HomeBuilders

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U.S. Housing: Momentum Slows but Recovery Continues

At the headline level, the United States housing market lost some momentum in the data released last month. I described in last month’s article how July data was almost universally positive, prompting the question of how sustainable the recovery might be. Despite a drop in the latest August figures for existing home sales, there are good reasons to believe the momentum in housing will continue at least for a few more months.

While foreclosure prevention efforts by the U.S. government have amounted to virtually nothing, the first time home buyers tax credit has been effective. This tax credit which was part of the federal government’s $787 billion stimulus program is set to expire at the end of November 2009. We shall see what happens after that point. At a minimum, the momentum should continue until then.

New home sales are up only slightly but inventory is dropping fast. Sales of new homes increased in August but only by a marginal amount, 0.7%. Inventory of new homes for sale continues to drop both in absolute terms and in terms of months of supply on the market. After peaking at 12.4 months in January 2009, the new home inventory now stands at 7.3 months. The total number of new homes on the market has been cut in half from a peak of 548,000 homes in April 2007 and now stands at 262,000 today.

Many problems of the U. S. housing market remain. However, the inventory of new homes is one issue that has been corrected in the last year. In absolute terms, the inventory level of 262,000 new homes on the market represents 27 year low. If you adjust for population, we are more than 10% below the lowest inventory year on record (1967).

Thus, it is not surprising that housing starts have rebound 34% from the beginning of this year.

Existing home sales dropped 2.7% but are likely to continue upward trend. After four consecutive monthly increases, the sales of existing homes figure dropped nearly 3% in August. The inventory of existing homes on the market also fell 8.6% and now stands at 3.6 million homes. This works out to be to 8.5 months of sales inventory, down from a peak of over 11 months. This is no record low but it does represent a healthy correction.

As for the rate of existing homes sales, the seasonally adjusted annualized rate of 5.1 million homes reported for August remains the third best figure in last two years. If this was the beginning of a downward trend it might be troubling but it is likely that homes sales will remain strong, at least until the first time homebuyers tax credit expires at the end of November.

Pending home sales figures remain strong ahead of the tax credit expiration deadline. It is fair common for sales of existing homes to have an up/down saw tooth pattern but continued upward trend in pending home sales (a leading indicator of homes sales about 60 days later) indicates that sales of existing home will remain strong for two more months at least.

Pending home sales will remain a key factor to watch as the first time home buyer tax credit expires soon. This government subsidy has a chance of being extended but whenever it ends many fear that this will have less of a jump-start effect (where momentum continues on) and more of a cash-for-clunkers effect (where all momentum is lost upon program expiration). We shall have to see what momentum remains.

Foreclosures continue to play a meaningful role in home sales. Home foreclosures as tracked by RealtyTrac remain persistently high. Sales from foreclosures accounted for about 30% of the home sales in August. These sales have become an important dynamic in the market. Defaults still remain elevated and these defaults appear to be translating more rapidly into foreclosure sales than was the case last year.

The makeup of these foreclosures is transitioning away from problem states of CA, AZ, and FL and toward a more broad set of states related to job losses. We should know in the coming 2-3 months if foreclosures are at their peak or whether another wave is on its way. There are good arguments for both sides of that debate.

Home prices continue to strengthen through the summer. The July data for the Case-Shiller Index showed a third straight monthly gain in prices. All but two of the 20 cities showed price increases, virtually all of those posting more than a percentage point gain. The 1.7% increase for the composite indexes represents the strongest monthly gain since the summer of 2004 when the housing boom was in full force.

While home prices may increase slightly throughout the rest of the year, it is unlikely it would continue with this strength, as the Case-Shiller Index is not seasonally adjusted. It tends to show the strongest data in the summer and the weakest results in the winter months.

Mortgage rates are trending back down. Last week the 30-year fixed rate (as tracked by Freddie Mac) dropped below 5.0% for the first time in almost four months. Mortgage rates surged in June along with other long term interest rates in U.S. This rise was triggered by rising government debt levels in the United States and the United Kingdom but was fueled by the market perception that this borrow and Asian growth would lead to imminent inflation. As I described back in July, Asian growth was insufficient to fuel this “reflation trade” and rates have steadily declined since.

Mortgage rates below 5.0% have neither a profound nor an immediate effect on the housing market. Yet on the margin, low rates help create record home affordability, which in turn brings buyers into the market despite alarmingly high unemployment.
While the momentum of the housing recovery in the United States has slowed in the latest round of monthly data, the recovery still remains in place. Plenty of negative factors weigh on the U.S. economy such as high unemployment, elevated foreclosures, and an overleveraged consumer but record affordability and stimulus programs should keep the momentum in place throughout the remainder of the year.

http://seekingalpha.com/article/164788-u-s-housing-momentum-slows-but-recovery-continues?source=email