Wed, 21 Dec 2011
Homebuilder sentiment, start and permit trends, and consumer behavior suggest a turn for the long-suffering housing market, says Morningstar's Bob Johnson.
Please tune in to Morningstar.com on Tuesday, Dec. 27, for Bob Johnson's quarterly outlook for the economy.
Jason Stipp: I am Jason Stipp for Morningstar. We got a bit of housing data this week, and some of it actually looked pretty good, but is this trend sustainable? Here with me to offer his insights on housing is Morningstar's Bob Johnson, director of economic analysis. Thanks for joining me, Bob.
Bob Johnson: Great to be here.
Stipp: Three pieces of housing data this week. The first one is the homebuilder sentiment number. Can you tell me about that what that number said and how it's changed recently?
Johnson: Yes. The homebuilder sentiment, they do just what it sounds like. They go out and ask people that actually build homes, how are you seeing activity? And they generally base it on the people who are walking into their showrooms or asking for bids or so forth. And that number has typically been around, when the markets are really hot, at 50, and that's probably as good as it gets. In the recession it probably got as low as 11. And it bounced around in low teens for many, many months, and now at least the last three months it has begun to take off into the high teens, and now this month we actually hit 21 on that ratio.
So, we've had a 17, 19, 21 type of progression. So, clearly there is better sentiment on the part of homebuilders and I'd expect that to show up in activity in home construction eventually.
Stipp: So, definitely a positive trend in that sentiment, but still compared to a normal level, still a lot of room to go, which isn't necessarily a negative thing. It's not like we are peaking out or anywhere close to that.
The second piece of data we've got is housing starts data. Can you talk about what was behind the starts data, and did you think it was a good number?
Johnson: Yes. We got 685,000 home starts, and we've kind of been really stuck in that 500,000 to 600,000 level for some time, and in the last few months, we've broken out over that 700,000 mark--it's at 685,000 this month. So, that's a much better number than it has been. We got as low as just under 500,000. Obviously, in boom times, we were at about 1.5 million or 2 million units. So clearly to be ... close to 700,000 is a lot better than 500,000, but not near, again, the 1.5 million or so we might have had at the top.
Stipp: There are some interesting trends in the starts data and the kind of buildings that helped to make up that number. How did it break down? What kinds of starts are happening?
Johnson: Well, one of the big numbers in there this time--and it's one of the reasons you have to be a little cautious about the data--was that, certainly, apartment buildings, multi-family units, were more popular than single home sales. We had a booming number on the top line, but still single-digit growth in single family homes, the conventional part of the market that we all think about, but there certainly has been a strong revival in apartment construction.
Stipp: Do you think that's a good sign, or how can you read this number right now? So if we're still seeing decent, but not as strong numbers as we want, on single family homes, but more interest in apartments, what does that say about the overall housing and rental market right now?
Johnson: Well, there are two things, two ways you can look at, or two things that are certainly factors. One is, children that were staying at home with their parents, have finally said, "I have had enough of this; I'm moving out." They have now started moving ... out into at least an apartment, maybe even an apartment with a roommate, or maybe it's people who had apartments with a roommate are now getting their own apartment. But you started to move that chain along where at least maybe we are starting to see a little bit better household formation patterns, where people that were doubled up for various reasons are starting to un-expand. So, that's probably the good part of why the rental market is a little strong. I suppose the bad part is that how many people that were in a foreclosure, now said, "Well I've got to live somewhere, I'm going to rent ... an apartment."
Stipp: Okay, so two sides of the coin there.
Another piece of data you got along with the existing homes sales are permits; this tells you what people might be planning in the future. Does that bode well or poorly for what we might see over the next few months?
Johnson: Well, as you say, people don't draw a permit unless they plan to start a building, and so permits are a good leading indicator. Maybe 30, 60, 90 days in advance you might pull that permit before you actually start your home. And the starts are important, because that's when you actually get the shovel in the ground, you order the lumber, you're actually working on it, you've created the jobs. Pendings, on the other hand are, you've signed a contract and you may or may not begin, and who knows exactly when. Well, the permits are up 5.7%; this is the second really good month in a row we've had for permits, so we should have better starts yet again next month. So, I think that's really good news out of the Census Department that things are looking up.
Stipp: Okay. Third piece of the data we got this week on housing was existing home sales. This data came out with a big revision this month. I want to talk about that, but let's talk about first, what did the actual existing home sales data look like first of all before we talk about the revision?
Johnson: Well it's kind of hard to talk about it anymore, because the order of magnitude--we used to think of 5 million as a magic, existing home sales number, but they have brought the numbers way back down. The number is now 4.4 million existing home sales, and that's up from the previous month; it's up 34% off of the bottom that we've seen, but again, like everything else, still far from the top.
Stipp: So the revision, it has to do with a couple of different factors that led to what looks like a really big revision in the data of what they thought had been existing home sales. Can you unpack that a little bit, and tell us why did they have to do a revision and what does it mean?
Johnson: Well, let me talk about the revision. The 5.2 million is the number they thought they had sold at an annual rate in 2007 to 2010, and now that number is 4.4 million, about a 14% reduction.
Stipp: And this is coming from the National Association of Realtors; this is their data.
Johnson: Right. And there have been other ways to come at the data, and CoreLogic is another company that's out there that actually records the deeds and so forth, and they have been saying, "Well those numbers look a little high to us" for some time, and so they've been talking at the Realtors Association about adjusting the numbers for the last year, and now we finally got the revisions, it's been delayed two or three times. We finally did get the revised data.
And the big revision in the data was because of "for sale by owner" homes, the FSBO, For Sale by Owner, if you think of the first letter of each one of those. FSBO were down. And to give you some example, in 2009 16% of the homes were FSBO, for sale by owners, and now it's down to 9% in 2010. So just a huge drop in that.
The Realtors Association had just taken whatever number was in their Realtor database, which is what they can actually see and touch and guarantee. And they added to that [by saying], well we don't do everything, and if somebody puts a sign in front of their home and sells their home, we can't count it, because it's not in our database, but we'll assume it's an extra 20% or whatever.
Stipp: They have to estimate that piece of the market.
Johnson: And so they had been estimating relatively the same number. So now ... they've actually gone back through their database and tried to make a better adjustment for that, and I think that they’ve now got a better number than they had before; now it looks more like some of the CoreLogic data, and I think everybody is happy about that.
Stipp: And there is a second piece of the revision as well. So the National Association of Realtors would true up the data now and then to try to get a better handle on this "for sale by owner" number, and they are doing that a bit differently now as well, correct?
Johnson: Right. If half of the correction was this "for sale by owner" phenomenon, then there is a phenomenon where they’ve got to go back in the database and maybe the house got double counted, maybe some of the ways they were estimating population that figure houses that were in markets where there wasn't a Realtor Association. There were a bunch of things that they need to true-up every now and then, and there used to be a Census report they trued up to every year, and that report is no longer available, so they had to find a new mechanism, and that's also the other half of the data--homes that they have been estimating outside of the Realtor database.
Stipp: And there is another important piece about this revision, and first of all a lot of folks are focusing right now on the revision to the existing home sales, but they also revised inventories as well, and it's important to think of that in tandem with the existing home sales?
Johnson: I mean a lot of people are trying to make this out as, "oh, look the numbers are wrong, and the home market is really a bigger disaster than everybody thought." But I think that the basis of the numbers is pretty much the same as it has been. We’ve still got about a seven-month supply of inventory, which is the same amount we had last month. We’ve got lower sales, and we’ve got lower inventory levels. So it's not as big a deal as people make it out.
In fact, on the inventories, let me add one thing, for the last 30 years, inventories have been pretty much between 2 million and 2.5 million unit level, and for a while we got up pretty close to 4 million, even in the revised data set, and now we're back in that 2 million to 2.5 million range. So I don't think the inventories looked as stretched as they may have last month, just on an absolute basis. So I think that's good news. Relative to units, it's still about the same, about the seven months of supply; we'd like to see six, but we are not wildly out of line anymore.
Stipp: So on balance, it seems like the recent data we've gotten on housing is relatively positive. Is this the beginning of a trend that we're really going to start to see a housing recovery, or is it too soon to tell? And if it's too soon, how are we going to know? When we are going to know? What do you need to see?
Johnson: I think it's a little soon to guarantee everything, and you’ve got to be careful. We in the Midwest here, in particular, I don't know so much about other regions of the country, but we've kind of had a really good set of weather, which has been favorable to starts and favorable to permits. Other years ... you'd have given up on starting or thinking about it when there is snow on the ground in November. So I think that may help the data along just a little bit here. So that's the one negative.
On the positive side, why I think it's extended: I think we do have a shot because of low interest rates. We are now down to 3.99%. The Realtors said that that was the lowest rate they've seen since records were started to be kept in 1971. So clearly rates are on a very good place right now.
We've got people that have been living in apartments or living with their families, building up their savings, and I think that's a positive for the market going forward. I think we've talked about in our last video that in housing, the affordability is probably twice as good as it was at the peak. Mortgage payments between the lower prices, which are 20% to 30% lower and mortgage rates that are half of what they were; if you put those two together, you're looking at payments that are substantially below what they used to be. So housing is more affordable.
And at the same time, you've seen rents, especially in some of the bigger cities, here in Chicago, Boston, Washington, you've seen rents go up 5% to 10% every year, and now you're starting to push it--it's beginning to be--if I can get the loan, if I’ve got the income, if I haven't skipped a payment, if I can get the house to appraise, which are all a whole bunch of ifs--but if all those things can happen, it's actually probably cheaper to buy a low-end home today than it is to rent if you can swing it.
Stipp: What about the sentiment piece of it, because I know sentiment is a hard thing to get your arms around, but the banks were saying for a long time, we don't have demand for loans. People aren't asking us for home loans. Do you think consumers are coming around a little bit now, especially if we're seeing them start to rent more, that they might feel, "okay maybe we can go out and start to look for a home now" and that sentiment could also help the situation along?
Johnson: You know the multi-part way I look at sentiment. You know I throw the Michigan stuff and the Conference Board stuff all aside, and I look at three parts, retail sales, autos, and homes. Retail sales is a short-term, and that one has been doing exceptionally well. We got the data from the International Council of Shopping Centers again this week, and again a very good number in terms of shopping center sales--one of the best numbers we've seen in some time when weekly sales came through. We're back in the 4% to 5% year-over-year growth pattern again; that's fantastic. So that's the shot-term confidence.
Auto sales are booming right now. We're seeing a lot of good specials, a lot of activity in the auto industry. So the medium-term confidence seems to be very strong.
Now we're finally seeing just a little bit of a better feeling in the housing market from the most recent data, and that's the last piece of confidence that I've been really looking for, and I think we're beginning to see it, and I am relatively confident that we'll have a good market for housing next year. Will it boom? You know what, that always probably hard. There are still people that have bad credit records from things that happened to them in the recession; those aren't going to walk away from us. But I think the inventories are under control. I think the affordability is there. I think confidence is finally coming back. I think the fact that we've seen people get tired of driving the same old car or just can't. I think you're going to see the same thing with housing: you just can't keep living in the small space anymore. I think those things are starting to happen in the housing market, too.
Stipp: All right, Bob. We won't hang our hats just yet on housing, but certainly some reasons for optimism. Thanks for joining me today in laying out all the details.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.