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Housing Market Getting on Its Feet

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. We recently saw some better-than-expected existing and new home sales. Dare we think that we possibly could be seeing a turnaround in the housing market? Here with me to offer his take is Morningstar's Bob Johnson. He's associate director of economic analysis. Thanks for joining me, Bob.

Bob Johnson: Jason, nice to be here.

Stipp: I want to talk about the housing credit in a moment. But first of all, aside from the housing credit, what do you see out there that might be leading to some better-than-expected results on the home sales front?

Johnson: Sure. I'm seeing a number of things going on out there. One is interest rates are way down from where they've been. We're now back to kind of where we were all the way in December. And keep in mind, when you calculate the affordability of a home, one of the things is the interest rate that goes in there. And that rate has now fallen dramatically.

One of the fallouts of this whole European crisis is that everybody has come to the US as a safe haven, and that's driven the long-term or the 10-year Treasury Bond down in terms of rate, and that's how people price their mortgages. So now we've got mortgages well under 5% again on a 30-year mortgage.

Stipp: Now are we seeing that people are actually able to get loans? Because I know that that was a concern at one point. Even though the interest rates were low, not everyone was qualifying to get a mortgage.

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Johnson: A lot of the surveys that I look at, again, they tend more towards the commercial side, but it does indicate the spigot is opening up at some of the banks. It's certainly tight for small businesses. It's relatively easy for bigger businesses. And I think the consumer front--I'm seeing commercials for home equity loans on TV now, of all things.

Stipp: I know that you hate to look at the consumer confidence numbers, because you're always saying watch what consumers do versus what they say. But we have seen that consumer confidence has gone up in some readings this week. How much do you think that that could be playing into some of the feelings about the housing market and recovery there?

Johnson: I think--and what you are alluding to is the Michigan survey, which is now back over 63--and it's up to, I think, its highest in this recovery. So it's made not just a small kind of little bounce. But it's a volatile number. Three months ago we were talking about it making a new low again. So it's a volatile number, and it's how people feel on that day.

But the good news about the higher confidence number--confidence is an important factor in people deciding to buy homes. It's a long-term asset they won't buy unless they're confident. And that number has gotten better. I think it's probably because of the jobs market that it really has. That's been the key driver. People have jobs and I think they're feeling better. I think we had a great jobs number last month, and I think this month is going to be pretty darn good, too, when it comes out.

Stipp: Now onto that homebuyer's credit. I think a lot of bears out there might be saying: "OK, this is because of the credit." We saw a nice uptick and we've seen some good results. That's going to go away, and that we're going to see right back off the cliff again. What's your take on that? How much of this is explained by the homebuyer's credit?

Johnson: Well, I don't think a great deal of it. And I think the number one example came this morning from our homebuilding team and Eric Landry, who talked about it on a conference call.

Toll Brothers is a major builder in the country, although they are not in every city. But they indicated that their traffic and their deposits were up substantially in May. That's post when the credit goes into effect. The credit expired April 30. So sales that came in May aren't benefiting from the credit, and they were actually better than the results "pre" the credit. So that would certainly be one thing that I would cite as an indicator that maybe we haven't got this great cliff to fall off of.

I think also, it certainly didn't drive things crazy this time. I think that when the credit was going to expire in November and we had kind of that fake-out in existing home sales, we had well up to 6.0 million house units sold. And this time we kind of peaked out at about 5.7 million units.

Again, so it didn't cause the number to wildly explode and now we've got artificially, and now we've got to collapse again. It just kind of gave it a little boost, and I think that's not going to be such a big deal.

Stipp: So maybe some signs that there are other fundamentals that are helping to underpin some of the results that we're seeing. Now on the inventories front, I know this is also another big issue as far as the recovery and the number of homes that are available, and also the number of homes that may become available. How much downward pressure might we see from excess inventory?

Johnson: If I had a thing I did worry about, it is on the inventory side, and the inventory number, which is reported along with existing sales, was back up again. We don't like to see that, but as things move through the foreclosure process and make it out on the market, that's what happened. The inventories have moved up and that's something that we're going to have to keep an eye on.

But they do seasonally tend to go up, and that number is not seasonally adjusted; it's hard to do that on inventory, so they don't. So we'll have to wait and see what happens on that front.

And then you alluded to the shadow inventory. When loans get so far overdue, people start to say, "You know what? It's just a matter of time until they move into inventory." You hear people talk about two, three, four, five, maybe as much as six million units in this shadow inventory.

But those people that are in those homes, if that's in the shadow inventory and they are behind on their loan, they are going to have to move somewhere else. Maybe it's an apartment, maybe it's something down the street or whatever, but they have to live somewhere.

So with not that many new homes being produced, I'm not as scared as some people are about this six million shadow inventory, because those six million people still have to live somewhere.

Stipp: Sure. And looking forward, Bob, given some of the factors that are out there on the plus and maybe on the minus side, what are you expecting? What kind of trajectory are you hoping for here in the housing recovery?

Johnson: Sure. I think next month already... Now, we had an almost 15% gain in new homes sales this month for April. Certainly we're going to move into, I think, maybe in a small decline mode next month. Not huge, but we will probably get a decline, and maybe it will last a couple months. And I think we kind of come back on the new homes.

The existings, I think five million is kind of a normal range for that number. So that may be more drastic. It may look from a 5.7 million to a 5.0 the following month. We've probably got a month or two before we have to worry about that in the numbers, because that ends June 30.

Stipp: OK. Well, Bob, thanks for giving us a firm foundation for thinking about the housing market.

Johnson: Yeah. Great to be here.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.