by Calculated Risk on 2/10/2014 10:40:00 AM

First here are some excepts from a post I wrote in June 2012 that is relevant today:

The key number in the existing home sales report is not sales, but inventory. ...

When we look at sales for existing homes, the focus should be on the composition between conventional and distressed. Total sales are probably close to the normal level of turnover, but the composition of sales is far from normal - sales are still heavily distressed sales. Over time, existing home sales will probably settle around 5 million per year, but the percentage of distressed sales will eventually decline. Those looking at the number of existing home sales for a recovery in housing are looking at the wrong number. Look at inventory and the percent of conventional sales.

However, for the new home sales report, the key number is sales! An increase in sales adds to both GDP and employment (completed inventory is at record lows, so any increase in sales will translate to more single family starts).
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Some people think housing will recover rapidly to the 1.2+ million rate we saw in 2004 and 2005. I think that is incorrect for two reasons. First, I think the recovery will be sluggish - 2012 will probably be the third worst year ever. Second, the 1.2 million in annual sales was due to an increasing homeownership rate and speculative buying. With a stable homeownerhip rate, and little speculative buying, sales will probably only rise to around 800 thousand at full recovery.

A few key points:
• If existing home sales are flat this year, or even decline - that doesn't mean the housing recovery is over. For existing home sales we need to look at the composition of sales (distressed vs. conventional), and the percent of conventional sales are increasing (and investor buying has slowed too).  This is a positive sign.

• New Home sales were up 16.4% in 2013 (strong growth rate), but were only at 428 thousand. This was the sixth worst year since 1963. I don't expect sales to increase to 1.2+ million that we saw in 2004 and 2005, but I do expect sales to increase to close to 800 thousand - so I expect significant growth over the next few years.

• There was a slowdown in new home sales in the 2nd half of 2013, and I expect downward revisions to the Census Bureau reports - see Lawler: Expect Downward Revisions to Census Q4 New Home Sales, Broad-Based Builder Optimism for 2014 - but that was due to a combination of factors (builders increased prices rapidly, higher mortgage rates, constrained supply of entitled land) - but I expect a solid increase in sales in 2014.