Markets & Finance

For Housing, It's March Sadness


Existing-home sales slumped more than expected; however stabilization in residential construction is still considered likely

The weather may be warming as the calendar creeps toward May, but the U.S. housing market remains frosty. Reports released Apr. 24 show that the outlook for the sector remains dicey as we enter the heart of the critical spring home-buying season.

The main event: The National Association of Realtors' (NAR) existing-home sales report for March, which showed sales dropping 8.4% to a 6.120 million-unit annual rate, vs. economists' median forecast of 6.435 million. This reverses the big pop in existing home sales in February and still leaves the sales rate fluctuating around a sideways trend since mid-2006.

Existing-home sales tumbled 8.4% to a 6.12 million-unit annual rate in March, breaking a string of monthly gains in four of the past five months. February's 6.69 million rate was revised down slightly to 6.68 million. Total sales are down 11.3%, year-over-year.

Stats and Forecasts

The declines in the headline figure were all in sales of single-family homes, down 9.5%, the largest drop since January, 1989. Condo/co-op sales were flat. There was more bad news on the inventory front, with the month's supply of unsold homes surging to 7.3 from 6.7 in February.

The sole glimmer of good news: The median home-sale price rose to $217,000 from $213,600 in February, though prices remained down 0.3% vs. a year ago. The NAR said the sales drop is a very sharp decline, but blamed poor weather in February as well as spillover from subprime fears for exacerbating the weakness.

Though the size of the March sales drop will attract attention, market forecasts for the headline figure were surprisingly cautious given the enormous overshoot of sales vs. market expectations in the first two months of the quarter. At some point, that strength had to unwind. And the $217,000 median price for March was modestly stronger than expected.

Existing-home sales averaged a robust 6.41 million in the first quarter overall, which contained both sides of the weather zig-zag (i.e., exceptionally warm January weather and a frigid February), vs. 6.26 million in the fourth quarter. Even if there is another restrained figure in April, it may not necessarily mean a negative signal for the second quarter.

Another report released Apr. 24 also sounded a gloomy note for housing. The S&P Case-Shiller home price index fell 0.47% in February to 201.2, vs. 202.2 in January. That's a seventh-consecutive monthly decline. On a year-over-year basis, the price index fell 1%.

Stabilization Expected

Returning to March, other housing measures have been mixed, with both housing starts and permits rising 0.8%, while the Mortgage Bankers Assn. purchase index climbed 3.6%. The National Association of Home Builders' composite index fell 7.7%, followed by an 8.3% April drop.

We still expect March construction spending to rise by 0.5% in response to the bounce in construction employment, while new-home sales should bounce 8.5% to a still lean 0.920 million annual rate. The real residential construction component of first quarter gross domestic product should drop at a 19% rate, following a similar rate of decline in the 2006 fourth quarter.

The full set of housing data has been quite volatile in the first quarter, but is still adhering to our ongoing assumption of a sideways pattern for real estate volume in 2007, with lagged price declines, and assumed pass-through to construction stabilization by around the third quarter.

We are hardly out of the woods for housing, but we continue to expect stabilization in the residential construction sector by mid-year. We expect that housing weakness will not cause significant distress to the broader economy.

Englund is principal director and chief economist for Action Economics. MacDonald is director of investment research and analysis for Action Economics.

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