Fri, 26 Jul 2013
The housing market has plenty of runway, but several headwinds will hold it back in the near term, says Morningstar's Bob Johnson.
Jason Stipp: I'm Jason Stipp for Morningstar.
The long-term housing story is still intact, but the short-term is looking messy. Here to explain is Morningstar's Bob Johnson, our director of economic analysis.
Thanks for joining me, Bob.
Bob Johnson: Great to be here.
Stipp: The long-term housing story, the positive news, is still intact. Why do you say that? We've seen some uneven data recently.
Johnson: The reason that the long-term picture still looks so wonderful is that housing as a percentage of gross domestic product has historically run about 5% of GDP, and right now it's running about 2.5% of GDP. It got as low as 2%, so we've come back a little bit already, but we've still got a lot of runway in front of us.
I think the [demand] market is also still very much intact. People of a certain age generally buy homes, and we've underinvested in homes over the last bit of time. And we need starts to be somewhere--we can argue whether it's 1.1 million or 1.5 million--but somewhere in that range is the normalized rate of housing starts that we need to meet normal demand. ...
So, I think we've got a lot of runway on both of those fronts right now, with housing starts at around 900,000+ in the first half compared to that 1.3 million average that I would expect as a normal demand. So, I think we've still got some upside from there, and on the GDP calculation as well.
Stipp: That said, you've identified some factors that are essentially keeping a leash on that long-term picture and holding us back a little bit. What's causing some trouble here in the short term?
Johnson: Well, there are a lot of issues, and most of them are shortages of one type or another. I guess probably the biggest thing out there is that the financing remains incredibly tight. Mortgage lending right now is about as hard to get as it was a year ago. You'd think with home prices being up so much, and default rates being down so much, that maybe the banks would let a little bit go here, but they really haven't. And they're being tight for both the buyers and the smaller homebuilders who don't have the resources available. So those remain a big impediment to growth, but there are a lot of other things, too.
There is a shortage of labor. We've heard stories about homes sitting idle on lots, because they can't get people to put the siding on the homes. That's certainly a factor that's out there. Materials have been up and down, but generally speaking, a lot of the suppliers of raw materials that you need to build a house are being very coy about adding new capacity right now, because they got burned so badly the last time around, and shut down so much capacity, that it's just not there. Some of the builders, even if they go to the supplier they may have used over time, [that supplier] is not there anymore. They went away in the last recession. So it makes for a very tough market on labor and supplies.
Then, finally, I would add … another very important one: the permitting and the availability of land. In places like California, it's very hard to get a new set of buildings approved, and it takes a long period of time. It doesn't happen overnight. Inventories of raw land don't happen overnight. You've got to build up the plots, and the lands, and gather it all up. And that's been slow to develop. So those are just a few things holdings us back in the short run.
Stipp: You're saying these things won't crush the housing recovery, but they will hold us back. To what extent, though? You think some of the data you had projected earlier will be tough to meet at this point, given some of these issues?
Johnson: I've been an optimist on housing for some time. We've really seen better than a lot of people had hoped for. Now, I am becoming probably just a little bit more cautious, just as the world is becoming a lot more bullish. But the raw numbers are, housing starts are at about 915,000 through June, the first half of the year. That's an annualized number. And July, based on permits data, won't raise that average much off of that 915,000. Then we only have five months left of the year, and I was thinking we'd get to 1 million to 1.1 million starts, and maybe even a little bit better. But because of all these bad factors, it looks like it may be hard to get there; we'd need 1.1 million starts by some point in the second half, and that just looks hard.
Stipp: These headwinds, you say, are also causing some strange data that we're seeing, some conflicting data. Can we quickly run through some of the data points you're seeing and why they look a little bit strange?
Johnson: Yes. Permits are in the dumper right now. We had a very bad starts number last week, and then this week the new home sales, which only focuses on single-family, not the multifamily market, actually looked pretty good. The other reason that number can look a little better [is that] the new homes data include homes that haven't even been started yet--ones that are on the drawing board, and have been sold to somebody because they're desperate, and they said, I want this new home; I know I can't see it, but I'll buy it. So that's helped the new home data a little bit, but again that will be a while before it flows through the economy and through some of the other data. So that's certainly one of the biggest dichotomies.
Stipp: Especially given the shortages too, right?
Stipp: You also say we're seeing big differences in regional pricing.
Johnson: A lot of people are really excited about the pricing data, and I've talked again about the wealth effect, and believe me, it is huge. It's put a lot of money in consumers' pockets. And by the way, the house price appreciation really dwarfs what money the Fed might take away in the bond purchases market. We're talking a trillion-dollar improvement in net worth for individuals. So, that's a really huge number from house price appreciation--but it's exceptionally uneven. Prices in markets that were down, in markets that tend to be more new-home-oriented markets--California, Nevada, Arizona--prices were up near 20%. I may toss Florida somewhere in the middle--maybe at 10%. But the rest of the country is growing at 4% to 8%--not exactly anything to write home about.
So we're seeing a real difference in parts of the country. So, many viewers or writers will tell me, I'm not seeing any big home pricing [increases], but in some markets we are.
Stipp: We're also starting to see some discrepancies in the home price tracking data. So, we're seeing higher growth from some data providers and lower growth from others?
Johnson: We got a little bit of a shocker [Wednesday] morning. [We got] the FHFA data, which is the federal government database. They're [tracking] the government-approved loans, so it's a little bit of a different subset than the others, but it is more comprehensive in a way; it includes more cities in the database, [and] it always is less volatile in both directions. But, year-over-year growth was 7.3% for May--this was May data that we got--which was the same as the April data, which is in real conflict with the Case-Shiller and the CoreLogic data, especially the CoreLogic data, that indicates that we got 12% year-over-year growth, and that it's accelerating. Even if [the FHFA data] was a low [growth] number, you would have at least expected to see it [move up] to 7.5% or 7.6% or 7.7%. It didn't happen. Again, it maybe is this mystery of the West Coast versus the rest of the world type of situation.
Stipp: Builder sentiment is pretty high, but the actual starts aren't that great. So maybe their eyes are little bit bigger than their stomachs as far as long-term versus what they can do in the short-term?
Johnson: That may be a little bit of it, and they want to be optimistic. The other thing may be what we talked about: Some of the builders are actually selling homes that they haven't started on yet. I think that's probably a little bit of the explanation, but it takes time to move from that blackboard level to getting into some of the data, and in the meantime, we could see softer [housing] data.
Stipp: Bob, is there any reason for optimism in the short-term picture getting a little bit brighter? Or are some of these headwinds going to be with us for a while? And if they are, what does that mean for when we're going to reach that long-term, more optimistic [growth potential]? Is it going to be a longer pathway?
Johnson: I think as people manage their supply chain a little bit, … remember that some of this data gets pretty old … but maybe some summer workers came in that were able to relieve some of the labor issues that we've talked about. Although that certainly won't help on the skilled side of the house, but maybe over the summer a few things happened right for the industry. So maybe we see something a little bit better, and that might be a short-term thing that helps.
We didn't talk about higher rates, which obviously could [be weighing] in markets like California and Arizona, where prices are up 20%, and interest rates are up. Now you've got a real double whammy in those markets. But in some other markets, the increased prices may have gotten people off the fence that were just sitting there, and maybe that helps some of the short-run data.
Stipp: Is the lending going to loosen up at all in the near term? Any hopes for better ability to get a mortgage?
Johnson: The only hope there is [possible relief from] some of the legislation within the Dodd-Frank framework trying to make banks be more cautious. They've backed off some of the more strenuous parts of the bill recently that really made it difficult for banks to lend on mortgages. Some of the indications are that some of the really onerous restrictions that they were going to put on the banks on every type of mortgage are going to go away, and ... now they'll be down to a narrower subset, like maybe interest-only types of loans, which are so dangerous. [The banks will] have to put up money for those, but maybe not on the others.
Then rates have come up a little bit, and now that's increased the spread between what [banks] borrow at and what they lend at a little bit. They're still borrowing real cheap from the Fed, and now lending at a somewhat higher rate. So, that's certainly been a little bit more helpful to the banks. And you put those two together, maybe we break that lending [headwind]. But, again, that's going to take three to six months. It's not going to happen next month.
Stipp: So, it sounds like the big takeaway is, still be optimistic about housing, but also be patient, while we work some of these short-term problems.
Johnson: Exactly, don't panic.
Stipp: All right. Bob, thanks for joining me.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.