by Calculated Risk on 10/19/2012 11:36:00 AM

This was a solid report, not because of sales, but because of the level of inventory. Based on historical turnover rates, I think "normal" sales would be in the 4.5 to 5.0 million range. So, existing home sales at 4.75 million are in the normal range.

Of course a "normal" market would have very few distressed sales, so there is still a long ways to go, but the market is headed in the right direction. Note: No one should expect existing home sales to go back to 6 or 7 million per year. Instead the key to returning to "normal" are more conventional sales and fewer distressed sales.

From the NAR this morning:

Distressed homes - foreclosures and short sales sold at deep discounts - accounted for 24 percent of September sales (13 percent were foreclosures and 11 percent were short sales), up from 22 percent in August; they were 30 percent in September 2011

I'm not confident in the NAR distressed sales measurement (it is from an unscientific survey of Realtors), but other sources also suggest distressed sales have fallen in many areas.

Some quick calculations: According to the NAR, existing home sales in September were at a 4.75 million annual rate with 24% distressed sales. That would suggest conventional sales at a 3.61 million annual rate.

In September 2011, sales were at a 4.28 million annual rate with 30% distressed. That would suggest conventional sales were at a 3.0 million annual rate in September 2011. So conventional sales in September 2012 were up about 20% from a year ago.

Also, according to the NAR, the percent of distressed sales peaked in March 2009 at just under 50% when total sales were at a 3.94 million sales rate. That would suggest conventional sales were at a 2.0 million sales rate in March 2009, and that conventional sales are up about 80% from the bottom! If we were confident in the NAR data, this would be the number to watch.

Of course what matters the most in the NAR's existing home sales report is inventory. It is active inventory that impacts prices (although the "shadow" inventory will keep prices from rising). For existing home sales, look at inventory first and then at the percent of conventional sales.

The NAR reported inventory decreased to 2.32 million units in September, down from 2.40 million in August. This is down 20.0% from September 2011, and down 16% from the inventory level in September 2005 (mid-2005 was when inventory started increasing sharply). This is the lowest level for the month of September since 2002.

Important: The NAR reports active listings, and although there is some variability across the country in what is considered active, most "contingent short sales" are not included. "Contingent short sales" are strange listings since the listings were frequently NEVER on the market (they were listed as contingent), and they hang around for a long time - they are probably more closely related to shadow inventory than active inventory. However when we compare inventory to 2005, we need to remember there were no "short sale contingent" listings in 2005. In the areas I track, the number of "short sale contingent" listings is also down sharply year-over-year.

Click on graph for larger image.

This graph shows inventory by month since 2004. In 2005 (dark blue columns), inventory kept rising all year - and that was a clear sign that the housing bubble was ending.

This year (dark red for 2012) inventory is at the lowest level for the month of September since 2002, and inventory is below the level in September 2005 (not counting contingent sales). All year I've been arguing months-of-supply would be below 6 towards the end of the year, and months-of-supply fell to 5.9 months in September (a normal range).

The following graph shows existing home sales Not Seasonally Adjusted (NSA).

Sales NSA in September (red column) are only slightly above last year (there were 2 fewer selling days). Sales are well below the bubble years of 2005 and 2006, and also below 2007.

Earlier:
• Existing Home Sales in September: 4.75 million SAAR, 5.9 months
• Existing Home Sales graphs