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Housing Market Continues String of Improvements

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar. We got some housing data this week that seemed to suggest we're building a good foundation for a housing recovery that we hope to see.

Joining me with the details is Morningstar's director of economic analysis, Bob Johnson.

Bob, thanks for joining me.

Bob Johnson: Nice to be here.

Stipp: We got three pieces of housing data this week; the first one was new home sales. We saw some pretty good year-over-year and sequential growth in new home sales. What did that report say to you?

Johnson: There is a lot of data in the new home sales report, but the good news is that we did better than expected; we had some revisions upward in the prior month, and we're now operating at about the 343,000 level. So, that's a much better number than we had been seeing in the past, where we've been under 300,000 for some time.

We're up on a year-over-year basis--which you know is the way I like to look at the numbers--we're up about 10% on a year-over-year basis in terms of single-family new-home sales. So, that's a great number. And even sequentially, we were up 3.3%. So, a nice surface gain in the number of units sold. Still well below what we'd what we'd consider normal, but to say that we're 10% above a year ago is a pretty big deal.

Stipp: So, March of last year, was that a particularly tough month for housing? Would you called it maybe an easy comp for this March to see some improvement?

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Johnson: You know I think last spring, between weather and a couple of other things, we had a pretty tough year last year. So, certainly that makes the numbers a little bit harder, but then you can take some solace by looking [at the sequential data] ... the month-to-month number was still pretty good at 3.3%. In fact, that annualizes into a higher number than the 10%, but I won't do that.

Stipp: What about regional trends? Did you see any pockets of strength or any areas that are still really struggling with new home sales?

Johnson: Across the board, we were pretty strong. We would be really afraid if the Midwest was the strongest or the Northeast because of some of the weather-related things, but really the strength was pretty broad-based, with the one exception of maybe the Deep South was kind of single-digit growth while the rest of them were low, I mean very low, double-digit growth. So, the South probably did hold the number back a little bit.

Stipp: What did you see on pricing? Are prices firming up for housing?

Johnson: Absolutely, we were up in the new-home sales prices, which is good news.

Stipp: And inventories? This is something you have to watch. If there is a lot of inventory out there, that's a headwind for sales. What did the inventory number look like?

Johnson: Record low, and the best way to look at that is to say, what is the inventory compared to the number of sales that we made. And that number right now is at 5.1 months of supply. That's the lowest number that we've seen since they've been keeping those records. And I am a broken record on that, because I keep saying that every month, but it is a record low number. To give you some idea, something like 144,000 homes, or something like that, for the whole country that are available if somebody said, I need a new home.

Stipp: 144,000 or 145,000 new homes--that's all the inventory you have available nationwide?

Johnson: Right, if you want a brand-new house.

Stipp: And how does that compare to maybe 2010?

Johnson: Well, if you look back to that level, and ... that was already way down from the peak ... but we were at 233,000 units, so we've really come back in, and now sales are higher

Stipp: So, that inventory headwind really is starting to abate now.

You get some other detailed data about the pipeline of new housing, where those new houses are [in the construction process], and where [in that pipeline] people are purchasing them. That had some interesting insights this month?

Johnson: I usually kind of gloss over this report just a little bit because it's very complicated, because it includes all houses that are sold, whether it's bought sight unseen. Somebody says, I have got a lot and I want to do this, or he goes to a site and says he wants a house or whether he goes to a new development and sees the house kind of halfway underway, and looks at the model on the corner, or whether he buys a thing that's completely done and built-out and he's got no further choices.

And what's interesting in this report is that about 30% of the people bought the homes even before they were started, and a year ago that number was 20%.

So ... what that indicates, people buying homes kind of sight unseen, is that there is a little bit more pressure on the market, that people are more willing to take a little bit more risk.

Stipp: And also more confident to make a big-ticket purchase like that, on a sight-unseen basis, it shows that they are feeling a little bit pressured to go ahead and make that move and buy that new home.

Johnson: Exactly.

Stipp: We also got existing home sales data; this was also better than expected and saw some good growth. What kind of growth rates did we see there?

Johnson: Well, again on a year-over-year basis, we were up about 10%; we were at about 4.62 million units, so that was a very good number, and we were also up sequentially on that number, again about 3.4%. So good numbers either way you’d cut the data.

Stipp: Very similar trends of the new homes sales, correct?

Johnson: Exactly.

Stipp: What do we see on inventories on the existing home sales?

Johnson: Those ticked up a little bit, as they usually do seasonally, and it is hard to get those fully seasonally adjusted the correct way, but we were up a little bit, and we were up a little bit in terms of month of supply. We were at about 6.5 months worth of supply--normal is around 6. So we are right in the normal level again, and we are down from a year ago in terms of inventories. Last year at the same time, we were at about nine months of supply on the marketplace. And now, as I said, we are at about 6.5...

Stipp: So cut by almost one-third; that’s pretty good.

So this would indicate maybe that in some areas we are seeing a shortage of supply? Is there any tightness in any parts of the housing market across the nation?

Johnson: We’ve talked about North Dakota many times--not that it’s going to move the needle--but that’s certainly a market where things are tight because of the oil process up there.

Miami has been tight for some time. San Francisco, even Phoenix (one of the sand states) the numbers are tight as well. So, you're talking two or three months of supply; it's really a seller’s market.

Stipp: So, even much tighter than what you are seeing on the national average. What about pricing on existing home sales? What was the trend there? Are those firming up like new home sale prices?

Johnson: Again, you've got to be very careful with the number. With that caveat, let me just say it--it was up 10%, and part of that reason is the so-called mix issue. This doesn’t take the same houses every time, it says, what actually sold this month. And if you happen to sell more $1 million homes than $100,000 homes, it probably is indicative of a stronger market, but it doesn’t mean that the average house has really gone up 10%; it just means, the mix has shifted a little bit.

You can never really tell what's what, which is why I don't like to use this report for pricing. But it's a great piece of confirmation data that the market is stronger, that the prices are up here as well.

Stipp: So, when you look at that data point, while volatile, in the context of other data that we got, it tends to give you a clearer picture of what's happening out there in some ways.

The last piece of data we got, FHFA data. This also gave you some pricing data, and what did that tell you? You said it confirmed some of the other data that we saw on prices, right?

Johnson: That's right. For the first time in some time, we had an increase in both the month-to-month and year-over-year and the three-month moving average of the data, if you will.

So the numbers there were very good. On a year-over-year basis, ... March-to-March, we were up 2.7%. And so that was a really nice increase to see. And we were up also up month-to-month and both the month-to-month and the year-over-year numbers were up in all nine regions. Now, we haven't seen that for a long, long time. That's indicative that it's not weather or it's not a special factor or a housing credit somewhere that really moved the needle on this. This is broad based.

Now, March last year was the weakest month of the year for housing prices. So, it is a little bit easier from that standpoint, but I'm still really pleased with these numbers, and they bode well for the more closely looked at Case-Shiller numbers, which are due next week, which I also expect to show a year-over-year price increase.

Stipp: So, you're really seeing a string, then, over time of small improvements in a lot of these different housing metrics?

Johnson: Again, weather helped. We get some good months to pick from here in doing some of our comparisons. So, the numbers probably look just a little bit better than they are. So, I would tell you that I think we're moving in the right direction here, and again like so much I say about the economy, we're not booming, we're not busting. When the numbers look too good to be true, they probably are, and there is probably an explanation. And I think part of it is that last year was so weak, but still it's a powerful trend.

Stipp: So, last question for you, then: What do you make of this housing data, which says something about sentiment, in the face of the international headlines that we've seen and a souring of the market sentiment over the last few weeks. What does it say that people are still going out and buying houses in this kind of environment?

Johnson: Somebody might say, well those [housing numbers] are maybe from a month or two ago, so maybe they don't really apply to now, but I can also look at what they call listing prices on existing homes, and those--even in the face of the last few weeks--continue to move in an upward direction. I think the strength continues.

I think people are burned out about hearing about Europe on a consumer level. I think they've heard for the last year that Europe is going to fall under the drink again, and I think people--individuals anyway--are not running scared. They're just saying, "You know, I've got to live my life. I'm not sitting [waiting to see] what happens in Greece." I don’t think people are basing their housing decisions on that. Businesses are making decisions based on some problems in Europe; that's why business spending has been a little bit weak, and we'll see more as the durable goods orders and other numbers come out. But the retail sales have been great, and also driving some of the optimism in buying houses is that gasoline prices are much more attractive, and the whole inflation front is a lot better than it was.

Stipp: So it sounds like we're building a good foundation hopefully for continued improvement in the housing market. Some good signs, I think, for the U.S. economy in general. Thanks for joining me with all the insights again this week, Bob.

Johnson: Great to be here.

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