Wow! Good News in Housing

Companies noted here include D.R. Horton (DHI - Analyst Report), KB Home (KBH - Snapshot Report), MGIC (MTG - Analyst Report), PMI Corp (PMI - Analyst Report) and Colgate Palmolive (CL - Analyst Report).

In December, existing home sales rose 6.5% to a seasonally adjusted annual rate of 4.74 million from November's rate of 4.45 million (originally reported as 4.49 million). Even more encouraging, the inventory of homes for sale dropped a sharp 11.7% to 3.68 million.

While it is normal for inventories to drop in December, this was a much bigger-than-normal drop. That puts the months of supply down to 9.3 months, from 11.2 months in November.

As the Chart (from http://www.calculatedriskblog.com/) shows, 9.3 months is still pretty ugly (normal is 4-5 months), though it is good to see it moving rapidly in the right direction. On the other hand, the increased sales came at a price, namely a much lower price. The price of a median home fell 15.3% from a year ago and now stands at $175,400. This is also sharply below the median price for all of 2008 of $198,000, indicating the slide in prices is continuing. Distressed sales, mostly foreclosures, accounted for 45% of all sales in December.

The improvement in sales happened for both single-family homes (up 7.0% month over month but down 1.4% year over year) and for condos (up 2.1% month over month but down 18.4% year over year). The Northeast was the only region that did not see an increase in sales on a month over month basis, falling 1.4%, and down 14.3% year over year. It has also seen the least deterioration in median price over the last year, down 7.8% to $235,000. The Northeast is the smallest region of the country in terms of housing.

The West had the biggest improvement, with sales up 13.6% on a month-over-month basis, and up 31.6% year over year. However, it also had the largest drop in median price of 31.5% to $213,100. The South, which has by far the most home sales, posted the next best performance, with sales up 7.4% on a month-over-month basis, but down 11.2% year over year. The median price in that region is down 8.0% year over year to $158,600. The Midwest was up 4.0% month over month and is down 10.3% year over year. It is the cheapest region with a median home price of $140,800, down 11.4% from a year ago.

This shows that the market does work -- if prices get low enough, people will buy. Lower prices are not without costs, most significantly the wiping out of the equity of millions of Americans.  I don't think the decline in home prices is over, but perhaps this is at least the end of the beginning.

While there seems to be a little bit of light at the end of the tunnel, it still strikes me as too early to jump into the Homebuilders like D.R. Horton (DHI - Analyst Report) and KB Home (KBH - Snapshot Report). The decline in home prices is also a significant negative to the Private Mortgage Insurance firms like MGIC (MTG - Analyst Report) and PMI Corp. (PMI - Analyst Report). Stick to safer names like Colgate-Palmolive (CL - Analyst Report), instead.

Read the full analyst report on DHI

Read the full analyst report on KBH

Read the full analyst report on MTG

Read the full analyst report on PMI

Read the full analyst report on CL