Last time I looked at the new homes sales market. Today I'm going to examine the existing home sales market. As with the previous articles, I will be using information from a few sources: the blog Calculated Risk, and the blog Interest Rate Roundup.
Let's start with interest rates. Because housing is purchased on credit, the price of money is very important to the housing market. Here is the chart I used last time of the federal funds rate which shows that interest rates at the beginning of this expansion were at generational lows:
Economics 101 states that when prices drop demand increases. And that's exactly what happened at the beginning of this expansion.
Here is a graph from the blog Calculated Risk linked to above that shows the annual total of existing home sales plus the inventory levels for the concurrent year.
Like the new home sales market, we have roughly two periods. The first starts in the early 1970s and ends in the mid 1990s. During this period, the annual pace of home sales ran between 2 million and 3.5/4 million per year. But starting in 1998, the total annual sales increased at a faster rate. They were roughly 5 million in 1999-2002 and then really took off, coming in at a bit over 7 million in 2005. Since the annual peak in 2005, sales have come down. The total for 2007 is only through April of this year.
Now let's look at the red line, which represents total inventory available for sale. Notice how it was fairly constant from 1982 to 2004 when it fluctuated around 2 million total units on the market. However, it spiked up starting in 2005 and currently stands at an all time high of a little over 4 million units on the market. As the blog Interest Rate Roundup observed:
So what about the existing home market? That 4.2 million inventory reading is quite literally off the charts. My data for combined SFH+co-op+condo inventory only goes back to early 1999. Between that year and 2004, inventory typically ran in the 2 million - 2.5 million unit range. In other words, we are potentially oversupplied to the tune of 1.7 million to 2.2 million units. If you just look at the single-family only data (3.59 million units in April 2007), it's the same story -- a historical inventory glut. This measure typically ranged from around 1.5 million units to 2.3 million units throughout the 1990s and early 2000s.
This is at a time when lenders are tightening lending standards, meaning it will be harder to get a loan. Econ 101 states increased supply + decreased demand = lowered price.
So let's review the existing home sales market.
1. The market was pretty constant from the early 1970s until the late 1990s. 2. In the late 1990s a strong economy encouraged people to take on more risk, which led to an increase in home sale purchases. 3. Inter-generational low interest rates encouraged real estate buying in the early 2000s. 4. The real estate market quickly turned into a bubble. 5. Existing home sales topped in 2005. 6. At the beginning of 2007, lenders tightened credit standards, making it harder to get a loan and thereby lowering demand for homes. 7. At the same time, the inventory levels reached all-time highs.
Like the new home sales market, the existing home sales market is dealing with incredibly high inventory levels plus lowered demand from tighter lending standards. In other words, when the market needs to clear inventory to more appropriate levels, the buyers won't be there in strong numbers. This means prices will come down.
And like the new home sales market, the existing home sales market won't return to normal anytime soon.