Economic First Look: Housing Continues to Thaw

 | Feb 16, 2013 | 10:30 AM EST  | Comments
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Monday

  • All markets closed for Presidents' Day

Tuesday

  • Housing Market Index, 10 a.m. (all times EST)

Wednesday

  • Housing Starts, 8:30 a.m.
  • Producer Price Index, 8:30 a.m.
  • Federal Open Market Committee Minutes, 2 p.m.

Thursday

  • Consumer Price Index, 8:30 a.m.
  • Jobless Claims, 8:30 a.m.
  • Purchasing Managers Index Manufacturing Index Flash, 8:58 a.m.
  • Existing Home Sales, 10 a.m.
  • Philadelphia Fed Survey, 10 a.m.
  • Leading Indicators, 10 a.m.
  • Energy Information Administration Petroleum Status Report, 11 a.m.
  • James Bullard, President of the St. Louis Fed (voter), speaks, 12:30 p.m.

Friday

  • Jerome Powell, Board of Governors of the Federal Reserve, speaks (time not specified)

This week brings a number of housing indicators, though new-home sales won't be released until next week. One big news item here is that demand has been improving, thus reducing the number of homes for sale. In a Feb. 11 report, the National Association of Realtors (NAR) said fourth-quarter existing-home sales rose by 5% from the previous quarter, and were up 12.1% year over year.

As a result of stronger sales -- and would-be sellers waiting for prices to improve further, instead of listing now -- inventories have fallen remarkably in many areas. At the end of the fourth quarter, 1.82 million existing homes were available for sale -- 21.6% fewer than at the end of 2011, when 2.32 million homes were on the market. Note that unsold inventory is at its lowest level since January 2001, when there were 1.78 million homes for sale.

Improving sales, coupled with low inventory, resulted in rising prices in many metropolitan areas. The NAR reported that, for existing single-family homes, the national median price was $178,900 in the fourth quarter. That's up 10% from $162,600 a year earlier, for the strongest year-over-year increase since a 13.6% jump in the fourth quarter of 2005.

Part of this demand has come from buyers, particularly institutions, snapping up foreclosed homes and other distressed properties, which they then convert into rentals. With that early support for demand boosting prices, the trend may have spurred interest from "conventional" home buyers, who then also entered the market.

The trade group reported that distressed homes accounted for 23% of fourth quarter sales, down from 30% a year ago, reflecting both fewer foreclosures and more demand from mom-and-pop buyers. The "distressed" category includes both foreclosures and short sales generally sold at deep discounts.

The average American is feeling comfortable entering the real estate market, even despite a more general plunge in confidence. According to the Conference Board, the January headline confidence measure took a tumble to 58.6 from 66.7 -- but home-buying intentions remained stable at 5.3%. Six months prior, that figure was 4.6%.

Add in greater affordability, and housing seems likely to remain on an upward trend. Last year the NAR's annual Housing Affordability Index rose to a record high 193.5, up from 186.4 in 2011. The index is calculated on the relationship among median home price, median family income and average effective mortgage interest rate. The higher the index, the stronger household purchasing power.

Going into this week's existing-home-sales report, we can start with the prelude -- the pending-home-sales index. The existing-home-sales report measures a sale when a contract is closed, which occurs a month or two after the contract is signed. The NAR, which compiles both reports, designed the pending-home-sales index to measure home sales when a contract is signed. In this way, it's on par with the Census Bureau's new-home-sales report, which also measures a sale when a contract is signed.

The pending-home-sales index showed a sequential 4.3% dip in December, to 101.7, which the NAR said was due to the aforementioned supply limitations. Still, the reading was 6.9% higher than the 95.1 number seen in December 2011. In November, the index rose 1.6% from the prior month.

We need to look back a month or two, as we don't know when -- or even if -- these contracts will actually close. As a result, predicting the existing-home sales from these data isn't an airtight endeavor. That said, consensus expectations for this week's existing-home-sales report are for 5.09 million homes to be sold at an annual rate, up from 4.94 million in the prior month.

As to the supply limitations reducing the number of sales, NAR chief economist Lawrence Yun said, "Supplies of homes costing less than $100,000 are tight in much of the country, especially in the West, so first-time buyers have fewer options." He added, "We expect a seasonal rise of inventory in the spring to help, but a seller's market may be developing. Much of the West is already a seller's market for homes priced under a million dollars, but conditions are much more balanced in the Northeast."

Let's switch gears now and see how much new supply is coming on board with housing starts, due Wednesday. Builders have been feeling much more confident. The Housing Market Index -- a sentiment measure -- will be released Tuesday from the National Association of Home Builders, but we can take a look at last month's report to see where housing starts might be headed.

Homebuilders' sentiment printed at 47 last month -- the second month at its highest level since April 2006. This measure is a diffusion index, wherein "50" is the dividing line between optimism and pessimism. During the depths of the recession, the metric fell to the single digits. So, while builders aren't entirely optimistic, the trend remains in the right direction and shows considerable improvement.

Consensus expectations for housing starts are for 890,000 at an annual rate, down from 954,000 the previous month.

NAHB chief economist David Crowe summed up the housing market at this juncture: "Nearly every measure of housing market strength -- sales, starts, prices, permits and builder confidence -- has been trending upward in recent months and we expect to see gradual but steady growth along these lines in 2013."

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