Tuesday, May 06, 2014

What's Right with Housing?

by Bill McBride on 5/06/2014 03:37:00 PM

There have been quite a few hand-wringing articles lately discussing the problems with housing. Most articles point to some of these suspects:

1) Existing home sales were down 7.5% year-over-year in March.
2) New home sales were down 13% year-over-year in March and down slightly Q1 over Q1.
3) Housing starts were down 5.9% year-over-year in March, and down 2% Q1 compared to Q1 2013.
4) The 4-week average of the Mortgage Bankers Association (MBA) mortgage purchase index is down 19% compared to the same week last year.
5) Mortgage credit is still tight.
6) Mortgage rates are up significantly from last year.
7) The homeownership rate is still falling.
8) Younger people prefer renting and more ...

Oh my, the sky is falling!

Well, maybe not.

The first mistake these writers make is they are asking the wrong question. Of course housing is lagging the recovery because of the residual effects of the housing bust and financial crisis (this lag was predicted on this blog and elsewhere for years - it should not be a surprise). 

The correct question is: What's right with housing?  And there is plenty.

1) Existing home sales were down 7.5% year-over-year in March.  Wait, isn't that bad news?  Nope - not if the decline is related to fewer distressed sales - and it is.  (fewer foreclosures and short sales).

2) Mortgage delinquencies are down sharply.  See: Fannie Mae and Freddie Mac: Mortgage Serious Delinquency rate declined in March and Mortgage Monitor: Mortgage delinquency rate in March lowest since October 2007, "Only One in 10 American Borrowers Underwater"

3) Mortgage credit is tight. Hey, isn't that bad news? Nope.  There is only one way to go ...

New Home SalesClick on graph for larger image.

4) New home sales are up significantly from the bottom, but are still historically very low.

There really is no where to go but up.  A growing population will require more new homes.  (I'll post again on household formation in the future).  The graph for housing starts looks similar.

5) The percent of borrowers with negative equity is declining sharply.  See: CoreLogic: 4 Million Residential Properties Returned to Positive Equity in 2013 and Zillow: Negative Equity declines further in Q4 2013

6)  The impact from rising mortgage rates is mostly behind us.  Economists at Goldman Sachs have found "the effect of monetary policy shocks on [building] permits persists for 3-4 quarters".  Rates increased from around 3.5% in May 2013 to 4.4% in July 2013.  Since then rates have moved sideways or down a little - and the "3-4 quarters" is almost over.

7) Existing home inventory is increasing, and house price increases are slowing. Sometimes rising inventory is a sign of trouble (I was pointing to this in 2005), but now inventory is so low that it is a positive that inventory is increasing. This will also slow house price increases (I think that will be a positive for housing too - a more normal market).

8) The MBA purchase index is skewed by large lenders. Over the last few years, small lenders (many not included in the MBA survey) have focused on purchase applications (they market through real estate channels and charge lower fees than the large lenders). Other data suggests mortgage applications are mostly flat year-over-year.  UPDATE: The MBA told me they have expanded coverage of the index to include many smaller purchase focused lenders.  The MBA doesn't believe their data is "skewed" by the large lenders.

9) Investor buying is declining.

Housing is a slow moving market - and the recovery will not be smooth or fast with all the residual problems.  But overall housing is clearly improving and the outlook remains positive for the next few years.

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