Sales of new single-family homes (based on signed contracts) fell by 6.6% in June to a level that’s 40% below its 2005 peak. Sales of existing single-family homes (based on closings) fell by 3.5% in June to a level that’s 20% below its 2005 peak. “Pending” sales of existing homes (based on contracts signed) were up by 5% in June but down on a 3-month moving average basis. Indeed, the second quarter as a whole was down by nearly 7% from the first quarter average, pointing toward further declines in closings in the third quarter.

The Commerce Department’s series on new-home sales (signed contracts) does not recognize cancelled contracts. There is no estimate of net sales (contracts signed less contracts cancelled), resales of homes taken back by builders due to cancellations are not recorded in the sales series, and there is no estimate of new-home sales closed.

NAHB’s proprietary survey of 32 large builders (accounting for more than one-fourth of all for-sale housing in the U.S.) overcomes all of these conceptual deficiencies. The June readings (seasonally adjusted by NAHB) show gross sales 31% below the July 2005 peak, net sales 43% below their peak in July 2005, and closings 38% below their recent peak in March 2006.

Although NAHB’s large-builder data system showed some tentative signs of stabilization as the second quarter drew to a close, public statements by many of the public companies suggest that there’s still downward momentum in the single-family market. Indeed, NAHB’s broad-based single-family Housing Market Index points in that direction. The HMI fell to a cyclical low of 24 in July, down from the cyclical peak of 72 in June 2005 and the lowest level since January 1991 — near the bottom of the 1990 to 1991 economic recession. [return to top]
 

The U.S. homeownership rate slipped to 68.4% in the second quarter of this year (seasonally adjusted), a full percentage point below the record high three years earlier and a half-point lower than a year earlier. The absolute number of home owners has shown virtually no change during the past year while the number of renter households has surged by an estimated 835,000.

The erosion of homeownership rates has been broad-based, although the declines during the past year are particularly striking for the 35 to 44 age range, black households and families with below-median incomes. It’s likely that the subprime mortgage debacle, including an unhealthy dose of fraud and abuse, is at least partly responsible for these patterns. [return to top]
 

There were nearly 5.8 million year-round housing units on the market at mid-2007, down from a record 6.1 million three months earlier but higher than any previous number on record. Both the for-sale and for-rent components of this total were down from their first-quarter records, but both remained historically high.

The for-sale measure remained in the stratosphere at mid-2007, reflecting massive increases recorded in both single-family and multifamily (condo) markets since mid-2005. Total for-sale vacancies were 2.0 million at mid-2007, about four-fifths of these (1.6 million) were single-family homes, and nearly nine-tenths of single-family vacancies were in the existing-home market — a legacy of the investor/speculator buying binge during the boom years. [return to top]
 

The S&P/Case-Shiller 20-city composite home price index (based on a repeat-sales methodology that minimizes compositional distortions) was down by 2.8% in May on a year-over-year basis, moving more deeply into the negative range that emerged in January. On a sequential seasonally-adjusted basis, this measure actually entered the negative range in June of last year and contracted at an annualized rate of 7% in May.

The median price of existing single-family homes sold ticked up in June (year-over-year basis) following 10 consecutive months of decline. However, this series has no controls for compositional shifts, and the uptick in June undoubtedly reflects a shift in the composition of homes sold toward higher-priced units — because of the relatively heavy impact of subprime-related credit tightening on sales of lower-priced homes. [return to top]
 

In the midst of the turmoil, yield spreads for investment-grade corporate bonds over comparable-maturity Treasuries widened by about 20 basis points while spreads for lower-quality corporate bonds jumped by about 75 basis points. The broad-based shift away from risky assets also hit equities, dealing the major stock price indexes heavy losses.

The generalized flight to quality provoked a strong rally in the Treasury market, a dynamic that was reinforced as investors marked down their expectations for the path of the federal funds rate. Unfortunately, the decline in the 10-year Treasury yield did not transfer fully to the prime fixed-rate mortgage (FRM) yield. This yield spread widened amidst reports from a major mortgage lender that credit quality is eroding in the prime mortgage market.

The reported erosion was concentrated in second mortgages that had been layered on top of prime first mortgages and in payment-option ARMs where combinations of rising loan balances (via negative amortization) and eroding house values were pulling some of these “nontraditional” first mortgages under water. Although these types of problems hardly characterize the entire prime mortgage market, the frenzied flight to quality promises to elevate the FRM-Treasury spread for some time. [return to top]
 

On a year-over-year basis, we now expect total housing starts to be down by 23% in 2007 and another 1% in 2008. We now expect RFI to be down by 14% in 2007 and 1% in 2008; on a quarterly basis, we expect RFI to bottom out in the first quarter of next year before embarking on a systematic recovery path.

As in previous forecasts, the single-family market bears the brunt of the balance of the projected housing correction. In this regard, projected single-family starts fall by 40% from the peak in the first quarter of 2006 through the first quarter of 2008 and the single-family component of RFI contracts by a similar percentage over this two-year period. [return to top]