Is housing really back?
The media heralds improving metrics but problems and a weak economy remain.
| November 30, 2012 |
Here’s a tip that can save you a lot of time. Whenever you see a report on TV or in your daily newspaper heralding the resurgence of the housing market…ignore it.
Various pundits have wrongly predicted housing’s return for four years now, and as of this writing, the media has run a month-long string of what looks to be good news stories about the housing market. So does a groundswell of positive news reports translate into real actionable movement in the housing market?
From the cynical point of view of a journalist who has watched three epochal housing busts and booms come and go I can only definitively say…maybe. Or at least I’m not as skeptical of the possibility of forward progress as I was in June.
One thing is for certain, month-to-month numbers, which is mostly what you get in the mass media, are meaningless. A rainy, late winter can depress housing starts 50 percent or more over several months. Natural disasters, tornadoes, hurricanes, floods and fires, can boost starts once the rebuilding gets underway.
Does a groundswell of positive news reports translate into real actionable movement in the housing market?
The only way to accurately chart the numbers is to look at a lot of data points over a six- to 12-month span. And you have to look at housing in the context of the general economy and government policy as well
With that said, since it’s nearly December, lets take a look back at the good and bad news regarding housing over the last six months.
The good news looks like this:
- New home starts. The Commerce Department reported that in October builders broke ground on 894,000 homes, a 3.6 percent increase from the previous month. That puts housing starts 87 percent up from the bottom of 478,000 units in July 2008.
- Demographics. According to Moody’s, the children of the baby boomers, the so called echo boomers ages 30 to 45, are making their own babies now and entering their most promising household formation years when they are significantly more likely to buy a home.
- Stimulus/ QE3. Freddie Mac boosted its outlook for housing in October, saying the third round of stimulus spending (quantitative easing) was improving the outlook and that it would increase its purchases of mortgage backed securities by $40 billion per month
- Big homebuilders. Richard Dugas, CEO of homebuilding giant PulteGroup, said in October the housing market has realized a meaningful increase in the volume of new home sales for the first nine months of 2012 and that his company had logged a 27 percent increase year-over-year signups.
- Home Depot. The big orange, big box retailer posted 4.3 percent year-over-year improvement in same store earnings and says it expects full year revenue growth to be up 5.2 percent, easily beating expectations. Gross margins were up 34.6 percent, in part due to better appliance sales – a category Home Depot says serves as a good indicator of consumer confidence.
- Case-Shiller Index. A ratio of income to house prices, Standard and Poor’s Case Shiller Index climbed 2 percent year-over-year in August the third straight month of gains.
But the naysayers have plenty of bullet points in their gun belts as well, including these:
- FHA. As reported in November, the Federal Housing Administration is broke, $31 billion in the hole. This might be seen as a good thing, seeing how the FHA and its subsidiaries doubled in size between 2005 and 2009 and with $1 trillion in questionable loan guarantees all but created a housing bubble that had to burst. Unfortunately the government will probably bail out the FHA, which means political monkey-wrenching in the homeownership and mortgage business will soon begin anew.
- Student debt. The echo boomers may be entering their household formation phase, but two-thirds of them are saddled with college loan debts, too. The average debt is $26,000 per student. And the total size of the student debt market in the U.S. exceeds the total debt owed on all cars and trucks. Interest on student loans run 6 to 7 percent, which will make it difficult for this age group to qualify for a home loan or raise a down payment for decades to come.
- Supply glut. A housing bear if there ever was one, Barry Ritholtz, CEO of Fusion IQ and a prolific investment blogger, says there are anywhere from 3 to 6 million homes which will foreclose in the near future. Additionally, he says there are 12 to 16 million homes underwater that the owners can’t sell. There are also substantial numbers of rental homes, vacation homes and investment properties that owners are holding onto until prices improve. And there are 2.8 million homeowners who haven’t made a mortgage payment in 12 months. The glut of supply will take three to four years to work out, Ritholz says, and it’s pointless to talk of a housing recovery until that happens.
So on balance, what’s the verdict?
When you look at the positive news, it appears most of those trends are coming from narrowly-targeted statistics. The larger trends such as student loan debt or shadow inventory are macro-level problems. Factor in the fragile nature of the economic recovery, looming tax increases, health care and increasing regulatory burdens, it may be presumptuous to break out the champagne just yet.
On balance, the net impact of government will probably hurt the market more than help it.
The one good macro level statistic – 894,000 starts – certainly looks better than the 600,000 starts that last year were touted as the “new normal.” And another positive trend, not generally included in housing statistics, is the boom in domestic energy development. This has helped lower gasoline prices everywhere and boosted incomes and employment in some regions of the country.
But this year’s housing starts are still below the 1.2 to 1.5 million starts the industry says it needs to be healthy again. Note also that the housing starts number aggregates single family homes and multi-family (apartment) construction into one statistic, and multi-family starts are growing, whereas single family starts fell a bit this year. That would indicate that fewer young families have the wherewithal to buy a new home for the time being and that apartment rentals may be the dominant housing mode for some time to come.
The wildcard in all of this is the government. The feds have dozens of ways they can goose the market for political gain while simultaneously sledgehammering the industry with regulatory burdens that make homebuilding slower and costlier. And the full impact of Obamacare has yet to be absorbed by the economy. On balance, the net impact of government will probably hurt the market more than help it.
Bottom line: I think we might see around 900K starts next year, but single family starts will struggle and multi-family will continue to dominate. And I don’t think the market will break through that 1-million starts figure for several years to come.