2013 in Review

A year ago, I wrote about the excitement of a housing rebound that finally seemed to have legs, with all relevant indices showing positive growth.  Today, despite numerous economic and political headwinds that have been regularly buffeting the demand for new homes, I think it’s safe to say that the rebound is here to stay, but is transitioning into the next stage which will likely face steeper interest rates, tighter lending standards and higher building costs.

For the month of August 2013, seasonally adjusted annual new home sales rose by 7.9 percent over July totals to 421,000 units, and are up by 12.6 percent year-over-year.  At the same time, however, median sales prices rose by just 0.55 percent over the last year, while inventory rose from 4.6 to 5.0 months.  While the relatively tight inventory levels can be traced mostly to negative equity, fewer distressed sales and a depressed supply of new construction, the combination of higher interest rates and slumping consumer confidence is certainly contributing to a potential but temporary pull-back in activity.

According to the most recent outlook from Freddie Mac, we should expect the housing recovery to take some time, especially since the economy won’t be running at its full potential until after 2015.  Nonetheless, their chief economist notes that the market should continue to absorb these economic shocks and improve further in 2014, with 1.15 million new housing units added to the existing stock.

Builder confidence, which had climbed to 58 last August on the NAHB Housing Market Index (HMI), has since settled back to 54.  This recent dip has been largely attributed to the cost and availability of labor and buildable lots, as well as ongoing political uncertainty in Washington.  Still, according to the newly minted NAHB/First American Leading Market Index (LMI), 52 of the 350 metro areas tracked regularly have returned to or exceeded pre-recessionary levels of activity.  With a score of .85 in October based on current permits, prices and employment data, the national housing market is thus operating at 85 percent of normal capacity.

That improvement is also due to builders continuing to pull more permits and start more homes.  In August 2013, they pulled a seasonally adjusted annual total of 918,000 permits, which was down 3.8 percent from July but 11 percent higher than the same month of 2012.  Housing starts totaled 891,000 units per year in August, for an increase of just 0.9 percent since July but up by 19 percent over the last year.

For builders, however, there is definitely a concern about future profit margins, mostly due to these higher costs for materials, labor and especially land.  The Dow Jones U.S. Home Construction Index, which tracks major public builders, has also taken notice, declining by over 20 percent since last peaking at in May 2013.  Nonetheless, there is still enough confidence in the rebound for Toll Bros. to recently snap up California’s Shapell Industries and its 5,200 lots for $1.6 billion as well as for TRI Pointe Homes’ $2.7 billion merger with Weyerhauser’s own homebuilding business, which gives it access to 27,000 lots sold under brands including Pardee, Winchester and Trendmaker Homes.

After hitting the highest level in nearly four years during August, existing home sales fell for the second consecutive month in October to an annual rate of 5.12 million units. Even with this pullback, these sales have remained above year-ago levels for the last 28 months, with monthly sales totals up by 6.0 percent over October 2012.  With just 14 percent of distressed sales in the mix, sales prices rose for the 11^th consecutive month to $199,500, up 12.8 percent over the past year.
  

However, one important consequence of these rising prices has been lower affordability, which has fallen to a five-year low as home price gains have easily outpaced income growth.  According to the NAHB/Wells Fargo Housing Opportunity Index (HOI), 64.5 percent of potential homebuyers nationwide could afford the median-priced home during the third quarter of 2013 -- up substantially from the last trough of 40.4 noted in the same quarter of 2006 but down 13 percentage points from the first quarter of 2012.

Still, for the 49 percent of buyers paying cash in September – at least according to RealtyTrac – rising interest rates aren’t relevant, especially for the institutional funds which have invested up to $20 billion for over 200,000 homes added to the nation’s rental stock.  What remains to be seen is what happens when the low-hanging fruit has been picked off and these deals no longer pencil.

Indeed, may we continue to live in interesting times.

Towards Reforming Housing Market Research at PCBC 2011

For this year's PCBC in San Francisco, I'll be participating on two different panels discussing how and why traditional housing market research during the boom years (including consultants who were all too willing to write fiction to keep builder & developer clients happy) failed to fully recognize the financial cataclysm that was to come. Here's a description of the panel, which will take place over two days but focus on different issues:

The building industry largely missed the signs of the housing bubble, ignored its profound consequences, and adjusted too late. What went wrong? How can it be fixed? And, going forward, how can we develop a more objective and comprehensive framework of market-based due diligence? A panel of prominent economists, housing consultants, financial bloggers and market research data experts will discuss necessary reforms, the current outlook, and new tools to get a better handle about where the market is going.

I plan on turning off my censor completely for this opportunity, because by engaging in such deceptive practices, industry consultants not only tanked the housing market, but also played a minor role in destabilizing the global economy. Today, I still see those same consultants working within the industry, yet no one seems to care about the danger of history being repeated (hint: these guilty parties aren't going to warn you about their previous behavior in their marketing materials). If you choose a consultant who lies to you to get your business and then your project fails, guess who's to blame? YOU ARE!

If you're planning to attend PCBC, please join me and the following panel for what I'm sure will be a provocative discussion:

Moderator: Gerd-Ulf Krueger, Principal Economist, HousingEcon.com
Patrick Duffy, Principal, Metrointelligence
Rick Sharga, Senior Vice President, RealtyTrac, Inc.
Belinda Sward, Executive Managing Director, Strategic Solutions Alliance
Alexander Villacorta, Senior Statistician, Clear Capital

Click here to register for PCBC (prices go up after May 10th).

Foreclosures jump even over March numbers

After rising to a new high in March, homes going through various stages of foreclosure rose even higher in April, although repossessions fell by 11%. From a CNN story:

Foreclosures in April exceeded even March's blistering pace with a record 342,000 homes receiving notices of default, auction notices or undergoing bank repossessions, according to a regular industry report.

One of every 374 U.S. homes received a filing during the month, the highest monthly rate that RealtyTrac, an online marketer of foreclosed properties, has recorded in four-plus years of record keeping...

There were 63,900 bank repossessions, the last stop in the foreclosure process. More than 1.3 million homes have now been lost to foreclosure since the market meltdown began in August 2007...

Ten states accounted for 75% of all foreclosure activity, and they fell generally into two categories: one-time bubble markets and the Rust Belt.

California easily outpaced every other state with with 96,560 filings. Other hard-hit former boom states were Florida, Nevada and Arizona.

Those Rust Belts states with the most filings were Illinois, Ohio and Michigan.

Georgia, Texas and Virginia filled out the rest of the top 10 list...

Five other California metro areas ranked in the top 10: Modesto was fourth, Riverside-San Bernardino fifth, Bakersfield sixth, Vallejo seventh and Stockton eighth. Miami and Orlando rounded out the list.