Wed, 21 Mar 2012
Morningstar's Bob Johnson puts recent new home, existing home, inventory, and home price data into context.
Jason Stipp: I'm Jason Stipp for Morningstar.
We got a boatload of housing data over the last few days, which can make it difficult to pull out some of the bigger themes in the home market. But luckily, we have Morningstar's Bob Johnson, director of economic research, to give us the rundown and the walkthrough on recent housing numbers.
Thanks for joining me, Bob.
Bob Johnson: Great to be here.
Stipp: Let's start by talking about some recent trends that we've seen that cause a little bit of confusion around the year-over-year and the month-over-month numbers that economists like to track for housing data, but you have to take some things into consideration. What are those?
Johnson: You've got to be really careful about looking at the numbers in too short of a time span, because of the weather in particular. And one of the things is, we've had a couple of warm months in a row, so it's brought forward some of the housing data, and the season started a little bit earlier, which makes some of the subsequent months look a little less rosy.
So our usual way around that is to look at the data year-over-year and that gets rid of some of that stuff, but unfortunately, last February was an unbelievably cold winter, and so people couldn't get out to look at homes, and builders couldn't get out to dig basements to homes. So that makes it probably just a little bit too easy a [comparison] metric. So it gets very confusing right now to interpret the data.
Stipp: What about if you looked at a longer period like three months this year compared with last year. Are you seeing some sort of trends that are optimistic at all?
Johnson: Absolutely. I think even if you start looking over a three-month range and year-over-year, you are seeing some pretty nice improvement, and I think we are well off the bottom here.
Stipp: OK. So, let's talk about some of the recent data that we've had, because we've gotten a lot of different bits of data, and when you get it month-over-month, it's hard to really pick apart and see where are we right now in the recovery.
And I want to start with new housing. This is an important one because it does contribute to GDP with new construction. What have the recent numbers said to you? You have it broken out here: What we've seen recently, what we saw during the downturn, and what some of the peaks have been. Put that in context for us on new housing.
Johnson: In the boom times, we had about 2.2 million housing starts at an annualized rate, so that was the peak. And then at the bottom, a couple of years ago, we got just under 500,000, so it dropped almost 75%, so a huge downturn.
Now, ... the last couple of reports have both shown about 700,000 starts. So that's ... about a 40% move off of the bottom, but we are long ways from that top, and I don't think we'll ever get back to the 2.2 million, but I think 1.5 million is realistic over the next five years, and I think that's a huge opportunity.
One of the things about housing--everybody keeps on talking about automobile multipliers, [how] each automobile job [creates] six other jobs; well, I think housing is even more dramatic because you get the direct building, but then you've got the people that do the mortgages, you've got the real estate brokers, you've got people who make the furniture, the people that make the lumber that go in the house, so this is really an important sector, and one that we need to see do well. And we are now nicely off the bottom, but we've still got a long way to go.
Stipp: So certainly far away from those peaks. We probably won't reach those peaks again, but 1.5 million is decent for a "new normal" sort of number.
You also mentioned that this is a slower category to turn around. You don't see the data run back up as you might see in other areas. Why is that?
Johnson: I think foreclosures have certainly hurt a little bit in this marketplace, where there's other competition, where people like the thrill of getting a good price on a foreclosure, and so that's hurt a little bit.
Then also new homes, because they tend to be a little bit more luxury-oriented, they are priced higher, the average price of the house is higher, not because it's necessarily any better [of a] house on a square foot basis, but it's just they're bigger houses, builders tend to aim that way. And so that's hurt the market a little bit and made it a little bit slow to come back.
Stipp: Let's turn and talk about existing home sales. We got some recent data on that. Now that doesn't necessarily give GDP that big boost, but existing home sales will give GDP some boost. What are some of the differences there?
Johnson: Every dollar you spend on a new home, every little input that goes into it, adds to GDP; whereas, [selling] an existing home is kind of like selling a stock or bond--it doesn't really add to anything, you are just ... transferring it, and the commission is all that really gets added in. But the brokerage commissions are not insignificant in some states; they are as much as 8% of the real estate price, so it does add to GDP. Then also down the road, not usually the same month that you buy the house, but a couple of months later, you are going to see people buy furniture to stock that house up and maybe a few remodeling projects to touch it up.
Stipp: Also I would say existing home sales are a good sign of confidence in the general consumer economy.
So you have some numbers here for existing home sales, some highs that we saw, some lows that we saw, where we are now, and what you think is a new normal. What has that data been telling you?
Johnson: We got as high as just over 7 million units on an annualized basis. So that was a really high number. Then we dip back down and we got as low as 3.8 million. And now this last couple of months we were at about 4.6 million in January and February. So those are, again, numbers that are off the bottom.
Now, those are numbers that I think, in particular, won't get back to the old highs of 7.2 million; a lot of that was people flipping, buy a home, live there six months, flip it, maybe not even move into it. And I think that type of activity is gone, and I don't think that was necessarily healthy [anyway].
So, I think you have to look back to what was it just before things went crazy, and you had kind of 5.4 million to 5.5 million, and I think maybe we can get back to there, but this is not a number that I expect to get way back up or to see lot of movement in the short run.
Stipp: But certainly still a bit more room for growth there if you think that 5.5 million is a "new normal" number.
Another thing with housing that has concerned a lot of folks are the inventory levels. How much unsold is out there and the headwind that can create. What are you seeing on inventories, the levels that we saw at peak, what we saw during the crisis, and where we are now?
Johnson: Normal in the market is usually considered ... back many years ago ... was four to six months of supply. They compare inventory to what the selling rate is. That's a preferred way to look at it.
And so we got as high as 11 to 12 months in that metric, and now, we're falling all the way back ... in January, we got as low as 6 months. In February we were up just a little bit, at 6.4 months of supply, which I think is still a great number.
Now, it will probably tick up just a little bit toward 7 this spring, but we have really brought that number down, and that helps firm up prices and it helps assure confidence, and it's just a great number that I watch.
Stipp: You mentioned something that's interesting, that's maybe a dark side of the inventory that some folks aren't considering when you look at that number. What is it that's concerning you?
Johnson: The one concern that I have about low inventories is that it's going to keep existing home sales levels down, because I think a lot of inventory that's out there is either what I call "stranded inventory," stuff that's far off of the beaten track, it's stuff that's not occupied, it's stuff that has been foreclosed and damaged. And if you really go out and try to find a quality home, there may be issues in finding one because the prices are too low to get people to offer the really nice homes, and then what's left out there is kind of the junk, and so that unfortunately is probably going to hold the number back a little bit.
Stipp: So, quality of that inventory is important to consider as well.
Let's talk a little bit about pricing. So, pricing data has not looked that great recently. Where are we with pricing? How much of headwind is that going to be?
Johnson: Almost everything else is off the bottom, and I think we're still very, very close to the bottom on pricing, and if you look at Case-Shiller data, we're down 30% or more from the peak still, and even if you look year-over-year, depending on which cities and metrics you use, you are down 2% to 4%, December over December. So we really haven't seen a lot of improvement.
[But] if you look at some of the metrics that look a little bit more at the monthly data, we're beginning to see the turn. Case-Shiller is a moving average. So it takes a little longer to shore up there, but some of the government data from the mortgage agencies are looking up a little bit, and even the National Association of Realtors report that we got this morning, it reports a median home price, which has all sorts of statistical problems with it, but after being down for several months, it's now up 0.3% year-over-year. So I think we're beginning to see the turn in pricing, which I think is important.
Stipp: Lastly, let's talk about some of the folks on the frontlines, on the ground--the homebuilders--and how they're feeling about the market. What is that sentiment gauge telling you?
Johnson: They're talking to the people. They ... see people moving through their homes. They are the people who have to lay out the money for lumber and [other supplies] before things actually get going, and so they are a great place to get a handle on the market.
One of the best pre-indicators of new home sales, which I said was so important, is how these builders feel. And, again, in the recession we got as low as 10; maybe in a nice peak situation, you're somewhere in the 50s. Right now, we're up from that 10 that I mentioned 18 months ago to 29. Now, the number, again, like all of my other statistics, was flat from January to February, probably because of the weather, but nevertheless, we're still substantially up, almost halfway back.
Stipp: So, some nice progress on that front, but definitely still some ways to go to what would be considered a more normal figure for that sentiment gauge.
Stipp: All right, Bob, lots and lots of housing information, but very, very valuable context for that data. Thanks for joining me today.
Johnson: Great to be here.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.