US April Existing Home Sales Preview

The US will report April existing home sales tomorrow. Surveys by news wires expect a rise of around 2% following the 3% decline in March. Yet the market may still be a bit more optimistic than the data. Recall that the April housing starts and permits data disappointed and the March CaseShiller headline also was worse than expected. That said, in both reports, some details were not as bad as the headline would suggest. Existing home sales in the US has been saw-tooth, rising one month only to fall the next month. This pattern of alternating advances and declines goes back to Nov of last year. March was a down number, so if the pattern remains intact, April will be an up number. But the risk is that the up number is disappointingly small. Existing home sales have not risen in the month of April since 2005.

Typically housing starts and existing home sales are often seen as lead indicators, unlike say employment, which is typically a lagging indicator. Typically, housing starts lead the economy by half a year or so, while existing home sales lead the economy by a little more than a quarter. But as we all know this isn't the typically economic downturn.

Housing stress is still evident. Roughly speaking some $40 bln of mortgages payments are 90 days or more in arrears and another nearly $79 bln of mortgage are 30-89 days late in being serviced.

In 2007 and 2008, a total of 3 mln mortgages were foreclosed on. There are roughly 50 mln mortgages in the US. The number of foreclosures was kept in check by a "volunteer" program and there have been more than 1.5 mln mortgage modifications under the government's Hope Now program. In addition, a number of banks have offered their own modification programs. Nevertheless, a little more than 40% of the modified loans may relapse to a distressed state. While the first key appears to be the size of the mortgage payment, a more telling issue appears to be if outstanding amount owed is greater than the house is worth, lowering the mortgage payment may not suffice.

The average outstanding mortgage in the US is for about $210k. In a typical foreclosure the bank recoups around 75% of the mortgage value. Again in this not typically down turn, say the banks recoup only 50% (includes down payment) Three mln foreclosures roughly hits the banks with $315 bln. Another 2 mln foreclosures are likely this year (conservatively) and this brings the amount to $525 bln. This is indeed a significant hit, but it is not the trillions of dollars that has been bandied about. The problem is not that people who should not have bought houses bought houses. The problem is that these weak loans were used as leverage, not so much by American households as by financial institutions.