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What a Housing Turn Means for the Economy

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar.

Several pieces of housing data point to a positive trend in that area of the market, but what does it mean for the economy? Here with me to offer his take is Morningstar's Bob Johnson, our director of economic analysis.

Bob, thanks for being here.

Bob Johnson: Great to be here.

Stipp: We did have several pieces of housing data over the last few days. I'd like to run through them and get your take on the results and what they mean for the housing market.

Let's start with builder sentiment; maybe you wouldn't key in as much on consumer sentiment, but the builder's sentiment is actually a bit more meaningful to you.

Johnson: Yes, absolutely, because the homebuilders see the traffic and unlike a lot of other sentiment [reports], [the homebuilders sentiment report] isn't how you feel, it's how much traffic has come through, how many sales you have--it's a very statistical thing. And that number has now moved up from 28 to 29. There were some fears that it would fall backward after we got through that big boom in the spring that was weather-related, but now we've actually moved up to 29, which is the highest it's been in this recovery. It's well off its lull of 11, but still below the norm of 50.

Stipp: So, there's a still a long way to go until they get back to a more normal market, but it's good to see improvement there.

We also got permits data--this is folks expecting to build in the future. This could be a leading indicator. That also looks pretty good.

Johnson: Last week we got both the permits and the starts data, and both on a year-over-year basis looked very good.

The permits, which is the biggest looking-ahead number, at 780,000 was the biggest number we had seen since 2008 on that front. So, that was probably the most bullish set of the numbers, but even the year-over-year starts were up, and we're now getting close to 40% off of the bottom. 

Some people will say, well, I think housing is about to turn. Well guess what--it has.

Stipp: So, seeing those permit data is a good sign that whatever positive things we're seeing now will be continuing, hopefully, in the future.

We also got existing home sales data, and this one looks pretty good, but it was also held back by something. What's your take on that number?

Johnson: Now most of the numbers we're going to talk about today--the new home data and whatever--most of those numbers are up in the 20%-plus range, and this metric was up 10% year-over-year, which is still a very positive trend to where it's been. But it's being held back by the lack of what I call quality inventory. There is really not a lot of homes for sale. In a lot of markets, people go [home shopping] and there is really nothing for sale.

Stipp: I know of this shadow inventory that people were worried about; it has been hanging out there for a while. But you're saying these quality homes [aren't available]; there are not enough homes. If you're going out and looking for an existing [quality] home, you can't find one. Why is that, especially given that we were worried about all these homes that were going to flood the market?

Johnson: Well, there are a few things happening. One is, in real estate it's always local. Everybody read the story this week in The Wall Street Journal about San Francisco, and how impossible it is to find housing in that market, and there are probably several markets like that where it's nearly impossible to find housing that is near major work centers with good job prospects. And then there are other markets that are out in the middle of nowhere with long drives to work. Those houses are languishing and will probably continue to languish.

Stipp: And so those homes maybe you wouldn't even necessarily consider inventory if nobody is going to even look at them anyway?

Johnson: That's right. And you know, it may sound a little funny if I say that we would have had more sales if there was more inventory, but the way you can really see that is that the median price of a home went up, and again it's not necessarily the right way to look at pricing data--we'll talk about some other numbers that are a better way to look at it--but the median home price was up over 8%. That's a really great number. Now that more relates to a mix of homes, but it speaks to the fact that there's a shortage of low- to mid-priced quality homes.

Stipp: So, eventually will this correct? If the home prices are moving up, and folks who don't need to move, and don't want to sell in a bad market, will the prices eventually get to a point where they feel like the market is healthier now--I want to move, I haven't been able to or didn't want to [before], but now I might put my house on the market, and that could maybe self-correct the inventory issues?

Johnson: I'm really hoping that it will. ... Prices cure a lot of evils, and if prices move up a little bit, the supply will come out. And by the way, one other source of supply that has stopped a little bit is some of the foreclosure activity, and some ... reports this week also showed that delinquencies on mortgages for the 30 to 60 [days overdue], and 60 to 90 [days overdue] bucket are down considerably from where they were.

So, I think the other thing that's happened is that people, because they've got more jobs, have been more current on their mortgages. And then on some of the [foreclosures] that were already in the pipeline, the banks have found that they're much better off modifying a mortgage than saying, hey, you're out of here, and foreclosing on the home, throwing it out in the market, depressing prices, and they've found out that that doesn’t work.

For a while, it seemed like [the banks] were holding back, because all of the legislation and all the other stuff, but now they have found it's in their own best interest, self-interest, to modify some of these loans--and they are.

Stipp: Some very interesting trends there on the existing home sales, certainly some good context to think about when you look at that number.

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Let's talk about new home sales; we got some data there as well. New home sales are good to see because all of the work that goes into a new home is helpful for the economy.

Johnson: That's good for GDP. New home sales are not [projects] they are just thinking about--it's actual stuff. The lumber has been ordered. The things have been done, and the home has been sold. So it's real data, and it goes into the GDP, and we all know that housing has gone from 6% to 7% of GDP to 1% to 2%, depending exactly how you measure it. So even a small tick up would be a huge contribution to the economy. So I am really pleased to see the new home sales up.

The data there was particularly good on new home sales; they were up 20% year-over-year. We remain at record-low inventory. We are 33% above the low figure that we'd reached. So for everybody that says, well maybe we are about to turn in housing--we are up 33% from the low right now. We are better than we were.

Stipp: So you mentioned inventory on new home sales as well. So if existing quality homes are hard to find, and if you are not seeing very many new homes, because that inventory is low, that means prices probably will go up if anybody's looking for a home now. We got some pricing data, too. Does that play through? Are you seeing prices increase?

Johnson: Absolutely--and there are so many different ways to look at pricing. We talk about the median price on existing homes. The median price on new homes was also up dramatically, and this week, we even saw some good numbers out of Case-Schiller, which has been the most negative set of housing price data. The way they report it, it was a 1.3% monthly increase in prices. You seasonally adjusted it, which is how I'd prefer to look at it, it was up seven-tenths of a percent. But more importantly than those high percentages, is the fact that 19 out of the 20 markets were up. This is not a narrow, it's-hot-in-San-Francisco type of deal. Every market was better.

Stipp: So broad-based increases in prices, according to that month-to-month data from Case-Schiller.

Johnson: Month-to-month. Now let's step back and look at the year-to-year data. We've got three metrics there: We've got a government metric from the Federal Housing Finance Administration, which are government-financed loans. Then you've got the Case-Schiller data, and then you've got CoreLogic, and the CoreLogic number was up 1.1% year-over-year. The government number was 1.9% on a three-month moving average basis, so it's comparable to Case-Schiller.

Case-Schiller is still down--it's down about 1.9% year-over-year--but it was ... more than 4% down. So we've come a long way, and again as we move through a couple months of the summer here, I bet even the [year-over-year] Case-Schiller number turns positive.

Stipp: As we are seeing those positive month-to-month Case-Schiller numbers, certainly in the months ahead that will help us out based on the way that they are looking at the data.

Also we had some information about pending home sales. What did that say?

Johnson: Now pending is to existing home sales like permits is to new home sales. It's an early read on that, and that number has been quite volatile lately. But it was up over 5% on a month-to-month basis, and again on a year-over-year basis, we are up about 22%. So a great number there, and that should show up in existing home sales--maybe some more people are putting their homes on the market now that prices have come up.

By the way, the realtors in their outlook--and again, you've got to remember, they are the realtors, so they are going to be a little bit more optimistic than some. But they are now thinking that maybe home prices this year will be up about 3% or so, and that maybe we'll be up 5% or 6% next year. So that will cure a lot of these underwater mortgages that everybody has been so worried about, and it will certainly take some of the appraisal bug-a-boo off some of the houses as well.

Stipp: OK, Bob, wrap this up for us. We've said that the housing downturn and all the headwinds in housing have held back employment, they have held back GDP in a lot of respects. If we see continued improvement on some of these trends, what does that mean for what we can accomplish on the GDP and employment fronts?

Johnson: Well I think the good news is, it's usually a big help, because the housing industry employs a lot of people to build a house. It's not one of the most productive sectors of the economy. And so, you start to build more homes, it requires more people.

So I think it will show up in some of the construction numbers over the next few months, and that will certainly be a positive, and it will certainly help the GDP, adding maybe a percent or two on an annualized basis over the next several reports.

So that's the good news. The bad news is, unfortunately it's going to be offset a little bit by exports and business spending.

But the good news is that housing will certainly be, positively, you heard it here first, positive to GDP this quarter.

Stipp: All right, Bob. Thanks for the context on all the housing data; it sounds like some good news to talk about for once in that sector, and thank you for being here today.

Johnson: Great.

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