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Sentiment Flip in Housing

Jason Stipp

Jason Stipp: I am Jason Stipp with Morningstar. As we look at the economic indicators, several of them turning positive, one very crucial indicator that we are watching very closely is what is going on in the housing market.

Here with me to talk about that is Morningstar's Eric Landry. He is an associate director of equity analysis and he covers home builders. Thanks for joining me Eric.

Eric Landry: Hi Jason.

Stipp: So, you mentioned to me a little bit ago that you feel like a bit of a switch on sentiment in the housing market has gone off recently. Tell me a little bit about what might be behind that and why people may be a little bit more positive now.

Landry: Well, it is funny because we actually started to see, in the real time data, improving signals back in March. And nobody really believed us. We were a little suspect ourselves.

But, what you see now is new stories talking about how conditions have improved. Indeed, it was a CNN Money article just last week talking about "buy a foreclosure now before they are gone." When is the last time anyone has heard of that?

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And indeed that is true. When we talk to brokers who specialize in foreclosures and what not, some of them indicate that there may be as many as double the amount of buyers right now as there is actual supply of foreclosures.

We are seeing it in places where markets are depressed, like Las Vegas and Phoenix. Brokers in Las Vegas are actually asking banks to release more of their REO, which is Real Estate Owned, which is the inventory of these foreclosures.

So, I think sentiment has definitely improved significantly from what it was six to eight months ago, and it is because supply has dwindled a little bit, prices have started to firm and that has caught on in the news.

Stipp: So, it almost seems like the risk that people are seeing out there as potential homebuyers is that they are going to miss an opportunity versus they see a risk of buying something right now. It is almost like it turned around and now you don't want to miss out on a great deal because it might not come back for a long time.

Landry: That is absolutely true. What this sentiment shift has done is it has injected a little bit of urgency into the buying process. You can see that in the news. You can see that in the home builders order activity. It is showing up all over the place right now.

Stipp: OK. And what are you seeing regionally? Are there any data points that stand out from certain troubled areas across the country that might give us a sense of improvement?

Landry: Well, it is pretty clear right now, and it has been pretty clear for a while, that California real estate turned the corner sometime in the last first quarter, and that has been going on for a while now.

Las Vegas and Phoenix are still in some trouble, but what you are seeing is some activity start to pick up like I mentioned earlier. Florida is a little bit behind California, but again, they are seeing increased activity as well.

So, what I say right now, regionally California is definitely out front. Prices have been going up in California, believe it or not. Prices are still going down in Vegas, Phoenix, still pretty weak in Florida. Prices are going up in places like Boston right now, Denver, Dallas; they are all seeing some decent strength in prices.

But, I will say this, Jason. The real time data right now indicates that there is a bit of seasonal weakness setting in throughout. We look at the 55 largest markets in the country and typically, in a normal year, in which it look like this year is shaping up to be more normal than the past two or three, we are seeing a little bit of a summer lull in prices right now. So, that will be interesting if that gets picked up in the news a couple months from now.

Stipp: But that is something that even in a normal time you may expect to see a lull during certain parts of the season.

Landry: Yes. You do.

Stipp: OK. Now, you also cover the home builders. Tell me a little bit about what sort of signals you are getting from those folks. Are they ready to talk about an upturn now or are they still a little bit cautious?

Landry: They are still cautious. And frankly, I think I would be too, if my business was crushed the way these folks' businesses have been hammered. But we can see it. You can sort of tell by some of the comments, although they don't want to come out and say, "We think things are getting better." Some of the comments regarding buyer sentiment and what not are pretty positive.

And more importantly, where it is showing up right now is in order rates. A lot of the builders are having increased success on fewer communities. So, that means that there is "same store sales"--the metric you would use when you measure retailers--is actually going up. They are selling more homes per community right now than they have in several months. It is going up year over year, sometimes going up sequentially.

And that is a pretty good sign. Toll Brothers yesterday mentioned that this is their normally seasonally weak period, yet they saw an increase in orders on a sequential basis.

Stipp: So, they may not be ready to come out and say, "Hey, you know, things are looking brighter." But you can look under the numbers a little bit and see things are starting to look up a bit for these guys.

Landry: Yeah, I think spring has finally sprung on what has been a very long winter in the housing market.

Stipp: That is a great note to end on. Thanks so much for joining me today.

Landry: All right, Jason.

Stipp: For Morningstar I am Jason Stipp. Thanks for watching.