by Calculated Risk on 3/23/2009 01:56:00 PM

Here is a quote from the Real Time Economics blog at the WSJ: Economists React: Housing Offers ‘Some Encouragement’

Existing home sales peaked during the summer of 2005 and have fallen fairly steadily since then. However, the rate of decline has slowed in recent months, suggesting a bottom may be near.

It is correct that sales peaked in 2005, and have fallen steadily since then. And it is also correct that the rate of decline has slowed. However this doesn't suggest to me that "a bottom may be near" for existing home sales.

The opposite it true. I think existing home sales will fall further. (note: much of this post is an update from earlier posts)

This was an important disclosure in the National Association of Realtors (NAR) Existing Home Sales report:

Lawrence Yun, NAR chief economist, said ... "[D]istressed sales accounted for 40 to 45 percent of transactions in February.”

This is another reminder that the only reason existing home sales appear to have "stabilized" is because of the high number of REO sales. Sales excluding REOs have plummeted.

I've argued before that REO resales are real sales and should be included in the NAR statistics, but I suspect these REO buyers might hold these properties longer than recent turnover would suggest. If these are owner occupied buyers, they have probably been waiting to buy, and they have saved a down payment and qualified under the tighter lending standards. They probably won't sell until they can make a reasonable profit to buy a move up home - and it will probably be a number of years before prices recover.

If they are investors, they are likely buying REOs for cash flow - not appreciation, unlike the speculators in recent years - and these investors will probably hold the properties for a number of years too.

This suggests to me that the turnover rate will slow further.

Click on graph for larger image in new window.

This graph shows existing home turnover as a percent of owner occupied units. Sales for 2009 are estimated at the February rate of 4.7 million units.

I've also included inventory as a percent of owner occupied units (all year-end inventory, except 2009 is for February).

The turnover rate during the housing bubble was boosted by:

Speculative buying by flippers.

Speculative buying by homeowners (using excessive leverage).

Move up buying, especially by Baby Boomers.

Although slowing, the turnover rate is still above the median for the last 40 years and substantially above previous troughs. Both types of speculative buying are over for now. And the Baby Boomers have probably bought move up homes, and the next major move for the Boomers will be downsizing in retirement (still a number of years away).

And finally - and probably a very important point - homeowners with negative equity, who manage to avoid foreclosure, will be stuck in their homes for years.

All of the above suggests the turnover rate - and existing home sales - will fall further, perhaps much further.

As I noted earlier today, the key areas to watch for the housing market are declining inventory levels, a bottom in new home sales, and a closing gap between new and existing home sales. It would be a positive, not a negative, for both housing and the economy, if the number of existing home sales declined further - as long as the percent of distressed sales also declined.