[dropcap]A[/dropcap]s the magical “r” word – recovery – has begun to escape the lips of economic experts and pundits, it’s worth taking a closer look at housing, an essential sector of the US economy that has been absolutely brutalized over the last five years. So, is the housing market beginning to turn around? Well, do you want the good news or bad news? Because, the market is definitely in pretty bad shape, but it is looking like it has finally bottomed out and there are a few signs of life.
Housing has been a thorn in this country’s side for too long, and it has created two major issues: falling prices and a drop in construction and housing turnover. The former creates a negative wealth effect and ongoing issues for banks (think foreclosures), which in turn stop lending and the latter slows all sorts of economic activity.
So when will housing turn the corner? Seems every economist in the country has a prediction, but the reality is nobody knows. And when it does recover, it’s highly unlikely we’ll achieve the type of growth witnessed during the boom. But it remains an important part of our economy – approximately 14.9 percent of GDP according to the National Association of Home Builders. This means even a modest recovery can have a significant impact on growth. Given some recent negative readings, it’s worth taking a step back to look at the data in aggregate.
On Tuesday, Standard & Poor’s released the November reading for the Case-Shiller Index which tracks home prices across the country. The data showed prices in the 20-city index fell 0.7 percent from October and 3.7 percent year-over-year, seasonally adjusted. Atlanta and Las Vegas posted the largest annual declines. There aren’t many positive takeaways from this. Persistently high unemployment, economic uncertainty, and ongoing foreclosures have kept a lid on home values. December single-family new homes sales also came in below expectations posting a 2.2 percent drop from November, according to the US Department of Commerce. This followed three straight months of sequential increases.
Despite the negative readings, we must keep in mind housing data is spotty and fluctuates month to month. Taking a step back and looking at new homes sales on a quarterly basis shows a different trend – every quarter in 2011 posted better year-over-year results than the preceding three months. In fact, growth in the third and fourth quarter was actually positive, and at an accelerated pace. Moreover, the seasonally adjusted annual rate has been hovering around the 300,000 unit level for almost the entire year. The headlines pointed out that 2011 was the worst sales year on record, which is true from an absolute volume perspective. But the trend is more important, and it suggests sales have more or less established a floor.
Single-family existing home sales have shown an even stronger trend. According to the National Association of Realtors, the seasonally adjusted annual rate posted a 4.3 percent year-over-year increase in December and 4.6 percent increase versus November. More importantly, as the figure below depicts, the trend has generally been positive in the second half of the year. Coupled with falling inventory, this bodes well for future new home construction.
While building permits and new housing starts were both down sequentially in December, they were up 7.8 percent and 24.9 percent year over year, respectively. And as the figure below depicts, the trend over 2011 was generally positive, albeit gradual, with both ending the year higher than they started. Falling inventories should further support to this trend.
What does it all mean?
Short-term housing data will always fluctuate. We’ve seen some recent weak spots, but longer-term trends suggest the market is stabilizing. Of course, an unexpected spike in foreclosures could boost inventory and choke off growth. But this looks increasingly unlikely. Corporate earnings continue to come in strong, unemployment is falling and incomes are rising. Moreover, record low mortgage rates and depressed values have made homes more affordable than they’ve been since 1971, according to the U.S. Department of Housing and Urban Development.
There are also new programs being put in place to add further stabilization. The U.S. government plans to market large volumes of foreclosed homes to private operators as rentals. This plan has already peaked interest of multiple private equity firms due to attractive cash flows in the tight rental market. Buying up properties would also help stabilize home prices in their respective regions. Even President Obama is trying to make it easier for homeowners to refinance and take advantage of the market’s low current rates.
As the preceding figure shows, prices have fallen precipitously since peaking in 2006. But in these huge swings, prices usually over-correct, making another large drop unlikely.
Clearly, U.S. housing is not out of the woods. The market remains fragile and recent stabilization could reverse should economic conditions deteriorate over 2012. At this point, ripple effects from Europe pose the largest risk. But if the U.S. can remain somewhat unscathed, housing could find additional traction and provide a solid tailwind to economic growth.
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