Monday
- All U.S. markets closed for President's Day
Tuesday
- No major indicators
Wednesday
- Existing Home Sales, 10:00 a.m. (all times EST)
Thursday
- Jobless Claims, 8:30 a.m.
- FHFA House Price Index, 10 a.m.
- EIA Petroleum Status Report, 11 a.m.
- Kansas City Fed Manufacturing Index , 11 a.m.
Friday
- Consumer Sentiment (University of Michigan measure), 9:55 a.m.
- New Home Sales, 10 a.m.
This week, I am mostly interested in the two housing measures: existing home sales (measured when the contract is closed, which may occur a month or two after the contract is signed) and new home sales (measured when a contract is signed, though not all of these will actually close). Thus, the New Home Sales report is the timelier of the two, although the vast majority of home sales in the U.S. are of previously occupied homes.
In assessing the direction of home sales, there are a few factors to consider. One is the household formation rate, and the second is the preference for both new and already-established households to buy vs. rent. I am not so much interested in existing homeowners playing musical chairs and changing houses, I am mostly interested in new, incremental demand.
This demand depends on several factors. One primary aspect is consumer confidence when it comes to the specific question of "Is now a good time to buy a house?" That, in turn, depends on the jobs market, expected income growth – and expected home price appreciation. We can learn more by turning to The Conference Board's Consumer Confidence survey or the University of Michigan Consumer Sentiment survey. Here, we see that plans to buy a house have increased over the past year, though confidence more generally has weakened recently. Still, 71% of the 1,000 people surveyed by Fannie Mae in December said that now is a good time to buy a house, which is a good sign.
On the flip side, take a look at homebuilders' confidence, in the National Association of Home Builders monthly sentiment survey. Homebuilder confidence in the market for new single-family homes increased for the fifth consecutive month in February, rising from 25 to 29 on the NAHB/Wells Fargo Housing Market Index (HMI), which was released earlier this month. This is the highest level the index has reached in more than four years, but note that any reading below 50 indicates a net-negative sentiment. Still, the measure would tend to suggest that, while the market for new houses is unlikely to return to anywhere near it was during the boom anytime soon, an uptick in the confidence measure by builders suggests that we may see an uptick in new houses sold, perhaps even in this week's report.
Turning now to sources of incremental demand, NAHB also estimates there is pent-up demand from a possible 2 million households who are now doubled up with their parents, but who might be likely to buy a home.
Another estimate comes from David Berson, chief economist with mortgage insurer PMI Group, who cited an increase from 20 million to 22 million of the number of households that are "doubled up," or have grown children or other potential household heads living with their relatives in the same house, between 2007 and 2011. He notes that about 6 million of these housemates are young adults aged 25-34 living with their parents. This 2 million increase in the number of doubled-up households corresponds to the NAHB's estimate of possible homebuyers, as there will always be adult children living at home or relatives living with each other.
So what might entice these doubled-up households to move out? Most likely, an improved jobs market and income growth expectations. And what might cause any of such new households to buy vs. rent? Quite possibly, any sign that housing prices are on an increasing trend, as well as the obvious issue of affordability of buying vs. renting a home.
For the first issue of rising prices, across most markets, that isn't happening quite yet. The Case-Shiller Home Price Index for 20 major markets dropped by 0.7% on a seasonally adjusted basis in November from the prior month and is down 3.7% from a year ago.
However, a drop in supply can help prices recover. In the latest Existing Home Sales report, we see that the inventory of previously owned homes listed for sale sank to 2.38 million, the lowest level since March 2005. Supply came in at 6.2 months -- just about at the six-month level considered healthy, and down considerably from about 12.4 months at July 2010. Separate data from Realtor.com showed a drop in the number of homes for sale of 6% from the month before -- and down 22% from a year ago.
With inventories so low, an increase in buyers can cause prices to rise -- and that can compel more people to buy. Still, home listing service Zillow reported in its home-value forecast earlier this month predicts a drop of 3.7% this year. Gary Shiller of the Case-Shiller index also said there is still a "serious and real possibility that housing prices" could fall further.
However, the fall in prices has led to the second consideration of whether to buy or rent: affordability. With home prices having dropped 24% from their peak, which leaves them now at 2002 levels per the Existing Home Sales report, coupled with mortgage rates that are at record lows, affordability is extremely high. That should, in theory, cause some people to buy. However, the pledge by the Federal Reserve to keep rates low through 2014 has the perverse incentive of households putting off buying for now because rates will still be low later.
And while Shiller of the Case-Shiller index may be concerned of the possibility of further price declines, Karl Case of the index fame is more upbeat. He told Bloomberg that the "seeds of recovery in the housing market are being planted," pointing to both the affordability of homes and the same pent-up demand of doubled-up households noted by other economists. Perhaps for this reason, sales of existing homes are expected to grow between 2% and 5% in 2012, according a recent forecast from Freddie Mac. Perhaps, it is not exactly a surge, but it's certainly an improvement.
