Jason Stipp: I'm Jason Stipp for Morningstar. We got some undeniably disappointing housing data this week, but are the numbers as horrible as they seem?
Here with me to dig into the details is Morningstar's Bob Johnson, director of economic analysis.
Thanks for being here, Bob.
Bob Johnson: Great to be here.
Stipp: So the housing data we got this week was pretty dismal. There are not very many ways to put a positive spin on it. Can you just go through what data we got and what it said, and was it a lot worse than people expected?
Johnson: Well, the data was worse than expected. We actually got three pieces of data. We got existing home sales on Monday, and that indicated we were down about 10% in existing home sales.
Then [Tuesday], we got some pricing data that indicated that prices continued to erode at a very modest level, but nevertheless continued to erode last month. And then Wednesday, we got new home sales at yet again another near record low of 250,000 units, so that number has absolutely collapsed.
Stipp: So 250,000, when you put that in a broader context of how many homes are out there, this is a very small number. So similar to the unemployment situation where we're seeing gains that are relatively small numbers over the last year, year and half, you have to remember that there is a law of small numbers at work here to some extent as well, right?
Johnson: Yes, very, very tiny numbers, and numbers that our housing teams says, you know, we're working off a small base and there is a lot of noise in them. We're not so sure those numbers won't be revised a little bit or maybe the weather had an undue impact on the number. I mean, just to show you how that law of some small numbers works, the Northeast quadrant of the country, representing about 55 million people in the last month, there was just barely over a 1,000 new homes sold.
Stipp: So extremely low. It seems like it could hardly be sustainable over a longer period of time.
Stipp: So on that front, and just talking regionally, we've always spoken about how real estate is a very local business. So, there are other pieces of news that are interesting to take a look at as you're trying to assess the housing situation. Here in Chicago, we also had some new news locally that's sort of interesting to gauge how different parts of the country might be feeling a bit healthier perhaps.Read Full Transcript
Johnson: In Chicago, some of the look-ahead data is clearly looking an awful lot better than the February monthly data that we just got, and like the national data, Chicago data didn't look so hot for February. It looked a little better than the national data, but the look-ahead data that we got was very interesting.
The number one piece of data was that the number of homes listed in Chicago area, including all the collar counties around Chicago, inventories of homes listed were at a five-year low. So I think that's a pretty dramatic number that a lot of things have now come off the market.
Stipp: So, five-year low, does that mean that maybe people took their homes off the market because they couldn't sell them, so it's kind of a negative sign? Or how are you reading that?
Johnson: No, I think what's happening is that more of the properties are now being rented out, so people now have an alternative as people have decided they're confident about their positions, they don't want to live at home anymore. They want to do something. So people are moving out, and the rental market has become a lot tighter. So now renting is an option for a person that's trying to get out of his home.
Stipp: So, let's talk a little bit about the effective of this rental situation, because we have also seen some local reports about how rents are going up in the area. So it seems like if renting is maybe the housing of choice for a larger percentage of the population than we had seen during the housing boom, does that bode ill for the housing market--people aren't choosing to own homes anymore, they're going to rent instead?
Johnson: Well, I think people always had a choice, do I rent or do I buy a home? And when rents were absolutely dirt cheap, it made sense maybe to rent and not to buy, and now that rent have started to come up and up and up, now, maybe it's time that people will think, "gee, maybe housing makes more sense," and obviously, as people rent their homes instead, that takes some supply off the market as well.
Stipp: So, ultimately if you can't sell the home and you rent it, that's one more house that is not going to compete with the house next door if they are trying to sell.
Stipp: So I think another interesting thing we spoke about is the decision to maybe buy a home. So we've had interest rates that have been pretty low for quite a while. As things start to heat up, and we've spoken about how inflation for example is heating up, and as the Fed maybe begins to let interest rates rise a little bit, do you think that people will decide to stop waiting because the housing market didn't look too healthy, [and will start to buy] because interest rates are coming up?
Johnson: Yes, I think clearly as the rates have gone up, it's actually had the effect of people saying, "you know what, I better lock this lower rate in." People that have been maybe for two, three years sitting on the sidelines are saying, "you know what, these rates may be going higher. There are talks of new regulations relative to mortgages and what you have to put down. Maybe now is that time to act."
And a lot of the realtors, too, have seemed to indicate that people that are in a normal situation--where they might go out and seek a new home, maybe they just got married, maybe they had their first child, all events that usually trigger looking for home--those people frankly stayed in place for a while with all the uncertainty, and now those people are like, "you know what, I can't wait. This living situation is driving me crazy. So I'm going to move on to something else and just bite the bullet," and I think some of that is happening.
Stipp: So certainly looking forward, a few positive signals, but do we still expect that the recovery is going to play for a longer period of time? Are we seeing that this pent-up demand is ready to explode or is it more that we might see gradual improvement over time?
Johnson: I've got to be really careful on that. I really think 2012 is going to be a decent year for real estate and 2013. I think that's going to drive this recovery to last longer than many, many people expect, as the housing comes back. It usually happens first thing in the recovery; this time it's going to be at the tail-end and extend out the recovery longer than people are thinking.
This year, obviously, still looks pretty darn bleak. You have to kind of start the houses and plan ahead. I think that 2011 is not going to be a wonderful year, but I think the groundwork is being laid now for a much stronger housing market in years ahead.
Stipp: All right, Bob, well thanks for the insights and the context on those pretty dismal looking housing numbers, and also looking ahead with what you're expecting. Thanks for joining me today.
Johnson: Thank you
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.