Homes Sales Indicate More Grief to Come

Certainly you are not shocked by the lower existing home sales numbers released, are you?

It is interesting to note that on a non-seasonally adjusted (NSA) basis, sales were down 22.7% from a year ago. It is my understanding that March was in the same season in 2007 as it was in 2008, so it appears what ever fiddling the NAR is doing with the seasonal adjustment factors is cushioning the apparent severity of the decline. But since this is what the press is using, I will also be using the seasonally adjusted numbers in discussing the regional year-over-year changes -- just keep in mind that they are significantly worse in every region on a NSA basis.

These numbers are usually broken down in the different regions, correct?

Right. For the month, the worst hit was the Midwest, where sales were down 6.5%, followed by the South with a 3.5% decline. The two high priced regions, the Northeast and the West, were both actually up 2.2% each. Year-over-year, the West has seen the biggest decline at 22.3%, followed by the South (-20.0%), the Northeast (-18.8%) and the Midwest (-15.9%).

The inventory situation actually got worse. There are now 4.058 million existing houses on the market, up 1.0% from a month ago and 6.6% from a year ago. Combine rising inventories with falling sales and you get rising months of supply. At the existing sales pace, it would take 9.9 months to clear out the supply, up from 9.6 months in February and 7.5 months a year ago. Just a few years ago, 4.0 months was considered normal.

Do you see any good news at all here?

Actually, I do. We are still below the October peak in terms of months of Supply of 10.5 months, and the July peak in absolute numbers of homes of 4.561 million houses. However, the absolute level of inventories is seasonal, so look for the number to climb in the coming months.

Pricing is still holding up better than volume of sales, with the price of a median home down 7.7% from a year ago nationwide. In the Northeast, the median home price is actually up 4.6%. The worst hit is the West, where median prices are down 14.7%, followed by a 7.1% decline in the South and a 5.3% decline in the Midwest.

If measured by average (mean) prices, the story is much the same, down 6.6% nationwide year over year, with the Northeast (+3.1%) actually up while the West (-10.7%) has seen the biggest declines. The average price for a house is down 7.9% in the South and 7.1% in the Midwest.

Is the housing bottom in sight, in your estimation?

I would strenuously argue that we still have a long way for housing prices to decline since housing prices are still historically very high relative to both rents and incomes. At best, this process is half over, and that is a very optimistic outlook. One quarter to one third over is more realistic.

Home price declines are the single best predictor of mortgage delinquencies and foreclosures. Stay away from any financial institution that has significant exposure to mortgages. That list would start with S&L's like Washington Mutual (WM), Downey (DSL) and First Fed (FED). It would include banks such as Wachovia (WB), Citigroup (C), National City (NCC) and Zion (ZION).

Further, it also includes the GSE's Fannie Mae (FNM) and Freddie Mac (FRE) and the mortgage insurers MGIC (MTG) and PMI Group (PMI). Those that have not cut their dividends are likely to, and the process of raising capital will severely dilute existing shareholders, preventing them from enjoying any eventual rebound in the market.

I would also avoid the major homebuilders such as Pulte (PHM), Beazer (BZH), Standard Pacific (SPF), Lennar (LEN), D.R. Horton (DHI) and Ryland (RYL). The market will not really recover until we see several of them write new chapters in their histories - the eleventh chapter.

Dirk van Dijk, CFA is the Director of Zacks Equity Research.