Increases in the inventory of homes for sale, rising interest rates,declining consumer borrowing power and a downward revision of estimates forexisting home sales combined to crush any glimmer of hope that the sinkingmarket for new homes had struck bottom.
While bond yields were falling off their Thursday highs by midday Friday,the rise of yields on the 10-year Treasury note above the psychologicalthreshold of 5% effectively quashed expectations that the Fed would lowerthe bellwether Federal Funds rate later this year. The rise in the 10-yearT-bill, to which rates on 30-year fixed mortgages are pegged, pushed theaverage rate on the latter to 6.53%, the highest it has been since lastAugust, according to Bankrate.com.
The primary culprit in the rate rise was the European Central Bank, whichhiked rates to 4% on June 5, pushing rates up globally. Fed chief BenBernanke also said in a speech to bankers in South Africa that inflationremains the Fed's chief concern, and although he predicted improvingeconomic conditions for the second half of this year, equity markets sank onhis words.
Bernanke also said that there was no turnaround on the horizon for thehousing sector, saying that he believes housing will "remain a drag oneconomic growth for somewhat longer than previously expected." He also saidhe expected residential construction to remain "subdued" until builders canwork off excess inventory.
According to the May survey by Zip Realty, Inc., the Emeryville, Calif.national real estate sales company, inventories of unsold homes(single-family and condominium) in the 18 major markets it tracks were up anaverage of 5.1% from April and 28.7% from May, 2006. Regionally, on amonth-to-month basis, inventories were up 7.1% in Baltimore, 6.3% in Boston,6.0% in Chicago, 1.7% in Dallas, 3.3% in Houston, 3.6% in Las Vegas, 10.4%in Los Angeles, 1.4% in Miami, 4.0% in Minneapolis, 7.6% in Orange County,2.6% in Orlando, 1.6% in Phoenix, 10.7% in the San Francisco Bay Area, 5.2%in Sacramento, 12.3% in Seattle, 5.8% in San Diego, -1.0% in Tampa, and9.0% in Washington, D.C.
Meantime, there is no evidence that price cuts on existing homes havereached the level necessary to draw down inventories. The NationalAssociation of Realtors on Wednesday again lowered its estimates forexisting home sales in 2007 to 6.18 million homes, down 4.6% from last year.Housing starts are likely to total 1.43 million units in 2007 and 1.49million next year, below the 1.80 million recorded in 2006. It expects thenational median existing-home price to fall 1.3% to $219,100 and the mediannew-home price to drop 2.3% to $240,800.
Wachovia Capital Markets also on Wednesday put out its May survey of 150sales managers at housing developments, and 15% said base prices had beenreduced over the past 30 days, double the percentage who said so in Apriland a high for the survey. In a research note on the survey, Carl Riechardt,the senior home building and building products analyst at Wachovia, said,"Base price cuts have tended to be used relatively infrequently in oursurvey's history, because they're perceived as wholesale discounts on the'same house' by purchasers of homes in early phases who dislike havingequity cut out from under them...Our survey indicates little response inorders so far. We see little evidence of 'stabilization' in businessconditions in most markets."
On a brighter note, J.P. Morgan analyst John Rehaut put out a report onWednesday stating, "While inventories continued to rise in several keyregions in May, growth has moderated in some markets, and moreover, YTDgrowth remains at roughly 50% of 2006's pace. Specifically, while growthcontinued in May across several key markets, which, combined with subprimefears, has resulted in softer demand trends this year, we note the growthremains at roughly 50% of last year¹s pace. This, combined with the 20-30%YOY declines in starts and permits, as well as continued aggressive specreduction efforts by the builders, drives our view that a major incrementalrise in supply is unlikely."
Ivy Zelman, the lead home building analyst at Credit Suisse, put out areport that said, "Our MLS listings check covers 55 major markets,representing roughly 1/3 of the nation's existing inventory. Last week,listings increased 0.5% week-over-week, representing the 20th increase inthe past 21 weeks. In aggregate, there were 1.345 million units for sale inthe top 55 markets, which is the highest level since we began tracking thedata back in August 2005."
Other reports suggested that the consumer may be growing more wary of debt. The Federal Reserve reported Thursday that consumer borrowing rose at an annual rate of 1.3% in April, down from 7% in March. In dollar terms, the rise was $2.6 billion, much lower than the $6 billion expected by analysts. And LendingTree, the Internet loan company, reported the results of an online survey of nearly 1,500 adults that said almost half were concerned about their current level of debt.
By Friday, all this news had driven already beleaguered home builder stocks down 7.6%. By midday Friday, individual stocks within the group were up between 1% and 2% amid a broad market rally, perhaps suggesting that the news might improve this week.