Economic Research and Data

Economic Trends

Filling you in on the current state of the economy

09.06.07

Economic Activity and Labor

Housing Markets

Toward the end of each month a great deal of data on the housing market is released. By combing through the data releases we are able to get a fairly good look at what is going on in the housing market. This month’s review tells us the market is still in the doldrums.

In July, sales of existing single-family homes fell a relatively modest 0.4 percent, after having declined 3.3 percent in June. Since September 2005, when the sales of existing single-family homes peaked, sales have fallen at an annualized rate of 11.8 percent, which translates into the slowest sales pace since September 2002. Since the 2005 peak, the median sales price of existing homes has fluctuated somewhat but on average has remained fairly constant at around $220,000.

In the market for new single-family homes, sales increased 2.8 percent in July to regain some of June’s 4.0 percent decline. Sales of new single-family homes peaked two years ago and have fallen steadily since that time. The pace of the decline over this two-year period has been faster than that of the market for existing homes, coming in at an annualized −20.9 percent. However, of late that pace has slowed somewhat; over the most recent 12-month period, sales have fallen only 10.2 percent. While this is still a rapid rate of decline, it is only about one-third of the pace at which sales were falling during the previous 12-month period. Much like in the market for existing homes, the median price of new single-family homes has fluctuated as sales have fallen, but on average it has remained fairly steady at just above $240,000.

Both the new and existing home sales releases also include data about inventory levels. Inventories, which are typically measured in months of supply at the current sales pace, are important to the housing market going forward. An oversupply of homes on the market will generally put downward pressure on prices and prolong a return to normal rates of price appreciation. According to the most recent releases, inventories of both new and existing single-family homes remain elevated.

To get a better idea about movements in housing prices, it is useful to look at two other recent releases: the S&P/Case-Shiller home price index and the Office of Federal Housing Enterprise Oversight (OFHEO) housing price index. While each index is constructed differently, both show a rapid decline in the 12-month growth rate of home prices. The S&P/Case-Shiller index, which uses a repeat sales method in order to control for quality, shows an outright decline in prices over the past year for both of the first two quarters of 2007. The OFHEO purchase-only index, which also looks at repeat sales but excludes nonconforming loans*, shows slow annual price appreciation over the same period but no outright decline. Because the OFHEO index excludes pricier homes, it tends to show slower rates of both price increases and price declines when compared to the broader S&P/Case-Shiller index.

*Nonconforming loans are mortgages that either do not meet the underwriting guidelines of Fannie Mae or Freddie Mac or mortgages that exceed the conforming loan limit, a figure linked to an index published by the Federal Housing Financial Board.

Economic Trends is published by the Research Department of the Federal Reserve Bank of Cleveland.

Views stated in Economic Trends are those of individuals in the Research Department and not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. Materials may be reprinted provided that the source is credited.

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