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Housing Limping Toward Recovery?

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar.

We got a boatload of housing data recently. Some of it was good, some of it not so good. It was somewhat of a mixed bag.

Here with me to try to pull some meaning out of it is Morningstar's Bob Johnson. He's our director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So, we did get several pieces of housing data. Let's start with some of the good news. We got some data on pricing and it shows that maybe we're seeing a little bit of a recovery there.

Johnson: Yes. I think the good news is we're not going down anymore. Today we got the number out of the Federal Housing Administration, and that's the Fannie Mae mortgages and what they're seeing in their housing stock, what's happened to prices. And we were up on a seasonally adjusted basis 0.4%, and there was a 0.2% increase in the prior months. So, it's the second month in a row where housing prices have increased. Those are on a seasonally adjusted basis. So, that's a good thing to see.

Stipp: We also get housing price data in another report, which is the existing home sales. Did you also see a trend in housing price firming up there as well?

Johnson: Absolutely. The prices there were also up month-to-month. So, it's not just one isolated piece of data that's up. So, the trend appears that the decline has been arrested. I'm not going to declare that home prices are going up in any kind of great way, but they've stopped going down, which is what really scares people.

Stipp: Okay. So, we have seen some stabilization there. On the flipside, though, the existing home sales report was not all good news; in fact, the number of existing homes sold failed to meet a lot expectations. How did you read that number?

Johnson: Existing home sales were only about 4.8 million units, and people thought they might be a little higher, and it was actually a decline from the prior month. That was only about 1% sequential decline, but it was a decline. The news there was there was a lot of cancellations, which figure into the calculation--you get new sales signed, and then you've got ones that didn't happen because there was cancellation somewhere along the pipeline.

Stipp: So, what's the normal amount of cancellations, and what were we seeing here, and what do you think might be behind that?

Johnson: 10% what might be a normal rate of people that back out of a contract for one reason or another. This month the number was 16%.

Stipp: So, quite a bit more.

Johnson: Even in a couple of the more recent months, they've been less than 10%. So, the jump really affected the number this time around.

So, that was a big deal, and it can be because appraisals don't come through, it can be because people get cold feet, it can be because it doesn't pass the housing inspection--any number of things can happen where it kind of shows up in the pipeline.

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Stipp: Would you say that that number potentially because it spiked up so much might be an anomaly, that there might be something a little bit strange going on in this one month?

Johnson: It could be. But again, I'm not so sure how relevant existing home sales are anyway. I mean I don't want to see the number at a very low pace, but it doesn't really go directly into GDP. It's like selling a stock or selling a bond--selling an existing home just changes the title of it. It doesn't really help the GDP or help employment in much of a way.

Stipp: But it does kind of give you a sense of the sentiment or the health of the housing market. If people are moving around, there is going to be some existing home activity and also you would think that's probably going to be good for the new home sales market as well, if people have that mobility, right?

Johnson: Right. So, I'd like to see the number doing better, and I'd like to see more of the inventory that's sitting out there get flushed, if you will. That's the main reason I like to look at existing home sales, but it also was an indicator of confidence, and, you know, how much I hate the formal surveys of confidence. But for short-term confidence, I use the weekly retail sales. For interim confidence, I use car sales. And for long-term confidence, I tend to look at the housing market, through several different metrics, and unfortunately, this one is still kind of in the yellow or red zone.

Stipp: So, like to see that one a little bit higher, but for GDP, it's probably not going to have a huge amount of the impact here.

One other thing on existing home sales, there is going to be something happening in the next few months involving that data that could potentially surprise some investors when it comes out. What should they be expecting to see in existing home sales data? What factor could be a wild card there?

Johnson: What's happened is a couple of other people also compile housing numbers, CoreLogic being one of them and a couple of people that do mortgage things and so forth. They've all said, you know what those numbers from the National Association of Realtors have always seemed a bit high to us, and so the realtors went through and have been undergoing, I think it's about a six-month review of their data. And what's caused them to question some of the data is that they've always had to make an estimate of homes sold by the owners--that is, ones that don't go through the multiple listing service.

They've had to say, well we know what we sold--that's in our computer, you can't argue with that. But then we have to add on a factor for the ones that we don't know about. And that factor may have gotten over-exaggerated because there probably weren't any "for sale by owner" type sales for portions of the recession. So, they're going to have to restate some of the housing sale numbers down for some of the prior months in 2009 and 2010, which I think will be particularly hard hit. But that's kind of water already under the bridge in my opinion.

Stipp: Also, a lot of folks know that this is coming and know that that might happen. So, if we do see it happen it's not going to be a huge, hopefully, a huge surprise to the market?

Johnson: Right. But, I can see the headlines, already.

Stipp: Sure. The last piece of data that we've got was housing starts. What did that number look like, and did it give you any hope or confidence that we could be seeing a turnaround?

Johnson: Well, that was certainly by far the best number of the week and got some of the market-moving stuff going on earlier in the week, and those numbers were far above expectations. We ended up over 600,000 units sold. We had a 15% overall increase in housing starts. So, that was good to see. But a lot of that was driven by apartments and multi-family units. That growth was considerably higher, in the 30% range, while the single-family portion was more up in the 10% range.

Stipp: What implication does that have that we saw there is more demand for apartments, then. How do you think that relates to health of the housing market overall?

Johnson: Well, I think rents have been going up and I think that people are coming in and taking advantage of the opportunity in starting some new rental apartments.

You're hearing in certain cities that rental markets are bidding in to get a little bit tight. So, that may actually bode well for the existing home and even the new home market further down the road. It tends maybe to move just a little bit sooner, and also, if people are in apartments, they've got more flexibility to jump around, if you will.

Stipp: It at least shows that people are maybe moving out. Maybe if they had moved back in with their parents or something, now they're seeking an apartment.

Johnson: Right.

Stipp: It just shows that there is some mobility going on. So, maybe people could rent their homes, if they weren't unable to sell perhaps. And that might give them more mobility to go out and look for a new home if they've been waiting to do that until they could do something with their existing home.

Johnson: Exactly.

Stipp: Okay. So, Bob, last question then for you. So, we have seen some good numbers on pricing. It seems like it's firming up a little bit. The existing home sales disappointed, but yet we're seeing housing starts that looked a little bit better. When you put it altogether, what can you say about the housing market, if anything, broadly?

Johnson: I think, we're still kind of limping along. I don't think we're going to come flying out of this situation like we'd all hoped that maybe we would. Housing has driven almost every other recovery we've had, and we've certainly not seeing much on that front. In fact, we're still seeing it subtracting from GDP, even in some of more recent quarters of the recovery. So, we clearly haven't seen what I'd like to see. But with the pricing and some of the new home starts getting a little bit better, I'm feeling a tad better about where we are and that maybe 2012 will get those starts and existing home sales moving on.

Again, my take has always been that just based on population growth, we need 1 million to 1.5 million homes a year. I told you the number in the starts was in the 600,000s. So, we have got dramatic room to improve on that front. I caution everybody who always says, what about all foreclosure? Those people, if they get thrown out of their home or move out of their home, they have to move somewhere, and we're not creating any new supply.

The only reason things are staying so glum is that people who have been afraid to move out of their parents' home or they're doing stay-at-home divorces, if you will ... have really shrunk the new housing demand, but you can't fight that forever.

Stipp: So it's interesting that you say that, because, I think, just a few months, there was a lot of bearishness around housing that we might see another big drop, but you're saying, this is probably a remote possibility, given recent data?

Johnson: I think it's a remote possibility that we see another big decline. It seems to me that the affordability is at levels it's never been at. I'd certainly like to see employment a little bit better; that's what really is going to get the housing market moving. It's a little bit chicken and egg because some of the biggest job losses have been in people constructing houses. So, it's a little bit chicken and egg, there.

Stipp: All right, Bob. Well. Thanks for the tour of the recent housing data and for joining me today.

Johnson: Thank you.

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