Housing Recovery Still on Track

This week, the markets remained fixated on the fiscal cliff. Unfortunately, there was little economic news to keep minds off of the potentially painful situation.

Data on the real estate sector, the key set of economic indicators at the moment, remained bullish this week. Home price gains of 5% or more for all of 2012 are now pretty much in the bag.

Initial unemployment claims made another surprising dip, but I am always a little wary of holiday data that gets skewed by processing delays and vacations.

The Chicago PMI data for manufacturing also came in surprisingly strong, which bodes well for next week's national number and the manufacturing economy in general.

Holiday retail sales data was inconclusive and conflicting, though it looks like we will have to wait another week to know for sure. My best guess is that sales growth over the holiday period won't differ much from last year's 3% or so growth rate. However, there are other data that suggest things may have been softer. I think they are wrong, but only time will tell.

Some Fiscal Cliff Effects Could Show Up Late Next Week
There is little more I can add about the fiscal cliff, but some of the effects could show up as early as next week. New payroll tax withholdings and the 2% increase in Social Security taxes could show up on next Friday's payroll checks. In some states the following week, unemployment checks could go missing in action for those who have already been unemployed for more than 26 weeks.

I have avoided describing the blow-by-blow impact on individual groups, thinking that some last-minute deal would be worked out. I have, however, talked about overall impact by category, and reiterated some of those points in this week's video. For more information, here is a link to NBC News that summarizes the impact by income category and provides a more personalized look at going over the cliff. I really hope that by the time you are reading this article, we won't all need this link.

Home Prices Continue to Rise
I was very pleased with the Case Shiller 20 City Home Price Index reported on Wednesday. The year-over-year data (which is calculated as a three-month moving average) was up 4.3% from October to October. This now puts this metric only slightly behind the 4.7% calculated by the FHFA, and it's closing in on the 5.4% growth rate reported by  CoreLogic for the same period. 

The fact that all three metrics are moving upward by roughly similar amounts suggests that the recent price increases are not flukes. The methodology and universe for these metrics are slightly different, so we do see some divergence from time to time.

The home price growth also surprised me in that it was well above the 3.6% growth I forecast just last week. The regional variances were also smaller than I had expected, with 18 of the 20 cities reporting year-over-year increases. The usual bears focused on a 0.1% non-seasonally adjusted decline from September to October, which was far smaller than I had been anticipating. Seasonally adjusted month-to-month prices grew 0.7% (prices usually go down in the fall), not too shabby at all. Given that prices were still declining last November and December (2011), it appears that with no price increases at all in the last two months of 2012, prices will increase just over 5% for the full year.

Increased Pending Home Sales Bode Well for Future Existing Home Sales
Pending home sales increased 1.7% between October and November and 9.8% on a year-over-year basis. The three-month average, year-over-year data grew at 13.1%, only modestly off of my estimate of 13.6%. Pending home sales are a decent leading indicator of the more important existing home sales report. This is especially true given that more homes are now making it through the closing process, as I pointed out last week. The overall pending home sale index is now higher than at any point since 2007 (with the exception of one month of 2010 when buyers rushed to beat the deadline for a homebuyers' credit). The index has now been up for 19 consecutive months. Although one must always consider the source, the National Association of Realtors is projecting that existing home sales will be up 8%-9% in 2013 and that median home prices will be up 4% (following a projected 7% increase for 2012).

New Home Sales Rise Again
At a 377,000 annualized rate, new home sales increased 4.4% from October to November and 15% on a year-over-year basis. On a year-over-year, three-month moving average basis, unit sales were up 17.5%. After a big sprint up earlier in the year, volumes have slowed a bit. The causes include decreased inventories and a greater interest in builders constructing fewer but more expensive homes. Prices of the average home sold have been up at double-digit rates for three of the last four months. On a three-month moving-average basis, prices are up 13.4%. While part of that is due to increased prices for the very same home, the majority of that increase is due to a mix shift to more expensive homes. Combining 17.5% unit volume growth with increased average prices of 13.4%, the dollar value of new home transactions is up more than 30%.

The Housing Market Was Stronger Than Expected in 2012
Housing market forecasts for 2012 ranged from more doom and gloom to minuscule improvements. Instead, we got a year of considerable advancement. Across regional markets, there was relatively uniform improvement, though some hard-hit markets are now doing particularly well. Inventories are way down, which has led to higher prices across the board. At least in terms of units, sales of existing homes seemed to be considerably behind a lot of other metrics. The story here is that there were considerably fewer bargain-basement foreclosures available in 2012. However, there were a lot more medium- and high-priced homes sold during the year. So even though the 11.5% growth in existing homes sales looks anemic, the dollar volume of homes transacted is up a rather surprising 20% from November to November.

With inventories so low, it is now difficult to buy a home in many markets, especially on the West Coast. A lack of foreclosed properties will continue to hurt existing home sales. On the new home front, available lots for builders are becoming a problem again. The acquisition market for regional and single-market builders is heating up once more. And I understand that builders in some markets are now buying blocks of foreclosures for demolition and then filling in with brand-new homes.

There are other obstacles for builders, too. Supplies of raw building materials are drawing tighter and prices are up, in some cases by a lot. There are also continued stories of a shortage of construction workers. We believe that a shortage of workers (and an unwillingness to expand workforces dramatically) has stretched out the time it takes to construct a new home.

Given these supply constraints, I would expect a lot of volume-related housing metrics to slow down in 2013. There is no need to panic. I am relatively sure at some point that we will see headlines proclaiming the housing rebound is over, based on lower or flat unit volumes. However, these same constraints are positive news for prices. And those higher prices are likely to bring more supply, eventually. Near-record affordability, very low interest rates, and higher consumer incomes should also help real estate markets in 2013.

Don't Be Confused by Conflicting Holiday Retail Sales Data
In this week's video I highlighted some of the varying retail sales growth figures from a variety of sources. We have seen numbers as low as 0.7% to well over 4% for the year-over-year growth in holiday sales.

The numbers that I know and understand well are those from the International Council of Shopping Centers. The weekly averages show that the season turned out a tad slower than last year, but not by a lot. This year's data, so far, have been handicapped by the fact that the last two days before Christmas were included in last year's comparison data and not in this year's data. And with the ever-increasing use of gift cards in the days following the holidays, we shouldn't be counting this season as over yet.

When all is said and done, I expect holiday sales to be up at least 3%, about the same as last year. Also, in the data series below, note that most of the weakness compared with last year occurred early in the holiday period. That data was strongly affected by Hurricane Sandy. Given the storm, and the worries about the fiscal cliff and some bad weather right at the end, I think this year's showing was acceptable, though not outstanding. With incomes up, home prices up, and gas prices down, I would be really surprised if the final data turns as bleak as that 0.7% increase projected by MasterCard. It just doesn't add up.

Three Key Data Points Next Week: ISM Manufacturing, Motor Vehicle Sales, and Employment
Last months' Purchasing Manager Index for November was a disappointment at 49.5. However, I am optimistic based on better auto production that this key manufacturing ratio will move above 50 again to 51 or so. I base my optimism on a better-than-expected report from the Chicago region this Friday. Although what happens to the manufacturing sector is not a big deal for the economy at the moment, it still tends to move markets. Investors never seem to forget that this was just about the only indicator that called the bottom of the last recession. However, it is an exceptionally erratic indicator of market tops.

Auto Sales to Drop Back to More Normal Levels
Auto sales knocked the cover off the ball last month, hitting its annual high of 15.5 million annualized units. Of course, that was largely a result of Hurricane-Sandy-induced buying. That's why I am thinking that this month's number will fall in the 15.0 million-15.3 million range. I suspect that fleet sales and luxury car sales will lead the way in December.

Employment Growth Likely to Show Some Weakness
The employment report is always one that is notoriously hard to forecast. Headwinds include the Hostess closure (18,000 jobs) and earlier-than-normal retail sales hiring this year. Retail hiring was unusually strong in November.

Last month's job additions were 146,000, and the 12-month average is around 165,000. Given the headwinds, I think the report might be hard-pressed to show growth of much more than 125,000.  However, the consensus is for a relatively optimistic 140,000 new employees. I suppose we could get lucky if the missing construction jobs finally show up in the December report, but I am not holding my breath.