Wed, 18 Jan 2012
An eye-popping runup in homebuilders stocks could foretell a better housing market than many expect, but risks still loom, says Morningstar's Bob Johnson.
Jason Stipp: I am Jason Stipp for Morningstar. Homebuilder stocks have been on a tear recently, but what does this mean for the housing market? Here with me to offer some insights is Morningstar's Bob Johnson, director of economic analysis.
Thanks for joining me, Bob.
Bob Johnson: Great to be here.
Stipp: Homebuilder stocks have been doing quite well recently. What does the performance looks like, and what is behind that performance?
Johnson: Yes. There is a homebuilder exchange-traded fund, an ETF, that's out there. If you're ever curious and go check, the ticker for it is ITB, and that index which includes many leading homebuilders is up more than 60% since Oct. 1. Now, we're not talking all the way back to the beginning of recovery; we're talking just since September. That index is up more than 60%.
Stipp: What's behind that performance? We also got some recent data from Lennar, one of the homebuilders that seems pretty positive as far as demand. Why are these stocks running up so much?
Johnson: Sure. Well, I think you hit the nail on the head there. I think Lennar certainly got the last 10% or 20% of the move going last week. It had a very optimistic quarterly earnings report and outlook for the future. The firm talked about new orders for homes being up 20%, and the backlog being up even a more impressive 35%, which means there's more firepower behind that. And Lennar went on to say that it got all those new orders without substantial discounts, so it was not an issue of the firm giving away the homes at some type of bargain-based price. On top of that, Lennar said that December, which is usually the very weakest month of the quarter with all of the holiday shoppers not wanting to go looking for homes, that actually December was probably one the stronger months, and so that would set us up for a good trend going forward.
Stipp: So, improving metrics are occurring for these homebuilders. But from an economist point of view, when you look at the housing market, does that jibe with what you are seeing from a broader point of view? I'm wondering specifically, were these homebuilder stocks beaten down so much that even a little glimmer of hope from a lackluster housing market could cause them to pop up like we've seen?
Johnson: Well, I think that certainly some of it. I mean I think nobody believed at all, and now they've started to believe a little bit. They've got some firm evidence to do so, and we talked about some of that evidence. But certainly they have started to come back and react to that. Now, in terms of economists, I doubt that you could find an economist that says, "We're going to run wild in housing in 2012 or even 2013 maybe."
Now, there are a few brave souls out there who have said that maybe the housing market has "bottomed," and whether they mean in units, prices, or whatever, it's a little bit hard to tell. But in any case, I think some are thinking, "Yeah, it's not going to hurt anymore." But I don't think anybody is in a very bullish camp on housing. Yet, you've got the homebuilder stocks; people actually putting their money behind real stocks that are doing real things in the world. These homebuilder stocks are starting to move ahead, and I think maybe the economist might be just a little bit behind the eight ball on this one.
Stipp: So, you would say, you would fall maybe a little bit more on the bullish side then for the housing market looking ahead?
Stipp: So, what factors are you looking at? What things specifically do you need to see from an economic point of view that would show that some of these trends that these homebuilders are seeing are actually playing out?
Johnson: Well we get a number of reports every month on the housing market, and certainly we get pending home sales, existing-home sales, and new-home sales. These kind of measure something a little different. One measures how many have signed new contracts; one looks at the existing stock of homes such as what homeowners are mobile and feel like they can move. And then you have new-home sales, which is actually the number that goes into the gross domestic product report.
Stipp: So, when you're looking at all those, what's the trend been? And do you expect to see those trends continue then into 2012?
Johnson: Yeah. Well, they never make it easy, but for over the last four months, I think each of those indicators have probably been up in three of them, but not all at the same time. But I think the trend has certainly been positive in all of those for actually quite all the way back to September. So, we're certainly seeing some good news there on the housing front, and again, it's an early beginning.
Stipp: Another piece of data that we got is the homebuilder sentiment, which has been improving during the last several months. What is that actually telling you? Is that just how good homebuilders are feeling or is that a little bit more concrete than that?
Johnson: Well, you know how I think about sentiment indicators--generally with the word sentiment after them--such as consumer sentiment, which I don't believe in. But the homebuilder sentiment is a little bit more concrete. It looks more like the ISM Purchasing Managers Survey. They ask things, such as: Are more people coming through your models or less than last month? Are you closing more deals than then? There is a series of very specific up, down, or same type of questions. So, it's not as loosey-goosey as the consumer sentiment survey, and on Jan. 18, the number came out at 25 for that index. That had gotten all the way down to 10 at the worst of the recession. Earlier in 2011, it was still in the low teens. This month, it went to 25 from 21 in the prior month. So, there's clearly been a very nice positive trend.
Now, 50 is kind of normal; it means there's a good housing market. So, we are still not in robust land, but we've kind of probably doubled off the bottom here anyway. So, that's good news.
Stipp: So, let's put housing in a bit of broader economic context. How important is a recovery in housing to the bigger economy, and how much of the economy is housing actually accounting for at this point?
Johnson: I think that if you look at the housing numbers overall, housing kind of small. It's 1.0% or 1.5% of GDP right now, but that's because it's collapsed so far. It used to be the 4%-6% range would be more typical, and it got as high as that 6% at the top of the last recovery. So, we've really come way back down, and I think, it's got room to grow. That's going to be a potential surprise factor during the next few years. You usually have a big runup in housing, and then it stops, forcing the economy to stop, as well. Even if housing comes back slowly, I think, this time maybe you have a little bit more of a gradual runup of that. That might be the one piece of good news out of the slow recovery, and it certainly helps employment.
Stipp: When you're talking about some of the pieces of good news that we could see, what are the risk factors? What are you worried about that might stall the little bit of momentum that we are building up here?
Johnson: Well, certainly we've seen some nice numbers, and it's a nice track to build off of. But we still have to worry about pricing. Pricing is still down about 3% from our last peak in 2010.
Stipp: Is that entirely a bad thing, though?
Johnson: No. I think that pricing makes a home more attractive to some buyers. We certainly are seeing relatively attractive affordability ratios right now, probably the best that we've ever seen in history, maybe even twice as affordable as it was even 10 years ago.
Stipp: So housing certainly looks more affordable, but I can see that there would be a headwind for people who are already in their homes and feel like they can't sell them for as much as the home is worth, while prices are so depressed.
Johnson: Yeah. So, price is certainly one headwind. I think, there's a great fear of more foreclosures. With the robo-foreclosure scandal last year, we slowed our foreclosures last year. But there might be more of those coming on the market. I'm little less worried than others about foreclosures. The people who move out of a foreclosed home still have to move some place, such as rental apartment, but then building owners raise the prices on the rents, which will make people more likely go into a house. So, it gets to be kind of a self-feeding thing. I mean, unless you think these foreclosed people are going to live on the street, which I don't think they are, the demand will pop up somewhere else and create a demand cycle. So, I'm not as worried about foreclosures as others because it's not net supply because these people are going to have to move somewhere else. So, you have foreclosures, and then you've got pricing being a bad thing. And then in some markets you've got a lack of inventory, frankly, of good attractive homes.
Stipp: Well, these are some very interesting trends that we're tracking in homebuilder equities. Thanks for putting that into context in the homebuilding economy and for joining me today.
Johnson: Great to be here.
Stipp: From Morningstar, I'm Jason Stipp. Thanks for watching.