Posts Tagged ‘Wells Fargo’
Latest from S&P Case Shiller
The always excellent S&P Case Shiller report came out this morning, followed by a teleconference with Professors Carl Case and Bob Shiller. First, some highlights from the report, then some blurbs from the teleconference.
The average home prices in the U.S. are hovering around record lows as measured from their peaks in December, 2006, and have been bounding around 2003 prices for about 3 years. Overall in 2011, prices were down about 4% nationwide, and in the 20 leading cities in the U.S., the yearly price trends ranged from a low of -12.8% in Atlanta to a high (if you can call it that) of 0.5% in (amazingly enough) Detroit, which was the only major city to record positive numbers last year. In December, only Phoenix and Miami were on up-tics.
One thing struck me as a bit foreboding in the report. While housing doesn’t behave like securitized assets, housing markets are, in fact, influenced by many of the same forces. Historically, one of the big differences was that house prices were always believed to trend positively in the long run, so “bear” markets didn’t really exist in housing. (More on that in a minute). With that in mind, though, w-a-a-y back in my Wall Street days (a LONG time ago!), technical traders — as they were known back then — would have recognized the pricing behavior over the past few quarters as a “head-and-shoulders” pattern. It was the mark of a stock price that kept trying to burst through a resistance level, but couldn’t sustain the momentum. After three such tries, it would collapse due to lack of buyers. I look at the house price performance, and… well… one has to wonder…
As for the teleconference, the catch-phrase was “nervous but hopeful”. There was much ado about recent positive news from the NAHB/Wells Fargo Housing Market Index (refer to my comments about this on February 15 by clicking here.) The HMI tracks buyer interest, among other things, but the folks at S&P C-S were a bit cautious, noting that sales data doesn’t seem to be responding yet.
There are important macro-economic implications for all of this. The housing market is the primary tool for the FED to exert economic pressure via interest rates. Historically (and C-S goes back 60 or so years for this), housing starts in America hover around 1 million to 1.5 million per year. If the economy gets overheated, then interest rates can be allowed to rise, and this number would drop BRIEFLY to around 800,000, then bounce back up. However, housing starts have now hovered below 700,000/year every month for the past 40 months, with little let-up in sight.
Existing home sales are, in fact, trending up a bit, but part of this comes from the fact that in California and Florida, two of the hardest-hit states, we find fully 1/3 of the entire nation’s aggregate home values. The demographics in these two states are very different from the rest of the nation — mainly older homeowners who can afford now to trade up.
An additional concern comes from the Census Bureau. Note that for most of recent history, household formation in the U.S. rose from 1 million to 1.5 million per year (note the parallel to housing starts?). However, from March, 2010, to March, 2011, households actually SHRANK. Fortunately, this number seems to be correcting itself, and about 2 million new households were formed between March, 2011, and the end of the year. C-S note that this is a VERY “noisy” number and subject to correction. However, the arrows may be pointed in the right direction again.
Pricing still reflects the huge shadow inventory, but NAR reports that the actual “For Sale” inventory is around normal levels again (about a 6-month supply). So, what’s holding the housing market back? Getting a mortgage is very difficult today without perfect credit — the private mortgage insurance market has completely disappeared. Unemployment is still a problem, and particularly the contagious fear that permeates the populus. Finally, some economists fear that there may actually be a permanent shift in the U.S. market attitude toward housing. Historically, Americans thought that home prices would continuously rise, and hence a home investment was a secure store of value. That attitude may have permanently been damaged.
“Nervous, but hopeful”
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Housing News
I was just at a luncheon (sponsored by the local chapter of the Appraisal Institute) on apartments. One of the speakers noted that a real problem in doing adequate analysis was getting a handle on the single-family housing market — the data simply stinks due to the foreclosure mess, the number of homes being turned into rentals, etc. Thus, as we try to ALSO project the future of the homebuilding industry (really down for the count the last few years), that same dirty-data problem is a real issue.
That aside, the National Association of Homebuilders released a report today noting that the NAHB/Wells Fargo Housing Market Index rose in February for the fifth consecutive month. As I discussed back in November (click here for a link) this index attempt to project home sales based on model home traffic, customer inquiries, and such. Even though the over all stock market was down today, this news sent homebuilder prices higher — indeed, Beazer Homes (BZH) rose by 3.1%, albeit to just over $3/share.
NAHB’s Chief Economist David Crowe said, “this is the longest period of sustained improvement we have seen in the HMI since 2007.” Great news for homebuilders — we hope it stays this way. For a full copy of the article, on Fox Business News, click here.
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Musings about the real estate market — part 1
When we say the “real estate market” we’re really talking about four distinct but somewhat inter-related components: housing sales (and values), housing finance, commercial real estate (starts, occupancy, etc.), and commercial finance. Each of these components has plenty of sub-groupings. For example, commercial apartment development is going well, although commercial apartment finance still has some problems. Housing development finance is on life support. Many aspects of commercial development (e.g. – hotels) are moribund.
I’ll start today with the most significant problem in the housing sector — the one which may take the longest to fix — and that’s housing starts. The market is worse than it’s been since we’ve been tracking data (40+ years) and certainly the worst in my experience. The attached graphic comes from the National Association of Homebuilders, and shows their tracking of both housing starts as well as the NAHB/Wells Fargo Housing Market Index (HMI).
The HMI is based on a survey of current new home sales, prospective sales in the next six months, and “traffic” of prospective buyers (seasonally adjusted). While the two graphs seem to track one another, as you can see, the HMI is a bit of a leading indicator of the direction of housing starts. On a historic basis, this makes sense, since homebuilders will “start” houses they think will be sold six months from now, and they will heuristically base that on traffic from prospective buyers. (Back when I was in the game, we talked about a “qualified buying unit” being a prospective buyer or housing unit — such as a family — who actually had the capacity to buy a home and were actively in the market for a new home.)
As you can see, back during a period of relative housing stability (1985 – 2005), housing starts generally cycled between 1 million and 1.4 millin per year. With the bubble in home ownership rates, starts got up to 1.8 million for a short period then collapsed. More interestingly is the period between 1989 and 1993, when home starts dipped to about 600,000 per year, then rapidly bounced back to a healthy level. That was a period marked by real problems with acquisition, development and construction (ADC) loans, but the underlying demand and value equations still held firm. Thus, when the market cleared (when demand sapped up any supply overhang), the homebuilding community was ready to go back to work.
Today, it’s VERY different. ADC lending is still nearly non-existent (compared to a half-decade ago). The decline in values means that in many markets, it’s difficult to build a home for less than the selling prices. Further, the permanent lending market is also problematic. A big chunk of homebuilding is the “move-up” market, with a secondary chunk in the vacation or second-home market. Down payments for “move-ups” and second-homes traditionally come from equity in existing homes. However, a substantial proportion of homes in America have no net-equity. Reports talk about the high percentage of homes which are “under water” (that is, the value is less than the mortgage. However, for a home to have positive “net equity”, the value needs to exceed both the mortgage as well as anticipated selling costs. A handy rule-of-thumb in many markets is that a home needs to be valued around 110% of the mortgage for a seller just to break even on a sale. Worse, for there to be sufficient equity to “move up”, the home needs to be valued more like 120% to 130% of the mortgage. That simply doesn’t exist in most of America right now — trillions of dollars in paper equity disappeared over the past few years.
Additionally, there is a huge overhang in shadow inventory. As I noted in a recent blog post, Americans are currently buying under 5 million homes per year (new plus re-sale) and in a healthy market, the inventory for sale is about a six-month supply. However, the shadow inventory alone is close to 6 million right now (and that doesn’t include “regular” homes on the market). Thus, we’re looking at a couple of years of absorption just to get the market back to some level of stability. Even THAT presumes that the home ownership rate will stabilize right where it is (it’s been falling precipitously for several years). Bottom line, I wouldn’t be betting on home construction any time in the near future.
This is important for several reasons. First, home construction is a very big chunk of the economy. When homes aren’t getting built, lots of carpenters, plumbers, electricians, materials suppliers, real estate agents, bulldozer operators, bricklayers, and such don’t have work. Second, these are skills which are being lost to the economy. Further, if America is going to get the employment picture fixed, these people have to get back to work.
Good news — such as it is — is that the HMI is trending upward, ever so slightly. It’s currently standing at 20, up from a bottom below 10 about 3 years ago (and a near-term bottom of about 15 earlier this year). It needs to bounce all the way back up in the 50 range if the leading-indicator relationship holds true for it to point toward a healthy housing market. It actually went that far in the 1991 – 1993, range, when it bounced from 20 to 70 in about 3 years. However, that was a market with pent-up demand, good values, and a healthier lending climate.
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Phily Fed — Econ Forecast
One of my favorite economic touchstones is the quarterly survey of professional economists by the Philadelphia Federal Reserve Bank. Forty-four economists are surveyed, including such notables as Mark Zandi from Moodys, John Silvia from Wells Fargo, and Neal Soss from Credit Suisse. The focus is on “practicing” economists rather than “academics”, and as such gives a great snapshot of what decision makers at major corporations are thinking.
The Phily Fed then takes a synopsis — both a mean and a distribution — of their collective thinking in several key areas, such as Real GDP growth, unemployment, monthly payroll growth, and inflation. The interesting factors include both the current thinking, the CHANGE in current thinking (from the previous projections) and the probability distribution.
Current thinking about GDP growth is a bit less optimistic than it was before. As noted in the graph below (reproduced from the Phily Fed’s report), prior consensus thinking put GDP growth in the 3.0% to 3.9% range, while the current consensus mid-point is between 2.0% and 2.9%. Good news — hardly anyone projects negative GDP growth for this year. As we get into out-years (the graphics are on the Phily Fed’s report), which you can download by clicking here ), the consensus is a bit blurry, but in general most economists still see GDP growth postiive and between 2% and 4%. Unfortuantely, this isn’t the best of news — for the U.S. economy to really get back on track, much stronger GDP growth is needed (solidly high 3% range and even above 4%).
Philadelphia FED GDP Projectsions 2Q 2011
Unemployment projections for 2011 are somewhat rosier. In the prior survey, the mean projection was in the range of 9.0% to 9.4%, with a significant number of economists projecting from 9.5% to 9.9%. Currently, the mean is 8.5% to 8.9%, and a signficant number project in the 8.0% to 8.4% range — a very real shift in the outlook for the nation’s economy as we head into the second half of the year. On the downside — projections for out-years (2012, 2013, and 2014) show a very slow restoration of “normality”, with mean unemployment projections above 7% in all years.
Philadelphia FED Unemployment Projections 2Q 2011
One piece of good news — and this may be the FED patting itself on the back a bit — is that its inflation projections have been quite accurate over the years, and they continue to forecast exceptionally low CPI changes over the next ten years. While the median forecast is up slightly from last quarter (2.4% up from 2.3%), this continues to be great news for consumers and bond-holders. Notably, as you can see from the graphic, there is a fair degree of agreement among economists surveyed — the interquartile range is less than a percentage-point.
Philadelphia FED Ten-Year Inflation Projections as of 2Q 2011
From a small northwestern observatory... 