by Calculated Risk on 4/26/2011 11:08:00 AM

First, here is a graph showing nominal house prices for three indexes:

Nominal House Prices

Click on graph for larger image in graph gallery.

The first graph shows the quarterly Case-Shiller National Index (through Q4 2010), and the monthly Case-Shiller Composite 20 and CoreLogic House Price Indexes (both through February release) in nominal terms (as reported).

In nominal terms, the National index is back to Q1 2003 levels, the Composite 20 index is 0.4% above the May 2009 low, and the CoreLogic index is back to January 2003 levels.

Once the Case-Shiller Composite 20 falls below the May 2009 low, the index will be back to early 2003 levels.

Nominal prices will probably fall some more, and my forecast is for a decline of 5% to 10% from the October 2010 levels for the national price indexes.

Real House Prices

The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter).

Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to Q1 2000 levels, the Composite 20 index is back to November 2000, and the CoreLogic index back to January 2000.

A few key points:
• In real terms, all appreciation in the last decade is gone.

• I don't expect national real prices to fall to '98 levels. In many areas - if the population is increasing - house prices increase slightly faster than inflation over time, so there is an upward slope for real prices.

• Real prices are still too high, but they are much closer to the eventual bottom than the top in 2005. This isn't like in 2005 when prices were way out of the normal range.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Here is a similar graph through January 2011 using the Case-Shiller Composite 20 and CoreLogic House Price Index.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Composite 20 index is just above the May 2009 levels, and the CoreLogic index is back to January 2000.

An interesting point: the measure of Owners' Equivalent Rent (OER) is at about the same level as two years ago - so the price-to-rent ratio has mostly followed changes in nominal house prices since then. Rents are starting to increase again, and OER will probably increase in 2011 - lowering the price-to-rent ratio.

This ratio could decline another 10%, and possibly more if prices overshoot to the downside. The decline in the ratio will probably be a combination of falling house prices and increasing rents.

Earlier:
• Case Shiller: Home Prices near post-bubble lows in February

by Calculated Risk on 4/26/2011 09:00:00 AM

S&P/Case-Shiller released the monthly Home Price Indices for February (actually a 3 month average of December, January and February).

This includes prices for 20 individual cities and and two composite indices (for 10 cities and 20 cities).

Note: Case-Shiller reports NSA, I use the SA data.

From S&P:Home Prices Edge Closer to 2009 Lows

Data through February 2011, released today by S&P Indices for its S&P/Case-Shiller Home Price Indices ... show prices for the 10- and 20-city composites are lower than a year ago but still slightly above their April 2009 bottom. The 10- City Composite fell 2.6% and the 20-City Composite was down 3.3% from February 2010 levels.

Washington D.C. was the only market to post a year-over-year gain with an annual growth rate of +2.7%. Ten of the 11 cities that made new lows in January 2011 saw new lows again in February 2011. Detroit avoided another new low, managing a +1.0% increase in February over January, the only city with a positive monthly change. With an index level of 139.27, the 20-City Composite is virtually back to its April 2009 trough value (139.26); the 10-City Composite is 1.5% above its low.

Click on graph for larger image in graph gallery.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 31.7% from the peak, and down 0.2% in February (SA). The Composite 10 is still 1.8% above the May 2009 post-bubble bottom.

The Composite 20 index is also off 31.4% from the peak, and down 0.2% in February (SA). The Composite 20 is only 0.4% above the May 2009 post-bubble bottom and will probably be at a new post-bubble low soon.

The second graph shows the Year over year change in both indices.

The Composite 10 SA is down 2.6% compared to February 2010.

The Composite 20 SA is down 3.3% compared to February 2010.

The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Prices increased (SA) in 6 of the 20 Case-Shiller cities in February seasonally adjusted. Prices in Las Vegas are off 58% from the peak, and prices in Dallas only off 6.8% from the peak.

From S&P (NSA):

“There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing.” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “Ten of the 11 MSAs that recorded index lows in January fell further in February. The one exception, Detroit, is 30% below its 2000 price level. The 20-City Composite is within a hair’s breadth of a double dip. Fourteen MSAs and both Composites have continued to decline month-over-month for more than six consecutive months as of February."

“Atlanta, Cleveland and Las Vegas join Detroit as cities with home prices below their 2000 levels; and Phoenix is barely above its January 2000 level after a new index low. The one positive is Washington D.C. with a positive annual growth rate, +2.7%, and home prices more than 80% over its January 2000 level. Other cities holding on to large gains from 11 years ago include Los Angeles (68.25%), New York (65.19%) and San Diego (55.05%)”

Both composite indices are still slightly above the post-bubble low (SA), but the indexes will probably be at new lows in the next few months.

by Calculated Risk on 4/26/2011 08:24:00 AM

From the WSJ: Greece's Budget Deficit Higher Than Expected

Greece's budget deficit in 2010 was 10.5% of gross domestic product, significantly larger than forecast ... Lower-than-expected government revenue was the main culprit behind the higher deficit number. ... The Greek government was targeting a 2010 deficit of 9.4% of GDP ...

The missed target was "mainly the result of the deeper-than-anticipated recession of the Greek economy that affected tax revenue and social security contributions," the Greek government said in a statement after the Eurostat announcement.

More austerity coming - the beatings will continue until morale improves!

The yield on Greece ten year bonds increased to 15.3% today and the two year yield is up to 24%. It seems like the markets expect a credit event soon.

Here are the ten year yields for Ireland at 10.5%, Portugal up to a record 9.6%, and Spain at 5.5%.

by Calculated Risk on 4/25/2011 11:12:00 PM

From Dina ElBoghdady at the WaPo: Affordable rental housing scarce in U.S., study finds

The share of renters who spend more than half their income on housing is at its highest level in half a century and it’s no longer just low-income tenants who are feeling the pain, according to a Harvard University study scheduled for release Tuesday.

About 26 percent of renters — or 10.1 million people — spent more than half their pre-tax household income on rent and utilities in 2009.
...
Developers cut back on such projects when the economy deteriorated in 2009, which drove down vacancies and boosted rents.
...
In many areas, the demand is driven by families who lost their homes to foreclosure ... [and] as the job market recovers, more newly employed young adults appear to be seeking their own apartments instead of living with their parents, putting even more upward pressure on rental rates ...

This is a very high percentage of their income for housing. Add in higher gasoline prices, and there can't be much left.

Recent reports have shown the apartment vacancy rate is falling rapidly - and rents are rising - so this situation is probably even worse now than in 2009. Note: The Census Bureau's Q1 Housing Vacancies and Homeownership report will be released Wednesday and includes the rental vacancy rate for Q1.

Home sales for March:
• New Home Sales in March at 300 Thousand SAAR, Record low for March
• Home Sales: Distressing Gap
• New Home Sales and Inventory Graphs
• Existing Home Sales and Inventory Graphs

by Calculated Risk on 4/25/2011 08:03:00 PM

David Streitfeld at the NY Times quoted Jennifer Lee, senior economist at BMO Capital Markets today regarding the new home sales report:

"Sales remain very low by historical standards and, considering that a number of home builders reported large drops in orders recently, there is likely more weakness ahead."

I agree with Lee that there is more weakness ahead, however the recent "large drop in orders" for homebuiders was for Q1, and the Census Bureau report today was for March - so this report tells us about last quarter, not the future for homebuilders (just a few homebuilders have reported - many more will report this week).

According to the Census Bureau, this was the weakest Q1 on record with only 71,000 homes sold, so it is no surprise the homebuilders are reporting a weak first quarter. (Note: record keeping started in 1963). The previous record low was 84,000 in Q1 2009 (also there were 87,000 home sold in Q1 2010).

A key difference between the quarterly homebuilder reports, and the monthly Census Bureau report, is that the homebuilders report net new sales (net of cancellations), and the Census Bureau ignores cancellations (this works out over time). It appears cancellations ticked up in Q1, although nothing like during the worst of the housing bust, and that means the Census Bureau probably over estimated sales in Q1.

Here is a short discussion on cancellations from the Census Bureau.

As a result of our methodology, if conditions are worsening in the marketplace and cancellations are high, sales would be temporarily overestimated.

It would be great if the Census Bureau reported net sales so we could compare to the homebuilder's reports. Oh well ...

Home sales for March:
• New Home Sales in March at 300 Thousand SAAR, Record low for March
• Home Sales: Distressing Gap
• New Home Sales and Inventory Graphs
• Existing Home Sales and Inventory Graphs

by Calculated Risk on 4/25/2011 03:21:00 PM

Earlier from the Dallas Fed: Texas Manufacturing Activity Increases but at a Slower Pace

Texas factory activity continued to expand in April, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, moved down from 24 to 8, suggesting slower growth in output.
...
The new orders index was positive for the sixth consecutive month, although it decreased from 14 to 4 in April. ... The employment index edged up from 12 to 13, its highest reading this year. ... Hours worked were essentially flat in April after increasing for five consecutive months.

There are two more regional Fed surveys to be released this week (The Dallas survey is D-list data at best). These regional surveys do provide a hint about the ISM manufacturing index to be released next Monday, May 2nd, and I'll post a graph on Thursday after the other regional surveys are released.

by Calculated Risk on 4/25/2011 12:15:00 PM

Another update ... this graph shows existing home sales (left axis) and new home sales (right axis) through March. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Then along came the housing bubble and bust, and the "distressing gap" appeared (due mostly to distressed sales).

Click on graph for larger image in graph gallery.

The gap is due mostly to the flood of distressed sales. This has kept existing home sales elevated, and depressed new home sales since builders can't compete with the low prices of all the foreclosed properties.

Notes:
1) It is important to note that 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.

2) The National Association of Realtors (NAR) is working on a benchmark revision for existing home sales numbers. As I noted in January, this benchmarking is expected to result in significant downward revisions to sales estimates for the last few years - perhaps as much as 10% to 15% for 2009 and 2010. Even with these revisions, most of the "distressing gap" will remain.

by Calculated Risk on 4/25/2011 10:00:00 AM

The Census Bureau reports New Home Sales in March were at a seasonally adjusted annual rate (SAAR) of 300 thousand. This was up from a revised 270 thousand in February.

Click on graph for larger image in graph gallery.

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 March 2011 were at a seasonally adjusted annual rate of 300,000 ... This is 11.1 percent (±21.7%)* above the revised February rate of 270,000, but is 21.9 percent (±10.3%) below the March 2010 estimate of 384,000.

And a long term graph for New Home Months of Supply:

Months of supply decreased to 7.3 in March from 8.2 months in February. The all time record was 12.1 months of supply in January 2009. This is still higher than normal (less than 6 months supply is normal).

The seasonally adjusted estimate of new houses for sale at the end of March was 183,000. This represents a supply of 7.3 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 fell to 73,000 units in March. The combined total of completed and under construction is at the lowest level since this series started.

The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate).

In March 2011 (red column), 29 thousand new homes were sold (NSA). This is a new record low for the month of March.

The previous record low for March was 31 thousand in 2009. The high was 127 thousand in 2005.

Although slightly above the consensus forecast, this was a record low for March - and new home sales have averaged only 295 thousand SAAR over the last 11 months.

by Calculated Risk on 4/25/2011 08:39:00 AM

From Campbell/Inside Mortgage Finance HousingPulse: HousingPulse Distressed Property Index Rises for Month; Homebuyer Traffic Flattens

The HousingPulse Distressed Property Index (DPI), a key indicator of the health of the U.S. housing market, rose to 48.6 percent in March – the second highest level seen in the past 12 months.
...
The HousingPulse DTI indicated that nearly half of the housing market is now distressed properties. This trend is likely to continue as a backlog of foreclosures and mortgage defaults make their way through the housing pipeline.
...
Survey respondents reported mixed opinions on traffic for the winter and spring housing market. “January, February and March sales were characterized by a wait and see attitude of buyers.
...
[S]hort sales boomed in the month of March and the proportion of damaged REO fell. Short sales rose from 17.0% in February to a record-high 19.6% in March. Damaged REO fell from 14.9% in February to 12.0% in March.

This fits with other data showing a high level of distressed properties, and this suggests further declines in the repeat transaction house price indexes.

by Calculated Risk on 4/24/2011 10:59:00 PM

From Alan Zibel at the WSJ: Home Builders' Outlook Stays Fragile

Wells Fargo Securities projects only modest increases over the next two years, with 330,000 new-home sales likely this year, followed by 440,000 in 2012. It is likely to take another three years before new-home sales return to healthy annual sales of around 770,000, said Wells Fargo economist Anika Khan.

That is a little more optimistic than my outlook. The key will be how long it takes to absorb all the excess vacant housing units. The pickup in residential investment this year will be mostly from apartments and home improvement, but eventually we will see an increase in new home sales.

I haven't forecast new home sales for 2012 yet, but Khan's forecast of 440 thousand sales next year is still for one of the lowest years on record - and yet that would be a 33% increase in sales from her forecast for this year. If her forecast is close that would give a nice boost to employment and GDP.

But for the home builders right now, it is "wait until next year" once again.

Earlier:
• Schedule for Week of April 24th
• Summary for Week ending April 22nd
• FOMC Preview