Housing and “Distressing Gap” Graph

Comments on Housing and “Distressing Gap” Graph

by CalculatedRisk on 4/24/2012 

The solid new home sales report this morning is further confirmation that the recovery for the housing industry has started. New home sales are up about 17% from the weakest three month period during the housing bust. That is a significant improvement, even if the absolute levels are still very low.

The debate is now about the strength of the recovery, not whether there is a recovery. My view is housing will remain sluggish for some time, and I expect 2012 to be another historically weak year, but better than 2011.

For house prices, the Case-Shiller index has a serious lag, and the key right now is to see if the year-over-year change is declining (it is). Note: The current Case-Shiller report was an average of December, January and February closing prices, and some of those sales were probably negotiated last October, about six months ago!

More current, but less reliable, pricing data (such as asking prices, new home prices and some anecdotal comments) suggest that house prices have stopped falling in most areas, and I expect the year-over-year change in the Case-Shiller index to turn slightly positive in the not too distant future (it is difficult to predict when, although I’ll try in a couple of months). Of course the number of REO sales (lender Real Estate Owned) are down, and some of the improvement is related to fewer foreclosures and other distressed sales.

Here is an update to the “distressing gap” graph that shows existing home sales (left axis) and new home sales (right axis) through March. This graph starts in 1994, but the relationship has been fairly steady back to the ’60s.

Distressing GapClick on graph for larger image.

Following the housing bubble and bust, the “distressing gap” appeared mostly because of distressed sales. The flood of distressed sales has kept existing home sales elevated, and depressed new home sales since builders haven’t been able to compete with the low prices of all the foreclosed properties.

I expect this gap to eventually close, but it will probably take a number of years.

Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

1 Comment

Filed under Housing

One response to “Housing and “Distressing Gap” Graph

  1. It is clear as you suggest in your post, that foreclosed homes are selling well below normal market value, even for a foreclosure unit. New homes typically are priced below what any homeowner would require for their home in a resale situation (Builders have a large wholesale vs retail advantage). Therefore in markets with significant new home construction, existing home sales and prices tend to suffer. This makes the graph showing the ‘distressing gap’ even more distressing. In my opinion Banks are dumping homes and this is not good for the broader home market, consumers, builders or the economy. SImply taking big losses and write downs may allow Banks to move on to a better fiscal quarter, but it saddles the previous homeowner with big deficiency judgements and it prevents them from being future homeowners for a significant period of time. In my mind, there is a case to be made that Banks are acting in bad faith if they simply dump homes onto the market at fire-sale prices. If they are acting solely in their own interest they should not also be able to request deficiency judgements from the courts. This is having your cake and eating it to in my opinion.

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