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Real Housing Recovery Will Have to Wait

We could see a nice spike in the housing market as employment improves, but it likely won't happen in 2011, says Morningstar's Bob Johnson.

Jason Stipp: I'm Jason Stipp for Morningstar. We got a truckload of housing data this week; some of it was mixed. We had some home sales data, some home price data. Here with me to offer some context and some insight on those numbers is Morningstar's Bob Johnson, director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So there was a series of home data that we got this week, but before we talk about it, I just want to talk a little bit about the effect of the housing market on GDP, because we also see GDP data this week. How does housing factor into that and do we need to really focus on housing when we're thinking about GDP?

Johnson: Right now I am not terribly focused on housing in terms of my GDP forecasting--not looking at housing very much at all, because it is a relatively small amount. New homes, in particular, account for less than 1% of GDP. So it's really a small, not-move-the-needle type of number.

So that's the key thing to really keep in mind. And existing home sales don't directly affect the GDP, because like transferring a stock or a bond--it's an asset transfer. It's not new wealth being created. So, it doesn't really factor into GDP in a big way, other than maybe brokerage commissions, which is a direct impact. And the second way it affects GDP is things like furniture and things you tend to get when you buy a new home.

Stipp: When you move in you want to have a new couch and things like that. So a lot of people tend to think about housing and the economy together, though, especially because I think housing seems to be the culprit behind the big downturn that we had. So there's got to be some connection between the housing market and the economy, even if it doesn't exactly show up in GDP. How do you think about that?

Johnson: Absolutely, and by the way, I talk about it being 1% or so of GDP. Well, it's more in the 4% to 6% range typically. So, we've really fallen off the table, here. When I say it isn't really going to move the needle, it's now gotten to be such a small percentage of the economy. All we have left is upside. It had a pretty dramatic increase on the downside. It accounted for large amounts of the decrease in GDP as a matter of fact, but because we started from a much larger base.


Stipp: So digging into the numbers a little bit: we got some new home sales data, and it exceeded expectations. What do you think of that number and was it a big surprise?

Johnson: Yes, we got up towards the middle 300,000s in terms of new home sales on a seasonally adjusted annual rate basis, and that compares to expectations in the 280,000 range. So a considerable upside surprise, but there is a little thing hidden underneath the data there, and that was that California is implementing some new environmental regulations for housing that started up as-of the first of the year.

You had to put new faucet-restricting [devices] on your faucets, certain things had to happen with your carpeting that are new. And so a bunch of those regulations would have tended to raise prices. So, what happened is, there was a big rush to complete things in December, which is what we got the data for, and so that can help the data along a bit.

Stipp: So we might expect next month, perhaps, it will be a little less than some people might have expected because people bought early to get ahead of those regulations.

Johnson: Exactly.

Stipp: On the home price side, we got some Case-Shiller data, and it did show there was a year-over-year decline in home prices the way that they measure it.

Johnson: Yes.

Stipp: Is that something to really continue to be concerned about?

Johnson: Again, I am more concerned when I start to see price declines look like 5%, 10% or something like that on a year-over-year basis, and we aren't anywhere near that. I mean we're down something in the 20%-30% range overall from peak to trough, so we fell a long way, and these little wiggles of 1%, 2%, 3%, really aren't disturbing to me, unless they really turn into something bigger or add up for a large number of months. And the data seems to indicate that we may be at a turning point there.

Stipp: And you mentioned, in a lot of respects, on the housing numbers there's not much more downside because we've dropped so much. Are we still seeing any precipitous declines in these markets or what is the rate of decline looking like?

Johnson: Yeah, I think we really have slowed up remarkably, and I think some of the more forward-looking data is really kind of supportive, probably what we will see is just kind of niggling 1%-2% type of declines, not another 25% decline from here. ...

Keep in mind, now, the Case-Shiller data is a three-month average starting a couple of months ago. So that it's really pretty out-of-date data by the time we actually get to look at it, and even based on what we know, it's probably got a couple of bad months in front of it.

Now, what our housing team likes to look at is median listing prices, which are available in real-time on a weekly basis, and those numbers – the declines are definitely modulating, and we may even be looking at increases sometime next year.

Stipp: Very interesting context on that. Another piece of data that we got was on pending home sales, and there are just few things you have to keep in mind when you're looking at that data. It also was up about 2%. What should I have as context if I am looking at that 2% number? What's important for me to know?

Johnson: Well, the important thing is that existing home sales have been up, I think, five of the last six months. So we had the big housing credit expire, sales collapsed, and now we're actually kind of quietly up five of the last six months. So that's a pretty good thing to have, and we're now up to a pretty respectable level--not great--but we're not in the collapse land again either.

We had a particularly good month in pending sales last month, and now when this month's data was reported, we're still up from that. I thought maybe we might settle back a little bit, because the number the previous month was really quite good, and so to see the 2% increase in pendings was a good sign. And keep in mind, what pendings are: it's when you sign a contract to buy the house, and that turns into an existing home sale a month or two later when you get your financing and you actually go in and sign that ream of paperwork. And so pendings is a very good leading indicator of what we can look forward in housing sales going forward and looks like we're going to start off okay.

Stipp: So speaking of looking forward, what kind of expectations do you have for the housing market, given where it is right now, how far it's dropped, and what you've been seeing recently?

Johnson: Well, I think that's a very good question because we sit here and analyze little wiggles and monthly data, and I think the important thing to keep in mind is that 2011 is still going to be a difficult year for housing, I think. And the reason is, we haven't seen the breaking wide open of the employment data yet, and really the employment data has to get a little better to help out the housing market.

Banks, as you know, have tightened lending standards. They want two years of payroll stubs. They want you to have a good credit history and so forth, and if your jobs have been volatile over the last couple of years with the recession, it's difficult to qualify for those loans.

So, we need the employment to get better to really get that market going in full force. I think it'll be better this year than last year, but the issue is that unless unemployment gets better, housing is not going to get a lot better.

Stipp: So patience?

Johnson: Patience, but then 2012 will probably be a better year. If you get employment up there. Keep in mind, housing starts should be something like a 1.5 million per year based on just population growth and houses wearing out, and we're kind of down in the 500,000-600,000 range, a third of normal. So, if we can get people jobs, and if we can get moving back up again, we could have a nice spike in housing, but I don't think that's going to be 2011. I think it's going to be 2012.

Stipp: All right, Bob. Well, thanks for drawing that blueprint around the housing data and for joining me today.

Johnson: Great to be here.

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