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By Michael Pakko, August 27, 2010 3:20 PM

“the expiration of the home-buyer tax credits is the elephant in the room”

Information on residential real estate markets has dominated the news over the past few days.  When it comes to evaluating the housing markets in Arkansas, recent reports from various sources show a consistent picture of recent trends, but the outlook is very uncertain.

Home Sales

The Arkansas Realtors Association (ARA) released statistics this week showing that June home sales were up slightly over the previous year, but down from the previous month.  As shown in Chart 1 below, housing sales follow a recurring seasonal pattern, with the summer months tending to have higher sales than winter months.  July is often the peak sales months of the year, but so far this year, sales peaked in April and have declined since then.

Source: Arkansas Realtors Association

Disentangling the cyclical and seasonal effects is crucial to understanding recent trends.  Chart 2, below, shows seasonally adjusted data that are averaged over calendar quarters to smooth out some of the month-to-month variability (the data are seasonally adjusted using the technique described in a previous article).

Sources: Arkansas Realtors Association, National Association of Realtors

With these refinements, the cyclical pattern of home sales is more evident:  After declining throughout 2007 and 2008, sales steadily increased over the course of 2009.  The first quarter of 2010 saw a sharp decline, followed by a rebound in the second quarter.  Recent data for Arkansas home sales from the National Association of Realtors  (NAR), also displayed in Chart 2, confirm the recent quarterly pattern in the adjusted ARA data.

The sharp decline in the first quarter of 2010 can be partly attributed to weather.  Sales are usually low in the winter months, and this past winter in Arkansas was particularly ill-suited to house shopping.  Sales recovered in the second quarter to about the same pace as in the fourth quarter of 2009.

But when it comes to assessing the outlook for home sales, the expiration of the home-buyer tax credits is the elephant in the room.  Sales in the fourth quarter of 2009 were boosted by last-minute purchases under the original tax credit program for first-time buyers that expired at the end of October.  Weather might have kept activity low in the first quarter, but the impending deadline for taking advantage of the extended and expanded home-buyer tax credit on April 30 was undoubtedly a factor in the second quarter resurgence.

The recent tax-credit deadline required that a contract be in place by the end of April, but the closing date could be later.  As a result, recorded sales in May and June included some transactions that are associated with last-minute contracts to qualify for the credits.  The crucial question is whether the second quarter increase reflects sales that would have taken place later in the year in the absence of the tax-credit deadeline – implying that we should expect a sharp decline over the next few months — or whether it reflects a sustainable improvement in market conditions.

Preliminary information suggests that we will see a drop-off in the third quarter.  New data on existing home sales and new home sales nationwide showed sharp declines in July.  Information on home sales in central Arkansas for July show that Arkansas housing market experienced this downturn as well.  For example, sales in Pulaski county were reported to be down 30.2 percent from the previous month and down 31.5 percent from July 2009.  When the statewide sales figures for July are released by the ARA next month, they are likely to show a sharp downturn.  

Arkansas home sales over the remaining summer months will probably be relatively weak, as the market returns to an equilibrium undistorted by government subsidies.  On the other hand, mortgage rates remain low and house prices have fallen (see below), so the market continues to be favorable for buyers.  This factor should help sustain sales later in the year.

House Prices

In addition to reports from the ARA and NRA, new data on housing prices were released this week by the Federal Housing Finance Authority (FHFA).  Since the housing downturn began in early 2007, the FHFA purchase-only price index has shown a distinctly lower rate of appreciation than the all-transactions index, which includes appraisal data from refinancings.  Ultimately, it is the market sales price that matters, so the purchase-only index provides more accurate information on current market conditions.  However, refinancings are more likely to be prevalent in areas where houses are retaining their value, so the all-transactions index might give a better indication of long-run home values.  [See also, Comment:  Differences Among Home-Price Indices]

As shown in Chart 3, below, the two measures of house prices have diverged considerably since the market downturn began, with   the purchase-only index showing considerably more variability.  Over the past four quarters, the purchase-only index has experienced quarterly ups and downs, but has changed little on net.  The all-transactions index has fallen by 2.4 percent.

Source: Federal Housing Finance Authority

Under either method, house prices in Arkansas have not experienced declines as large as the nationwide average.  Over the past four quarters, for example, the FHFA all-transactions index for the U.S. showed a 5 percent decline compared to the 2.4 percent decline in Arkansas. 

Chart 4, below, compares the two FHFA house price indexes for Arkansas with the average sales-price data from ARA.  The series are normalized to take on a value of 1.0 in the first quarter of 2007, so the data presented in the chart show cumulative price changes since that time.

Sources: Federal Housing Finance Authority, Arkansas Realtors Association, and authors' calculations

 Not surprisingly, the average price data from ARA shows some similarity to the FHFA purchase-only index.  Both measures are based on prices of actual sales.  Both series show a sharp decline in the first quarter of 2010.  This drop is associated with the decline in home sales discussed earlier.  With fewer homes selling in general, the segment of the market including foreclosures and other distressed sales constituted a larger share of total sales, depressing average prices.  With the pickup in market activity in the second quarter, the price spike was also reversed.

Cumulatively, from 2007 through the second quarter of 2010, house prices in Arkansas have decline modestly.  All three measures of home prices show prices down over the period, but by magnitudes of only about 1 to 3 percent.

The FHFA also releases all-transactions indexes for metropolitan areas.  As shown in the table below, these data show that house price changes vary considerably across Arkansas’ metro areas.

Source: Federal Housing Finance Authority

Northwest Arkansas has experienced the largest and most persistent declines in house prices.  Earlier in the decade, the Fayetteville metro area showed the greatest appreciation in the state, so declines more recently serve to offset some of those earlier gains.  Hot Springs has recently shown fairly large declines as well, but compared to five years ago, prices are up about 14.6 percent.  Data for Jonesboro, Texarkana and Little Rock show that house prices increased in the second quarter, with prices also higher than a year ago.  In fact, Jonesboro serves as a counterexample to the experience of Northwest Arkansas:  Rather than rising sharply in the early part of the decade and subsequently declining, house prices in Jonesboro have experienced a relatively slow but steady upward trend.

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By Michael Pakko, March 9, 2010 9:12 AM

Rising gasoline prices are in the news again.  According to AAA Fuel Gauge Report, the national average price for a gallon of regular grade gasoline has risen to $2.76 per gallon–up six cents in the past week and ten cents from a month ago.   Here in Arkansas we’ve seen similar price increases, with the current average price reported to be $2.66 per gallon.

Price changes play an important role in any market.  Gasoline prices tend receive more attention than other prices–perhaps because gasoline is a commodity that we use on a daily basis, or perhaps just because gasoline prices are prominently posted on every street corner.  But like any other price, understanding movements in the price of gasoline ultimately comes down to considering supply and demand.

About half the cost of gasoline can be traced back to crude oil prices.  In the past month, world oil prices have risen from around $70 to over $80 per barrel.  Specific market factors have been mentioned as playing a part in this increase:  On the supply side, an insurgency in Nigeria (an OPEC member nation) has been causing some production disruptions, and there has been some uncertainty about the prospects for Iranian oil production as well.   Meanwhile, it is anticipated that China will be adding to its strategic petroleum reserves this year, raising demand.  More fundamentally, the world economy is seen as recovering from the deep recession of the past two years, bringing stronger demand for energy overall.

Other factors affect the price of gasoline specifically.  With the warmer weather, refiners are switching to their summer formulations, contributing to a seasonal increase to production costs.  Demand for gasoline also tends to rise in the spring as consumers come out of hibernation to drive more.  This year, strengthening demand is expected to be particularly important.   With the economy emerging from recession and consumer spending showing signs of picking up, it is anticipated that demand for gasoline will be especially strong during the spring and summer months of 2010.

For both crude oil and refined gasoline, rising demand associated with economic recovery is seen as the fundamental factor driving prices upward.  Some industry analysts are predicting gasoline prices as high as $3.00 per gallon by this summer, but the alternative–lower gas prices in the face of weaker-than-expected consumer demand–is not an attractive prospect either.

In current market conditions, higher prices are serving as a signal to producers and distributors to unleash their inventories of oil and gasoline.  The time is now to bring the product to market.  In fact, the Financial Times reports  that the relationship between crude oil prices on the spot and futures markets is in the process of moving from ”contango” toward “backwardation.”    The market has been in contango for some time, as weak demand during the recession has kept spot prices low relative to foward prices.  The market appears to be moving to a reversal, known as backwardation, in which forward prices fall below spot prices.  This serves as a signal for prompt delivery of product to market.  A similar process appears to be occuring in the markets for gasoline as well.

So in some sense, higher gasoline prices are serving as an indicator that the economy is strengthening, and should be considered a positive development.    For Arkansans, the other good news is that gasoline prices in our state remain about ten cents below the national average.  In fact, a “top ten list” of the lowest gas prices in the nation (see below) includes Arkansas, along with several of its neighboring states.  If you’re willing to pay one or two cents more for gasoline, Mississippi and Louisiana join the list as well.  So no matter which direction you head on a road trip from Arkansas this spring and summer, you’re likely to find relatively low gas prices.

Source: AAA Fuel Gauge Report, March 9, 2010