Jason Stipp: I'm Jason Stipp for Morningstar. We got some housing data this week. Existing home sales were up, but home prices continued to decline. Here with me to talk about his take on where we are in the housing recovery is Morningstar's Eric Landry. He is an associate director of equity analysis.
Thanks for joining me, Eric.
Eric Landry: Hi Jason, thanks.
Stipp: So, a lot of the headlines based off that news that we got this week, they seem to say that the recovery is still slow, that we still have a long ways to go before we start to see some improvement--generally a pessimistic tone. I think they are keying off of the declines in home sale prices that we still continue to see. What are you seeing? Do you agree with that negative pessimistic assessment?
Landry: Well, I'm glad you asked. Let me take you back a couple of years here first. 2009, we put out a report in the springtime, telling the world that hey, Case-Shiller prices are going to go up in the very, very near future, and of course, everyone laughed at us. Well, it turned out to be right.
We're seeing basically the same thing happening now that we saw back then in 2009, and that is this: There is a pretty well-defined cadence in which cities move first and which cities follow, and you will have to look hard for this, but buried inside both the November and December reports, which are the two most recent Case-Shiller reports, we can see some of these leading cities starting to move in a direction that is upward, while the entire index is moving sideways to downward as you mentioned in the intro there.
So, that combined with some of the real-time data that we are seeing, which is actually good through mid-February, as opposed to December with Case-Shiller, is showing some positive signs, I think, and I believe, contrary to what you see in the news, all the pessimistic sentiment out there in the news, the analysts' reports and whatnot, I think there is at least as good a chance that prices go up here in the near term, as it is that they go down.
Stipp: So I know that we're also moving into a season where more people maybe looking to buy a home in that spring to early summer season. Do you think that there is going to be a boost from that? Are you seeing signs showing even if that season is mediocre, we will still maybe see prices increase a bit from where they are right now?Read Full Transcript
Landry: Well, first of all, let me be clear when I'm talking about these prices increasing, that is on seasonally adjusted data. So, we are not being tricked here by the seasonality, at least in the Case-Shiller data.
Now when you talk about going into a seasonally strong period, you're right. The weekend of the Super Bowl typically signifies the start of the spring selling season. The early data on that right now if you talk to some builders and some consultants is that while traffic is not poor, builders are needing some incentives to get folks through their communities.
Having said that, I think the early data shows that it is working and there is some traffic. Toll Brothers just reported today; they are bit above what most other homebuilders are as far as price and quality goes, but they had a pretty good quarter, just reported today.
Stipp: Okay. And I'd like to talk a little bit about some of the headwinds because you read about some of the things that are against a housing recovery, and supply is one of the big ones. Can you tell me a little bit about where we are with supply and how much of a drag that's going to be on the overall market's health?
Landry: Well couple of things about supply. The issue is real, as we have basically been witnessing for the past several years. Having said that, the leading edge of the foreclosure curve is, of course, the delinquencies, and if you look at Fannie and Freddie data, Mortgage Bankers Association data, you can see that those delinquency curves are now declining--are rolling over and on their way down. So that is the leading edge.
So the leading edge of foreclosure is getting better. However, there is still a significant amount of stuff that's moving through the pipeline.
The other issue is that the supply that's already out there is probably more appropriately termed "stranded supply" in that it can still exist while the housing market gets back on its feet, and the reason is this: A job is not necessarily always created where there are extra houses.
So, if you think back to the amount and type of houses that are built in the boom years, much bigger than today. All of the non-essential items, like the very fancy kitchens, bathrooms, the theater in the basement and whatnot, none of that stuff is desired today.
So, what we've got is a situation where we may have homes sitting far from job centers that are not catered to today's buyer. They may just sit there for quite a while as today's buyer desires a different type of house closer to job centers, which may allow the housing market to get back on its feet as these other supply sits there.
Stipp: So again that old axiom of location is important to consider there…
Landry: More so now than ever.
Stipp: …which areas might start to see a recovery, so I think that's a very interesting point.
So looking forward again, so you have some forecast of what may happen in the nearer term. I know it's harder to forecast longer than that, but Eric, what things do you look at? What are the primary data points that you use to gauge the health of the market, and also what you use to test your thesis and whether that's playing out as you expected?
Landry: Well, as far as near-term goes, we can get a decent read on what Case-Shiller is going to present just by, one, looking at those leading indicators we talked about as well as the real-time data. So we're fairly confident that as far as Case-Shiller goes, and that's the most widely recognized house price index, that the near-term is problem looking a little bit better than what most think.
Now over the long term, you're right, it's much more difficult to forecast that, but I think one thing that people need to keep in mind is that the supply, the actual new supply, that is injected into the market, that's new houses being built, new apartments being built, has been more constricted over the past three years than at any time in recorded history back to the 1950s.
So that tells me that at some point--it's just a matter of time before production increases, prices firm, and the market gets back onto its feet. Now it's not going to be anytime soon before we are back at 2005 and 2006 levels, but I think it's not long before we are at levels significantly higher than those of today.
Stipp: You can argue that those levels actually were abnormal in 2005 and 2006, just like some of the depressed levels might also be abnormally low?
Landry: Right. You need to swing both ways, and I think we have done enough on the downside to circumvent the overbuilding on the upside.
Stipp: Right. Eric, thanks so much for your insights and for the context on the housing market.
For Morningstar, I'm Jason Stipp. Thanks for watching