by Calculated Risk on 4/22/2014 01:35:00 PM

A decline in existing home sales doesn't mean the housing recovery is over.  Far from it!  For existing home sales we need to look at the composition of sales (distressed vs. conventional), and the percent of conventional sales are increasing (even as investor buying has slowed too). That is a positive sign.

For the "housing recovery", we need to look more at housing starts and new home sales (housing starts and new home sales have a larger impact on GDP and employment than existing home sales). Both starts and new home sales are off to a slow start in 2014 compared to 2013, but I expect new home sales and starts to be up solidly year-over-year soon (there was a surge in starts at the beginning of 2013, and the comparisons will be easier going forward).

There are many positives for housing right now: 1) distressed sales are down sharply year-over-year, 2) delinquencies are down sharply, 3) inventory is up (this is a positive right now because there is too little inventory), 4) negative equity has declined significantly.   Overall the housing market is improving. 

Probably the most important number in the NAR existing home sales report is inventory.   This morning the NAR reported that inventory was up 3.1% year-over-year in March.   This is a smaller increase than other sources suggest, and it is important to note that the NAR inventory data is "noisy" (and difficult to forecast based on other data).  A few other points:

• The headline NAR inventory number is NOT seasonally adjusted (and there is a clear seasonal pattern).
• Inventory is still very low, and with the low level of inventory, there is still upward pressure on prices.
• I expect inventory to increase in 2014, and I expect the year-over-year increase to be in the 10% to 15% range by the end of 2014.
• However, if inventory doesn't increase, prices will probably increase a little faster than expected (a key reason to watch inventory right now).

Click on graph for larger image.

The NAR does not seasonally adjust inventory, even though there is a clear seasonal pattern. Trulia chief economist Jed Kolko sent me the seasonally adjusted inventory (see graph of NAR reported and seasonally adjusted).

This shows that inventory bottomed in January 2013 (on a seasonally adjusted basis), and inventory is now up about 5.8% from the bottom. On a seasonally adjusted basis, inventory was up in March compared to February.

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.

Another key point: The NAR reported total sales were down 7.5% from March 2013, but normal equity sales were probably up from March 2013, and distressed sales down.  The NAR reported that 14% of sales were distressed in March (from a survey that isn't perfect):

Ten percent of March sales were foreclosures, and 4 percent were short sales.

Last year the NAR reported that 21% of sales were distressed sales.

A rough estimate: Sales in March 2013 were reported at 4.96 million SAAR with 21% distressed.  That gives 1.04 million distressed (annual rate), and 3.92 million equity (conventional).  In March 2014, sales were 4.59 million SAAR, with 14% distressed.  That gives 0.64 million distressed, and 3.95 million conventional.  Although this survey isn't perfect, this suggests distressed sales were down sharply - and normal sales up slightly (even with less investor buying). 

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

Click on graph for larger image.

Sales NSA in March (red column) were above the sales for March 2011, and below sales for 2010, 2012 and 2013. 

Overall this report was as expected (fewer distressed sales pulling down overall sales).

Earlier:
• Existing Home Sales in March: 4.59 million SAAR, Inventory up 3.1% Year-over-year