The Reality of the Sales Volume Numbers

Today, there have been all sorts of news stories about the decline of the real estate market.

The following is an excerpt by ALAN ZIBEL and J.W. ELPHINSTONE of the Associated Press (http://www.chicagotribune.com/business/sns-ap-us-home-sales,0,6400813.story)

"Previously Occupied Home Sales Sink 27 pct. to Lowest Level Since 1995 as Economy Weakens

Sales of previously occupied homes plunged last month to the lowest level in 15 years, despite the lowest mortgage rates in decades and bargain prices in many areas.



July's sales fell by more than 27 percent to a seasonally adjusted annual rate of 3.83 million, the National Association of Realtors said Tuesday. It was the largest monthly drop on records dating back to 1968, and sharp declines were recorded in all regions of the country.


The plunge in home sales also magnified fears about the broader economy.


"The housing market is undermining the already faltering wider economic recovery," said Paul Dales, U.S. economist with Capital Economics. "With the increasingly inevitable double-dip in prices yet to come, things could yet get a lot worse."

Sales were particularly weak among homes in the lower- to mid-priced ranges. For example, in the Midwest, homes priced between $100,000 and $250,000 tumbled nearly 47 percent.

As sales have slowed, the inventory of unsold homes on the market grew to nearly 4 million in July. That's a 12.5 month supply at the current sales pace, the highest level in more than a decade. It compares with a healthy level of about six months."

Further in the article, it states: 

"The drop in July's sales was led by 35 percent plunge in the Midwest. Sales were down 30 percent in the Northeast, 25 percent in the West and 23 percent in the South."
Once again, NAR has released statistics that may be difficult to understand.  These statistics are pertaining to Sales Volume (or the total number of homes to sell).  True, the decline is significant, if not staggering.  The Midwest is down 35%, but according to the Market Report statistics in the MRED, Inc. (Chicago area's local MLS Service), it is 39.25%.  This is shown in the following table.
 

The article quotes statistics such as largest drop since 1995, and the largest monthly drop since 1968.  Professionals in the real estate industry do not want buyers and sellers to panic with these numbers.  

There is no question that the drop was significant, if not alarming.  But to better understand the drop, readers should understand Closed Sales typically drop at this time of the year.  This is due to the Spring market activity (contract pendings) that take place in March, April and May, that close in May and June.  Now the July activity shows the summer slowdown that continues into the Fall and Winter months, traditionally called "Seasonal Markets." 

A significant portion of the 39.25% drop reflects an accelerated demand that took place due to the tax homebuyer incentive program that existed until April 30, 2010. 

One way to look at the combined June/July statistics and see that according to the figures above, in 2009, the total was 14,957 residential units closed in the Chicago area, while in June/July 2010 a total of 15,631 homes closed in the Chicago area, which actually shows a 4.51% INCREASE from 2009 to 2010. 

In fact, the sales volume from 2008 to 2010 also shows an increase of 1.94%.  This is good news.  A wait-and-see approach of how the rest of the year will pan out would be the best approach rather than alarming the John Q. Public.  See the table below.

The real issue here is yes, the decline reported by NAR today has been very significant:  significant enough to shift the stock market and is at the headlines of major newspapers and radio and television have reported this story.  But the fact that the tax incentive accelerated the demand for housing this Spring, and because it expired on April 30, 2010 (date the property had to be under contract), it shifted the Spring market forward - much like the "cash-for-clunkers" program did for the auto industry - it accelerated the demand and left the industry with a hangover. 

The overall bigger picture is more homes sold during this period in 2010 than in 2009 or 2008.  Perhaps the most telling tale is looking at the Chicago area's year-to-date Sales Volume.  See the table below for a brighter picture.



According to the statistics above, 2010 is outpacing both 2008 and 2009 in the year-to-date sales volume.  It is 2.51% ahead of 2008's sales pace and 22.05% ahead of 2009's sales pace.  This is wonderful news.  The sudden drop again, was fueled by the accelerated demand of the housing credit program.

The headlines and articles are very "doom-and-gloom" today.  I offer another perspective with these figures.  I still believe our local real estate market is trying to improve, and the discussion of another recession and the nervousness on Wall Street is not contributing to positive consumer confidence.  As I have said many times over, we need the unemployment to get better and that will solve many of our real estate problems.

Contact Chip Wagner, SRA, SCRP at chip@wagnerappraisal.com or at (630) 416-6556