by Bill McBride on 5/23/2013 08:32:00 PM
Thursday, May 23, 2013
Several people have asked me about this article at CNBC by Jeff Cox: Why Housing Won't Drive the Recovery
Despite data points that in some cases are at multiyear highs, Robert Shiller, Karl Case and David Blitzer believe there are multiple headwinds that will keep a lid on housing gains.First, housing (technically residential investment) will be a key driver for the economy. Period.
Among the obstacles are a low level of new housing starts, an unexpectedly slow migration of so-called shadow inventory onto the market, and continued difficulty for buyers to secure financing.
"You've got a lot of breathless commentary in the media," said Shiller, a Yale University economist. "All this talk that we're in this great recovery—we probably are in the short run, the longer run doesn't look so terrific to me."
It is important to understand that "residential investment" is mostly new homes and home improvement. For existing home sales, only the broker's commission is included in residential investment (nothing is added to the housing stock). Those looking at the level of existing home sales are looking at the wrong number, as are those focused only on house prices.
Look at "headwinds" that are mentioned in the article:
1) "a low level of new housing starts". That is a headwind? To me, the low level of starts means there is more upside based on demographics. The homeownership rate peaks for those in the 55 to 75 age group, so the boomers will not negatively impact homeownership for a decade or more.
2) "an unexpectedly slow migration of so-called shadow inventory onto the market". Do they expect the pace of foreclosures to increase? I don't. The process is very long in most judicial states, and I don't expect another wave of foreclosures hitting the market - but I do think we will see distressed sales for years.
3) "continued difficulty for buyers to secure financing". OK, but this has been a headwind for the last couple of years. Looking forward, I expect some loosening in lending standards. So this is really a potential tailwind.
Nothing in this article changes my view.
Friday economic release:
• At 8:30 AM ET, Durable Goods Orders for April from the Census Bureau. The consensus is for a 1.1% increase in durable goods orders.
Note: The bond market will close early Friday at 2PM ET. The stock market will close at the normal time. All markets are closed on Monday in observance of Memorial Day.
The Calculated Risk blog is always open!
by Bill McBride on 5/23/2013 03:33:00 PM
From Freddie Mac today: Mortgage Rates Continue Upward Trend
Freddie Mac (OTCQB: FMCC) today released the results of its Primary Mortgage Market Survey(R) (PMMS®), showing fixed mortgage rates trending higher for the third consecutive week and putting pressure on refinance momentum. ...Click on graph for larger image.
30-year fixed-rate mortgage (FRM) averaged 3.59 percent with an average 0.7 point for the week ending May 23, 2013, up from last week when it averaged 3.51 percent. Last year at this time, the 30-year FRM averaged 3.78 percent.
15-year FRM this week averaged 2.77 percent with an average 0.7 point, up from last week when it averaged 2.69 percent. A year ago at this time, the 15-year FRM averaged 3.04 percent.
This graph shows the the 30 year and 15 year fixed rate mortgage interest rates from the Freddie Mac Primary Mortgage Market Survey®. Not much of an increase recently ... but it will slow refinance activity.
The Freddie Mac survey started in 1971 and 30 year mortgage rates are still near the record low set last November.
by Bill McBride on 5/23/2013 12:47:00 PM
Obviously the new home sales report this morning was solid with sales above expectations and significant upward revisions to prior months. I try not to react too much to the month to month ups and downs; the key points right now are that sales are increasing and will probably continue to increase for some time.
Now that we have four months of data for 2013, one way to look at the growth rate is to use the "not seasonally adjusted" (NSA) year-to-date data.
According to the Census Bureau, there were 153 thousand new homes sold in 2013 through April, up about 26.4% from the 121 thousand sold during the same period in 2012. That is a very solid increase in sales, and this was the highest sales for these months since 2008.
Note: For 2013, estimates are sales will increase to around 450 to 460 thousand, or an increase of around 22% to 25% on an annual basis from the 369 thousand in 2012.
Although there has been a large increase in the sales rate, sales are just above the lows for previous recessions. This suggests significant upside over the next few years. Based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years - substantially higher than the current sales rate.
And an important point worth repeating: Housing is historically the best leading indicator for the economy, and this is one of the reasons I think The future's so bright, I gotta wear shades.
And here is another update to the "distressing gap" graph that I first started posting over four years ago to show the emerging gap caused by distressed sales. Now I'm looking for the gap to start to close over the next few years.
Click on graph for larger image.
The "distressing gap" graph shows existing home sales (left axis) and new home sales (right axis) through April 2013. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.
Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales. The flood of distressed sales kept existing home sales elevated, and depressed new home sales since builders weren't able to compete with the low prices of all the foreclosed properties.
I don't expect much of an increase in existing home sales (distressed sales will slowly decline and be offset by more conventional sales). But I do expect this gap to continue to close - mostly from an increase in new home sales.
Another way to look at this is a ratio of existing to new home sales.
This ratio was fairly stable from 1994 through 2006, and then the flood of distressed sales kept the number of existing home sales elevated and depressed new home sales. (Note: This ratio was fairly stable back to the early '70s, but I only have annual data for the earlier years).
In general the ratio has been trending down, and I expect this ratio to trend down over the next several years as the number of distressed sales declines and new home sales increase.
Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.
by Bill McBride on 5/23/2013 11:47:00 AM
From the Kansas City Fed: Tenth District Manufacturing Survey Improved Somewhat
The Federal Reserve Bank of Kansas City released the May Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity improved somewhat, rising above zero for the first time in seven months, and producers’ expectations for future activity also increased.The last regional surveys for May will be released next Tuesday (Dallas and Richmond), and the ISM index for May will be released on Monday, June 1st. Based on the regional surveys released so far, and the Markit Flash PMI released this morning, I expect a fairly weak reading for the ISM index (perhaps at or below 50).
“It was good to finally see a positive number after seven months of modest declines, and for optimism about future activity to return after dropping last month,” said Wilkerson. “Still, activity remains at only about year-ago levels and firms are having difficulty passing cost increases through.”
The month-over-month composite index was 2 in May, up from -5 in both April and March. ... Other month-over-month indexes were mixed. The production index edged up from 1 to 5, and the shipments, new orders, and new orders for export indexes also rose. In contrast, the employment index fell from -3 to -7, while the order backlog index was unchanged.
by Bill McBride on 5/23/2013 10:00:00 AM
The Census Bureau reports New Home Sales in April were at a seasonally adjusted annual rate (SAAR) of 454 thousand. This was up from 444 thousand SAAR in March (March sales were revised up from 417 thousand).
January sales were revised up from 445 thousand to 458 thousand, and February sales were revised up from 411 thousand to 429 thousand. Very strong upward revisions.
The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.
"Sales of new single-family houses in April 2013 were at a seasonally adjusted annual rate of 454,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 2.3 percent above the revised March rate of 444,000 and is 29.0 percent above the April 2012 estimate of 352,000."Click on graph for larger image in graph gallery.
The second graph shows New Home Months of Supply.
The months of supply was unchanged in April at 4.1 months.
The all time record was 12.1 months of supply in January 2009.
This is now in the normal range (less than 6 months supply is normal).
"The seasonally adjusted estimate of new houses for sale at the end of April was 156,000. This represents a supply of 4.1 months at the current sales rate."On inventory, according to the Census Bureau:
"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted."Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.
This graph shows the three categories of inventory starting in 1973.
The inventory of completed homes for sale is at a record low. The combined total of completed and under construction is also just above the record low.
The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate).
In April 2013 (red column), 45 thousand new homes were sold (NSA). Last year 34 thousand homes were sold in April. The high for April was 116 thousand in 2005, and the low for April was 30 thousand in 2011.
This was well above expectations of 425,000 sales in April, and a solid report, especially with all the upward revision to previous months. I'll have more soon ...