believe that weak demand and steady supply will likely cause home prices to resume their decline in the second half of the year.
Stacey Wall is President and CEO of Pinnacle Trust in Madison, MS. His e-mail address is swall@pinntrust.com.
