Housing Hype: Recovery Turns to Relapse?
Housing was charging back. Spring sprung early. Sentiment among home builders doubled in six months. Any talk that the fundamentals might not be supporting the sentimentwas met with harsh criticism. And then suddenly it wasn’t.
A slew of new housing data last week disappointed the analysts and the stock market, and all of a sudden you started to hear concern that maybe housing wasn’t exactly in a robust recovery.
From home builder sentiment to housing starts, to home builder earnings right through to sales of newly built homes, there was not one hopeful headline in any of it (except perhaps if you invest in rentals, as multi-family housing starts made more gains, but that is a contrary indicator to housing recovery).
And then an email from a Realtor in New Jersey: “Just reviewed March buyer clicks, Google’s analytics on all the sites we monitor – March is turning out to be the weakest month since last October re: Buyer interest..”
Now we start another week with another disappointment. Pending home sales, a measure of signed contracts for existing homes, not closings, fell half a percentage point month-to-month.
That may not seem like a big deal, but the analysts were looking for a small gain. No doubt the Realtors will point to the solid 9% gain from a year ago, but so much of that gain is based on a change in the foreclosure pipeline.
Last year the foreclosure process stalled. The “robo-signing” mess brought everything to a standstill, and that left investors with little to buy on the distressed side. Foreclosures began ramping up again in the late fall, and that led to a surge in investor buying. Was that the “recovery” we were seeing?
Investors are still rushing into the market, with distressed sales making up a near-record 48.7 percent of sales in February on a three month moving average, according to a new report today from Campbell/Inside Mortgage Finance.
Investors are now a full quarter of the market, and they are increasing their activity in short sales (when a lender allows the home to be sold for less than the value of the mortgage).
Don’t get me wrong, investors buying up the distress is necessary to cleanse the market, but it is not real recovery. Mortgage originations are at a 12-year low, despite record low rates. Normal, “organic” home buyers, move-up owner occupants, are not flooding back into this market. Rents are still rising.
Mortgage analyst Mark Hanson runs some disturbing numbers to back up his contention that Q2 will disappoint: “Investor sales volume up 37 percent year over year for a whopper 69 percent of all year over year existing home sales gains. First-timers are starting to look weak in Feb. The gains in first-timer and repeat sales can easily be explained by historic rates and weather and can easily reverse in a single month.”
That may be why the home builders, who had been on a streak of gains in confidence, suddenly stopped moving this month. KB Home , which builds lower-priced homes, also came in with wildly disappointing earnings and an 8 percent drop in new orders. Sales of new homes also disappointed, which one analyst called, “puzzling.”
“If new homes are not selling, then why are builder confidence and single-family housing permits moving up, and why is the S.& P. home builder index up 80 percent since last October?” asks Patrick Newport at IHS Global Insight. “Time will tell if builders and investors have gone out on a limb.”
Several other analysts started to question the strength of the recovery as well, with some just hoping that perhaps a warm winter had pulled some demand forward from spring. Despite a miss on existing home sales in February, the headline pointed to, again, big gains from a year ago.
Yes, we are ahead of where we were, but as we’ve noted so many times here on this page, rising foreclosures will put added pressure on this market, and we may not be out of the woods yet.
“Despite an extraordinarily mild winter, home sales just plod along at a pace last seen during the mid-1990s,” notes Mark Zandi in his monthly report from Moody’s Analytics. “Thus, the underlying pace of home sales may not yet be strong enough to support a long-lasting upturn by home prices.”
Tomorrow we get the monthly reading on the S&P/Case-Shiller home price index. This index hasn’t been improving nearly as much as home sales, but the ever-hopeful housing lobby keeps blaming that on the fact that prices always lag sales, which is historically true, but what in today’s market has followed history?
Home prices are still falling not because of some lag, but because this housing market is running on sales of distressed properties at the very low end. The rest of the market is still stalled.