Is the housing market improving? Or not? In this edition of the Independence Voice, we will explore some of the arguments on both sides, and allow you to reach your own conclusion.
The housing market is improving
• According to the National Association of Home Builders, over 76% (274) of the 361 markets they follow have shown improvement over the last 6 months. There is no doubt the housing economy is on more solid footing than a year ago in these markets.
• Most national housing indexes are showing improvement in resales and mortgages. According to Corelogic, house prices are up 10.2% the last 12 months, the biggest increase in seven years. Case Shiller showed a 7% increase over the last year. Case-Shiller is currently the most followed house price index, however CoreLogic is used by the Federal Reserve and is followed by many analysts. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted.
• The Federal Reserve continues to keep lending rates at historically low rates, encouraging home ownership and investment. There has never been a more affordable time to buy. Housing affordability remains rather high even as prices continue to rise across the country thanks in large part to mortgage rates being artificially depressed by the Federal Reserve Board’s latest round of bond-buying, known as QE3.
• The number of underwater mortgages declined dramatically due to improving markets. Of the 52,394,000 home mortgages outstanding, the number underwater fell from 11 million to 7 million, more than a 30% reduction in underwater loans. Most analysts predict that almost 1 million more homeowners will be freed from underwater mortgages by the end of 2013, pushing the negative equity rate for the country down to 25.5 percent.
• The national inventory of resale homes continues to be under equilibrium (equilibrium defined as six months of supply) indicating a ‘sellers market’ with a 4.7-month supply at the current sales pace, up from 4.3 months in January, which was the lowest supply since May 2005. Listed inventory is 19.2 percent below a year ago when there was a 6.4-month supply. At that rate, the home building industry remains at less than two-thirds of what would be considered a normal market.
• The national median existing-home price for all housing types continues to improve. It was $173,600 in February 2013, up 11.6 percent from February 2012. The last time there were 12 consecutive months of year-over-year price increases was from June 2005 to May 2006. The February gain is the strongest since November 2005, when it was 12.9 percent above a year earlier.
• Troubled mortgage giant FNMA had its best year ever. The ability to turn the corner two years after being delisted on the New York Stock Exchange is big. Fannie Mae today reported annual net income of $17.2 billion for 2012 and quarterly net income of $7.6 billion for the fourth quarter of 2012, compared with a net loss of $16.9 billion for 2011. The improvement in the company’s full-year and quarterly net income was due primarily to improved credit results driven by a decline in serious delinquency rates, an increase in home prices, higher sales prices on Fannie Mae-owned properties, and the company’s resolution agreements with Bank of America. As a result of actions taken to strengthen its financial performance, and continued improvement in the housing market, Fannie Mae’s financial results improved significantly in 2012 and the company expects to remain profitable for the foreseeable future.
• Nationally, regionally, and locally there is not enough housing and real estate inventory. Twelve months ago, all three afore mentioned markets were challenged. Now, whether you are a consumer or a builder, the lack of available inventory has dramatically diminished with little to no inventory in the pipeline. This in turn puts positive pressure on values and sellers.
• Last but not least is the improving unemployment picture. While the number of Americans filing new claims for jobless benefits edged higher last week to 336,000, a trend reading dropped to its lowest level in five years. That bodes well for job creation in March because the data covered the survey period for the government’s monthly tally of nonfarm jobs. The four-week average of new claims fell last week to 339,750, down 6 percent relative to the survey week in February, when nonfarm payrolls increased by 236,000.
The housing market is not improving
• While the number of ’underwater’ homeowners has improved, it is still extremely high on a historical basis. An estimated 28% nationally are still ‘underwater’ (the figure is calculated based on anticipated changes in home values). When people can’t sell their home, they can’t purchase, or help contribute to the economy.
• Home values are still 30% or more off their peak in many markets. That means there is a long way to recovery, and we are not there yet.
• Only seven states are at prerecession employment numbers. Most metros and states have a way to go before they are in a recovery mode.
• Have you tried getting a loan? Loans may be cheap, but only for those who have sterling credit and don’t really need it. With unemployment so high and wages not improving, millions of people can’t qualify or sell.
• While we are speaking about loans, there does not seem to be an answer to what should be done about the government guaranteeing loans through FNMA/ FMAC and FHA. When is that bill going to come due, and how much will it eventually cost the taxpayers? And what will the government end up doing with all that debt?
• The Federal government has passed a debt ceiling scared, but without much damage, but the sequester will cause massive budget cuts that effect schools, government jobs, and private industry. When Congress imposes this large of spending cuts it should depress economic growth and drive unemployment back up and cause more foreclosures and less people buying. Its hard to think about home buying when there is so much uncertainty in the economy. Budget sequester spending cuts starting March 1 between -.5 to -1.0 of annual GDP ($48,112,000,000,000). That’s potentially a lot of jobs.
• In Texas, budget sequestration will cost the state $16.039 billion in gross state product. That is 1.23 % of the states total GDP for 2012. 159,473 jobs will be lost in Texas. 98,979 of the jobs will be because of defense spending. 60,494 if the jobs will be because of cuts in non defense spending. Texas stands to lose $67.8 million in education funding, putting about 930 teacher and aide jobs at risk. Head Start services would be slashed for 4,800 children. About 52,000 Department of Defense employees will be furloughed.
• While United States employment is up, wages are declining, according to the Bureau of Labor Statistics. Employment increased nationally by 1.6 percent, or 2 million jobs, for the year September 2011 to September 2012. But, average weekly wages for the country as a whole declined by 1.1 percent (taking the figure down to $906 per week in Q3 2012). This is one of only six annual average weekly wage declines since 1978, the report notes. Wages declined across all industries save for the information sector, which saw a modest increase of 1.3 percent. The county-by-county breakdown follows the same trend. Employment increased in 84 percent of the largest U.S. counties over the same timeframe. Yet among these largest counties, nearly the same percent saw over-the-year declines in average weekly wages. Only 46 counties saw over-the-year increases.
• Existing home inventory is on the rise nationally. The increased number of homes for sale may suggest that there still is a large amount of shadow inventory that lenders are dumping, causing values to decrease more. The total housing inventory at the end of February increased 9.6% from the previous month to 1.94 million existing homes for sale. Part of this rise was seasonal, but rising prices are also inducing more home owners to place their homes on the market. While inventory is rising, demand is rising faster. At the current sales rate, the February 2013 inventory represents a 4.7-month supply compared to a 6.4-month supply of homes a year ago. Concerns remain about the mix of home buyers. NAR estimates that in February, all-cash transactions rose to 32% of all existing home sales. Investor buyers constituted 22% of sales. The number of first-time buyers remain historically low, at 30% of buyers in February, down from 32% from a year ago.
• Other notes of caution come from the builder side of the supply equation. Due to the historic nature of the downturn in residential construction, it is not surprising that the infrastructure of building – buildable lots, workers with the right skills and a pipeline of building materials – will at times and in certain locations be insufficient to meet the demands of rising home construction.
So, is the market improving or not? And what does this mean for us in Texas?
The national housing and real estate market, in this analysts eyes, continues to improve slowly, much slower than past recoveries.
Real estate appreciation has been good, but not great in our state over the last five years. On a national scale, Texas has been 45th or less in appreciation (we moved up from 50th). So even though the rest of the nation suffered, Texas and its metros have had nice steady organic growth. Many readers will groan and possibly disagree with that statement, however if you look at the last ten years in Austin, San Antonio, Houston, or D/FW, our housing appreciation did not beat Case Shiller or any of the national indexes. Again in this analysts eyes this is a good thing, we have not got caught in the ‘speculation bubble’ that has happened in most growth states. More stringent lending and mortgage parameters look to slow speculation in our metros.
That said, with home and lot inventory remaining historically low regionally, Texas metro markets will remain challenged to keep pace with demand. Prices of newly built homes are expected to increase in the coming year for multiple reasons. One is low supply, but rising building costs for lots, materials, and labor will also boost new home sales prices. Speaking of labor, the welcome shale oil play has had a large impact on construction costs. Not as many suppliers or labor are available for new work. As a result, the NAHB reports adverse effects for most builders nationally and particularly locally. Between June 2012 and March 2013, the share of builders reporting at least some shortage increased in every category of labor. Averaged across all twelve categories, 27.8% reported a shortage of directly employed workers in 2013, up from 19.6% in 2012. The majority of builders reported that labor shortages over the past six months have caused them to pay higher wages or subcontractor bids, and to raise home prices. Other effects include delays in completing projects on time, being forced to turn down some projects and lost or cancelled sales.
Additionally, building materials prices continue to rise. While overall producer prices have been relatively stable, the prices for certain building materials have risen rapidly as the housing recovery has gained momentum since the beginning of 2012 through the 1st quarter of 2013. Overall producer prices are up less than 3% while softwood lumber, OSB, and gypsum prices are 30%, 80% and 26% higher than at the start of 2012. According to data associated with the Consumer Price Index, gasoline prices were up 3.3% in February year over year.
All that said, the long-term prospects of home building nationally demand remain positive, with builders ramping up production despite the occasional monthly dips. Housing starts for February came in at a healthy pace for both single- and multifamily units according to Census data. As most of us know, locally, new construction is improved dramatically and looks to be on at least a three year rally because of demand. Nationally, single-family housing starts in February ran at a 618,000 annual pace while multifamily starts came in at 299,000. This represents a continuation of the solid growth trajectory in single-family starts that began in earnest in late 2011 and carried through the start of 2013. Issuance of new building permits is on track to sustain the current levels of production and NAHB expects that going forward, the pace of single-family production will accelerate, approaching 1 million starts by the end of 2014. A doubling of starts from 2011, but still 40+% less than the top of the market.
So yes, the housing and real estate market is improving!
Most housing consumers are finding that the house / rental they look at this morning won’t be available this afternoon.
I know that you are tired of hearing this from me: if not now, when?