Housing Expected to Show Improvement Even Without Fed Factor

Fresh home sales and housing starts data Wednesday are expected to show continued gains by the sector, which has been steadily improving despite the bumpy economy.

Tim Boyle | Bloomberg | Getty Images

Economists expect to see slight improvement in August’s existing home sales to 4.55 million, up 1.8 percent, and housing starts are expected to come in at 765,000, up from July’s 746,000. Existing home sales are released at 10 a.m. ET, and the housing starts reports are released at 8:30 a.m. ET and come a day after a key sentiment indicator showed home builders confidence rose to the highest level in six years.

“When I look at home prices now, I see evidence across all the important home price series of signs of a turn,” said Deutsche Bank Chief U.S. economist Joseph LaVorgna. LaVorgna said that was apparent in CoreLogic data, which showed a national 3.8 percent price increase year-over-year in July, and a 7.2 percent rise in prices year-to-date.

“The important thing is when you see home prices are going up that‘s only going to reinforce positive builder sentiment because nobody wants to invest in or buy a declining asset,” he said.

The National Association of Home Builders index jumped to 40 in September from 37 in August, better than expected and the best since June, 2006. However, any number below 50 is still negative.

There was also improvement in present sales, and prospective buyers traffic was at the highest pace since May, 2006. The builders’ outlook for sales for the next six months rose to a positive 51, from 42 in August, a sign builders see the trend continuing.

Builders though reported tight credit conditions for builders and buyers.

Home builder stocks were hit by profit-taking Tuesday, but they have skyrocketed to five year highs recently. The XHB home builder ETF is at the highest level since September, 2007. PulteGroup , for instance, is up more than 150 percent year-to-date.

Goldman Sachs made positive comments on the sector Tuesday, saying that the summer activity reinforces that 2012 was not another false start for the housing recovery and that improving confidence should be a tailwind.

They also pointed to historically low levels of new home inventories and new policy moves like QE3 and new rules for clarifying and easing policies for Fannie Mae and Freddie Mac.

Yale University economist Robert Shiller said he’s still not ready to say the housing market has bottomed, and he wants to see a solid year of price increases. Shiller’s namesake S&P/Case-Shiller home price index has also showing signs prices are stabilizing.

But the housing market has had difficulty working through multiple waves of foreclosures, and progress has been sluggish because of high unemployment, tighter lending, and underwater homeowners.

“There are a lot of positive indicators, but I think people tend to overreact to these, and if you look at the trend, which has been down since 2006, it’s a pretty strong trend that we have to see reversed,” Shiller said on “Fast Money Halftime Report.” “You know, maybe I might call it later this year when we’ve reached the bottom, but I’m not ready yet.”

Shiller said there’s been four attempts at recovery since the subprime crisis sunk the housing market, and those attempts have been seasonal. “The question is will this continue through the fall and winter? We’ll wait and see. If that happens, then you know I believe in momentum in the housing market and we are starting – it looks like upward momentum, but I think it’s too soon to call,” he said.

The Federal Reserve last week took direct aim at the slowly recovering housing market with a new quantitative easing program (QE3) to buy mortgages. “It might be lowering mortgage rates a little bit,” said Michael Feroli, chief U.S. economist at JPMorgan. “To the extent that it raises inflation expectations, that may also kind of boost housing demand…I think it’s going to improve regardless but the Fed’s action might give it a little more of a jolt.”

Mortgage yields have been tightening when compared to Treasurys, well before the Fed confirmed its much-anticipated program last week. The Fed has said it would buy $40 billion of mortgage securities a month. As the biggest buyer in the market, the Fed could impact mortgage supply dramatically.

“If there aren’t enough mortgages around, banks may decide to invest more in origination and holding mortgages so they might start to hire more people to get involved in origination,” Feroli said.

LaVorgna said the easy policy of the Fed should help the housing market and boost household balance sheets, but it may ultimately backfire and overheat the housing market. “They’re almost assuring a stronger housing cycle than what might otherwise have been the case,” said LaVorgna. “Obviously, if rents are accelerating at a four to five percent pace, if the cost of your mortgage is cheaper than it is to rent, why would you rent? You’re going to buy.”

What Else to Watch

Stocks were mixed Tuesday, with the Dow up 11 at 13,564, and the S&P down 1 at 1459. Treasury yields continued to decline, after rising on the Fed QE3 announcement last week. The 10-year yield fell to 1.808 percent, below its 200-day moving average of 1.84 percent.

Oil fell again, losing $1.33 per barrel to $95.29, on global growth concerns and comments from the White House that it was considering all options, related to oil, including release of strategic reserves. EIA inventory data is released at 10:30 a.m. Wednesday.

There are a few earnings Wednesday, including AutoZone, General Mills, and Cracker Barrel before the bell, and Adobe Systems, Bed Bath and Beyond, after the close.

Follow Patti Domm on Twitter:@pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com