Existing home sales stabilize, but low; inventory still very high

The National Association of Realtors released the existing home sales figures for May 2008 today. Sales increased to a seasonally adjusted annual rate of 4.99 million units in May, up 2.0% from April 2008 but down 15.9% from May 2007. The median sales price was $208,600 in May up from $201,200 in April 2008 (up 3.7%) but down from $222,700 in May 2007 (down 6.3%). The monthly gain in May over the previous month was fueled by increases in the Northeast. New home inventory and sales are continuing to decline as builders are paring down their activity. On the other hand, existing homes inventory is elevated and sales have bottomed out at around an annual sales pace of 5 million units.

Lawrence Yun, NAR chief economist, said “the large supply of homes on the market clearly favors buyers, and it should take several months to draw the inventory down.” From 1996 to 2005, the average inventory level was 2.17 million units. For May the inventory was 4.485 million units. It will take a lot longer than "several months" to draw the inventory down. Months Supply for May 2008 was at 10.8 down from April's Months Supply of 11.2. Months Supply will not suddenly drop down to 6 (where supply and demand are equal) in "several months".

Foreclosures are adding to the existing sales numbers. The real estate market won't hit the bottom until both sales and home prices start to rise. Lehman has this to say on the topic:

The surge in foreclosures has started to influence the data. Sales of foreclosed homes have been crowding out regular sales, particularly in formerly bubble markets. For example, according to Radar Logic, 50% of sales in Sacramento are foreclosed homes. Other bubble markets such as Las Vegas and San Diego have similarly big shares of foreclosed homes but in non-bubble markets like Seattle, foreclosures make up only 4% of sales. Foreclosures not only crowd out sales, but also add to inventory.

Inventory normally peaks in the summer months. It will be interesting to see how demand reacts to supply.

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