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Housing Market Taps on the Door to Recovery

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar.

Despite some headlines you may have read this week, there was some positive news on the housing market. Here with me to explain the situation is Morningstar's Bob Johnson, our director of economic analysis. Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So, there are a few different key pieces of data that we got recently on housing.

Let's talk about the first one, prices. We got some housing price data this month. Case-Shiller, obviously, one of the bigger ones that came out. What did that report say?

Johnson: Well, you know what, it was a double-edged report. The front end of it said we were down eight-tenths of a percent in the 20 City Index, but that's not seasonally adjusted. When you go back and seasonally adjust it, we were up a couple of tenths. So, actually a positive piece of news that we actually did get the growth in prices that I was hoping to see. And even if you look back on the year-over-year prices, we've definitely moderated the trend on a year-over-year [basis], and we're down to something like the 3% level.

Stipp: So that headline that said we've hit a new housing low was a number that wasn't seasonally adjusted?

Johnson: Correct.  Absolutely. That's how they wrote the article, and how they wrote the press release, but if you dug behind the data, got the seasonally adjusted data and looked year-over-year, there has definitely been some improvement, and on the month-to-month, we actually had one of our first price increases.

Stipp: We got another report from the FHFA, and that also gives you some insight on the housing prices. What did that report say, and were there any differences with what you saw in Case-Shiller?

Johnson: Well, it showed not only that month-to-month there was a price increase, but they also showed that there was a year-over-year price increase. That's the first time that's happened since July of 2006, so it's dramatic that we've shifted in the positive territory on that metric. ... We're talking a large number of years, and now we've finally seen a year-over-year increase, so that was really probably the most compelling piece of price data, and it was up monthly in five of nine months on a year-over-year basis; it was up in six out of nine markets. So, it was not concentrated in North Dakota or something like that, lest anybody question.

Stipp: So I wanted to ask you a follow-up, because we all do know that different regions have different experiences. They've had different recovery rates. What are some of the regional takeaways when you look at the data on pricing? Are some markets still really struggling, and others are starting to pick up a little bit better?

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Johnson: Absolutely, the pricing seems to depend on inventory levels, and the higher the inventory level, the greater the price decline. And the markets that are still struggling: Atlanta has been struggling for a few months now, Chicago is struggling, Long Island is struggling--again both relatively high inventory levels, way above the national average. And pricing still, both on a month-over-month and year-over-year basis, down in those markets.

On the other side, you've got areas like San Francisco, Phoenix, Minneapolis, Miami that are up 2%, and they are doing better, and there you've got inventories down in the two-, three-, four-month territory, and of course six is kind of considered normal. So, these markets are really short of inventory, and when you get a shortage of inventory, prices are going up.

Stipp: There was also an article in The Wall Street Journal on Friday that said some markets are seeing evidence of bidding wars. Are we actually seeing a healthy market in some areas, where people are having to try to outbid each other for real estate?

Johnson: Yes, we certainly are, and people, to get a home, are having to bid on multiple homes. Some [homes] are going for above the asking price, and so the markets are acting a lot more healthy than they have been in some time.

Now, it's not every market and ... it has to be a quality home, but in some markets, there's a real shortage of inventory, and in those markets, we're seeing a price increase. And that's, I think, a lot of what's going on, and I think there are some great graphs in that article that show how low the inventories in some cities are--it's just impossible to even find a home.

Stipp: Then even within that, you've mentioned before, the quality inventory that's available, the kind of homes that people really want to move into, could also add to that tight situation where there aren't that many great homes, so you have to try to bid on two or three to get the one that you think you want?

Johnson: Absolutely.

Stipp: So, I think there are also some knock-on effects, you could say, from a little bit more strength and stability in housing prices. You've also mentioned that appraisals have been an issue in the past; a little bit more stability, with prices could help more appraisals go through, right?

Johnson: Absolutely. I think the housing market could survive small amounts down, but the one nice thing about actually seeing an increase is that it is going to help this appraisal factor, because a number of homes have gone under contract and then they are not appraising at what the deal was done at, and then the deal falls through, and that's weighed on the market quite a bit over the last several months. And now we have price increases, the appraisals are going to be a little bit more flexible than when you've got a market that's trending down, so that's really, really good news, and that's one of the things that's been holding back existing home sales.

Stipp: Last thing on prices, Bob, you normally think that when prices are lower, you get more demand, more people want to go out there buy, but could it be that if we see prices go up a little bit, we could actually start to see more people enter the housing market?

Johnson: Yes, I think people are thinking "Well, it's going to be cheap forever, why should I do it now?"

Now, they are getting the rent increases year-over-year, they are looking at 5%, 6%, 7%, 8%, and they're starting to see the housing prices move up, and they start reading stories like the one in The Wall Street Journal about bidding wars, people may just get off the dime here.

Stipp: Second piece of data we got, new home sales; this is one that’s important to GDP. That headline number was better than expected. What was your read on that report?

Johnson: I like that report because new home sales actually do go in the GDP number, and because each home is so expensive, it really is a decent adder to the GDP. In fact, housing in general contributed four tenths of the 2.2% growth that we saw in GDP [in the first quarter], and that's after many quarters where it had contributed just a little, or up a little, down a little. This is one of the bigger contributions we've had from residential housing, so that was really a good number to see.

Stipp: Also there was a revision to a previous report that was also good news in that report, right?

Johnson: We moved up from something like 313,000 to 353,000 for one month, so these reports are volatile. So, I like to look, like I always do, at the three-month moving average year-over-year, and there we're looking at something like up 13% in new home sales, and I mentioned DR Horton and a couple of others talking 19%, so I bet the trend is even a little bit better than what we're seeing in some of the numbers.

Stipp: And we also have a report on pending home sales. Can you talk a little bit about what you saw in that report, and are you seeing strengths there that would seem to carry through some of the themes you're seeing elsewhere in the housing market?

Johnson: Well, the numbers there were really strong, almost maybe just bordering on "too good to be true," which we always have to be a little bit careful about, but they were really good. We were up 12.8% on a year-over-year basis; that's one of the biggest jumps we've seen in a long time, and even on a sequential basis, which is never usually a good way to look at it, but we were up 4.1%. So that was really a very healthy number, and the trend if you look at the year-over-year, three-month moving average has improved dramatically, and so it's not just a one-month fling.

Stipp: Bob, when you're looking forward, do you see that this is something that we can sustain, do you think that's it's maybe gaining some momentum, or could we fall back again? One of the things that's been on a lot of people's minds is, this foreclosure shadow inventory that is still going to haunt us in the future. Are we facing a lot of those headwinds where we shouldn't get too excited about seeing some improvement yet?

Johnson: Well, you've always got to be careful, and I've had my hands burned a couple of times thinking that we would finally turn the corner completely in housing, and we seem to get a few months of good numbers, and then something is a little soft, and then we got a couple of other numbers, and I think there is some worry about more foreclosures.

The robo-signing scandal last year really did slow down the number of foreclosures, and there was a big fear that ... when they got settled, that there was going to be this flood--and it's now been settled a couple of months--so we'd have this flood of foreclosures hitting the market that was going to depress prices and do all sorts of nasty things.

Well, lo and behold, the settlement comes along, and I've talked to Jim Ryan who follows some of the mortgage insurers for Morningstar, and he said that the anecdotal evidence that they are all hearing right now is that the banks are actually a little bit more flexible now on modifications and on doing short sales, and they are kind of doing everything in their power to avoid something moving into the end of the foreclosure process, because if it's a foreclosure, the loss that they take is huge. If they have a short sale, they still have a loss, but maybe it's not quite as much. And if you do a modification, they may not have a loss at all. And so the banks, this fear that they would dump everything, it seems it's turned into a non-event so far. Now, we can't say we're cured, but it certainly hasn't been the flood that the world had expected.

Stipp: Well, the housing market has been in a long, long recovery process, but these few good signs that we are seeing recently are certainly positive and some reason perhaps for optimism. Thanks for joining me, Bob.

Johnson: Great to be here.

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