Housing Problems Resurface

There have been several updates on the housing market in the past couple of weeks, and none have been very encouraging. This morning brought the latest reading of the S&P Case/Shiller Home Price Index, and it showed that housing prices are falling anew. The 20-city composite has fallen to its lowest point since May 2009.

It’s certainly not “news” that the housing market is struggling mightily. The stock market has adjusted by punishing home builders and other housing-related stocks. In terms of the economy, housing’s share of GDP has fallen from 6.3% back in 2005 to 2.3% last year, so it has a much smaller impact.

No, the bigger concern is the secondary effects that another leg down in prices may have. Specifically, large financial institutions are still carrying very large inventories of houses, which may create another wave of losses if price declines lead to even more defaults and foreclosures. At the consumer level, a drop in price will increase the ranks of homeowners who owe more on their houses than they’re worth at the same time that gas prices are soaring, potentially creating a big drag on future spending.

The bottom line is that problems in housing aren’t totally yesterday’s news, and we need to keep a close eye on developments there because of potential spillover effects into other important parts of the economy.

Homebuilders Defying Conventional Wisdom

There are still plenty of analysts and pundits that worry that housing markets remain weak, and some believe that housing prices may be poised to drop another 10% over the next year or so. I guess I’m in the camp that says we’ve seen the worst of the housing crisis overall. Even if we are forming a bottom that takes some years to base out, I just don’t see the surprise factor that was embedded in housing a few years ago. A few years back, surprise that housing could go down at all was compounded by the real surprise that a housing boom and lax lending standards had formed systemic rot on the balance sheets of global financial institutions.

Despite all the negative fundamentals, it’s not lost on us that homebuilder stocks have been rallying lately. Since the last dip in late November, homebuilders have outperformed the S&P 500 by about 10%. It could be that this is just another outperformance spurt that will ultimately fizzle, like we’ve seen several times from the homebuilders over the last few years. But perhaps a better economy and more jobs will solidify home prices, and share prices of the builders are beginning to pick up on this theme. We’ll have to watch closely as this industry is volatile, but it’s been interesting to watch the builders rallying at the same time that many are predicting another big leg down in housing.

Housing Market Starting to Feel Pain of Tax Credit Expiry

The Homebuyer‘s Tax Credit officially expired on April 30th. Over the last few weeks, we’ve started to get a sense of the impact on the housing market without this government support from some of the latest housing data, and the evidence is troubling. Below is a list of some of the latest developments:

• The National Association of Home Builders’ monthly Housing Market Index fell to 17 in June, from 22 in May. Consensus expectations were for a much milder decline to 21.

• The Mortgage Bankers Association’s weekly index of applications for new mortgages has plunged -38% since the end of April

• Housing Starts in May fell to a 593,000 annual rate, from a 659,000 pace in April

• Likewise, Building Permits fell to a 574,000 annual pace, from 610,000 in April

All of this has happened in an environment of improved affordability for consumers – house prices are down significantly from their highs of a few years ago, and mortgage rates are back below 5%. We weren’t anticipating that the housing market would come roaring back, but there were increasing signs that it might be forming some sort of bottom. Instead, the latest batch of reports has created a fresh round of concern about how the housing market will fare going forward without government assistance.

Pending Home Sales Higher

For the fifth straight month the Pending Home Sales Index compiled by the National Association of Realtors was higher. Pending Home Sales, which came in at a 3.6% gain month over month, is an index that tracks the number of home re-sales under contract. The index is designed to be a leading indicator of housing activity as most contracts become existing home sales between 1 and 2 months later.

Existing home sales, which will be reported on August 21st, have gained ground in the previous three months just as the pending home sales predicted. The National Association of Home Builders Market Index, which gauges sales, expectations and traffic, has more than doubled from a low of 8 in January to the current reading of 17. And New Home Sales have risen the last two months. The June reading of +11% was the largest month over month increase since December of 2000.

There are many reasons for the jump in housing data including lower prices, attractive mortgage rates, and the tax credit for first time homebuyers. But whatever the reason these are very encouraging signs for the devastated U.S. housing market that perhaps we have started to find a bottom. This is no more important than in the home construction stocks. Since July 13th, the homebuilders are up a very healthy 34%, and since the March bottom in the S&P 500 the stocks have risen over 100%. Certainly this has contributed to the overall sentiment in the market and helped break 1,000 on the S&P 500!

Housing Market Update

There were several economic updates on various aspects of the housing market this week. On Wednesday, data on Existing Home Sales was released by the National Association of Realtors. It’s encouraging that sales have seemingly stabilized (shown on the first chart below), but worrisome that prices continue to post big declines. On Thursday, New Home Sales data was released by the Census Bureau. The key take away from that report was that the outstanding inventory of unsold new homes continues to fall (shown on the second chart below), which should help sales and prices to stabilize going forward. While there were some positives found in those reports, on Thursday the Mortgage Bankers Association revealed that mortgage delinquencies and foreclosures rose to record highs during the first quarter. So, a mixed message from the housing market this week, which is actually an improvement from just a few months ago when the information was overwhelmingly negative.