Forex Economic Analysis: More on Existing Home Sales

The existing home sales figure for the month declined once again (see 1st chart).   However, the supply of existing homes for sale expressed in terms of months declined to 9.6 months, down from a high two months ago of 10.7 months.  The decline is supply is needed to stabalize the housing market and the financial markets.  This movement is a step in the right direction but does not mean the housing market is out of the woods.  A more normal level would be around 7 months.

As the Fed lowers rates, and mortgage rates move lower (albeti at a slower pace), the affordability of housing for those employed increases.  In addition, if those who still have to sell, lower their prices, the affordability will likewise increases.  The combination, given steady income, should lead to an increased contraction of the houses for sale supply as new buyers take the plunge in the housing market. 

The below chart is the Housing Affordability Index which is calculated by the National Association of Realtors.   The December release of this index is due out on the 29th of December, but most of the pieces that go into the calculation are already known.  Given those figures, the index should come in at 121 from a low of 103.6 in July 2007.    

A number of 100 in the Index means a person who earns the median income can purchase the median price house at the average interest rate for home buyers.   A reading of 121 means that the median person can comfortably afford the median house. 

This is good news for new home buyers and is what the Fed wants to do - that is, attract those who could not previously afford a home, to come in and bale out those who cannot afford the home or homes they currently own. 

The expectations with 9.7 months supply is the prices should continue to come down.  As more and more months go by, sellers become more and more antsy. This increases the index.  We know the Fed is easing and so the interest rate value should also decrease which increases the index.  The third piece is income.  If unemployment increases, the income of Americans fall (and may increase the supply of homes on the market as well).  This would cause the Index to decline.  So the key for the Fed and he economy is to keep people employed - maybe not grow, but not getting worse (i.e. above 5.5-5.6% unemployment level). 

If this can be done, I would expect the housing market to work through the supply but once again that will only work with prices coming down, rates staying low and people staying employed.