NAR’s forward-looking pending home sales index slipped 4.4 percent in December, signaling a loss of momentum in contract signings, but the easing seems to be more about inventory shortages than weak demand, NAR Chief Economist Lawrence Yun says.
“Clearly to me the slowdown is due to the lack of inventory, the lack of supply,” Yun says, “because one can see the month’s supply situation variation. The month’s supply is the lowest in the West region and also it is in the West region that we see the highest price increase, clearly implying that it is a supply constraint slowdown rather than [a slowdown from] demand decelerating.”
Outside the West, the regions actually saw gains in contract signings in December, suggesting that the tight inventory in the West is a big enough issue that it’s dragging down the numbers measurably on a national basis.
Yun says builders are ramping up starts but they need to ramp up quite a bit more to make a dent in the inventory situation, because starts have been way down from what’s needed for several years now. So, builders are starting from a considerable deficit and their increased pace isn’t near enough what’s needed to make up for that lost ground.
NAR released its December 2012 pending home sales index today, January 28. The index is considered a leading indicator because it points to the pace of expected closings a month or two down the road.
If any more evidence is needed that home sales are recovering we have it in NAR’s latest pending home sales data, for November, which were released last week. The index is up for the third straight month and it’s reached its highest level, 104.6, in more than two years, when households were rushing to buy before the home buyer tax credit expired.
NAR Chief Economist Lawrence Yun says the strengthening housing market is based entirely on improving fundamentals: continuing economic growth (albeit at a moderate pace), improving jobs picture (again, no where near where we’d like it to be, but heading in the right direction), improving consumer confidence as home prices strengthen, and growth in the number of new households.
What’s encouraging about the latest data is the improvement is happening despite continuing difficulties households are having obtaining financing. Think of how much better the market would be if lenders would return to the underwriting standards they had in place before the boom, when the standards were reasonable and safe rather than overly restrictive as they are now.
The big concern today is what the federal government will do. In the short term, you have the fiscal cliff looming in just another day. If lawmakers can’t forge a budget agreement, hundreds of billions of dollars in federal spending cuts and tax hikes will take effect, which Yun says could send the economy into recession because it would take a 4-percent bite out of the economy.
In the longer-term, we have some unresolved regulatory issues coming up, including the qualified mortgage (QM) and qualified residential mortgage (QRM) rules, as well as the international banking protocol known as Basel III, which could impose new capital requirements on banks. These three matters taken together are casting quite a pall over lenders. They’re concerned they’ll have to hold back more capital and meet certain minimum underwriting requirements because of these rules (none of which has been enacted yet, but they could be enacted soon). So, how the federal government actually comes out on these rules could have a big impact on the availability and affordability of mortgage financing.
As of right now, though, the market is improving on its own, thanks to the slowly improving economy. Now we just have to see if there will be any shocks in the days and months ahead.
NAR’s forward-looking pending home sales index showed a very small rise in September, just 0.3 percent, but it’s one more data point to suggest the recovery is solidly underway even if it remains modest.
The rise represents the latest in a string of about half a dozen months in which pending sales have moved in a very narrow band, and that’s really what’s most informative about the latest release: it suggests that the underlying factors in the improved market are systemic and not due to just one or two transient factors.
In an interview yesterday, NAR Chief Economist Lawrence Yun said he expects home sales to be 10 percent higher than in 2011 at the end of the year, which would put home sales at close to 5 million, and prices to continue rising. Right now they’re at a median $183,900 on a national basis.
Thanks to slow but steady job growth, the improved market is expected to carry into 2013. “I wish job creation could happen much faster, but nonetheless [there’s been] nearly 5 million job creation and this is supporting the housing market this year and it will continue to support it next year,” he says.
Yun also said rising rents are helping to bring new buyers into the market. He cited NAR’s latest member survey in which 60 percent say they see rents rising in their markets, compared to 10 percent who see rents falling. That rental rate outlook should convert some renters into buyers in the coming months. “It’s a rising trend, and when the rents rise, that means that some of the renters will want to become owners, so there will be additional stimulus for the home sales,” he says.
In the 2-minute video above, Yun talks about the latest pending sales figures. Pending sales are based on contract signings, not transaction closings, so they’re considered a leading indicator—that is, they point to where sales are expected to be 2-3 months down the road.
The Wall Street Journal today says the housing market nationally is bottoming out, the essential first step before it can start rising again. But the Journal is a little pessimistic that the upward bounce is coming any time soon. It says the market could drag along the bottom for a while, thanks in part to the uncertainty over how banks’ “shadow inventory” will be handled over the next few years and the continuing trouble borrowers are facing getting financing.
“There are more signs than there were a year ago that housing isn’t getting any worse,” the paper says, “and that it may slowly be getting better.”
But how slowly? The Journal says prices nationally are still falling. It cites February data from CoreLogic that prices fell 2 percent from a year earlier. Recent Case-Shiller data also show prices continuing to fall. NAR data, which draws directly from MLS data, differs from these two data sets. In February it showed prices with a slight, 0.3 percent gain, and in March with a more substantial 2.5 percent gain. These figures take into account distressed sales, which comprise about a third of all existing-home sales today and have a dampening effect on prices, so price gains would be higher if these sales were taken out of the data.
Time will tell which data set is more accurate. Several months will need to go by before we can look back and see what’s actually happening today with prices, but in any case, NAR Chief Economist Lawrence Yun is optimistic about what the market will look like later this year.
First, distressed homes are getting snapped up by bargain hunters, both investors and owner -occupants. That softens the impact that banks’ shadow inventory will have on markets in the months ahead as more properties are released. Second, inventory levels are down to six months, which historically has been the level at which prices stabilize.
To be sure, inventories have been down to six months only for a short amount of time, so it’s too soon to say there’s a trend here. But if inventories stay down at this level for several more months, the stage could be set for better news on prices.
One point made by the Journal that is certainly the case is the continuing trouble borrowers are having getting loans. As the paper says, banks are maintaining tight credit standards in part because of their concerns that Fannie Mae and other secondary market entities will make them buy back any loans that go bad. So, their standards are ratcheted up, and that’s causing even creditworthy borrowers headaches.
It’s safe to say that, until the difficulty of getting financing eases back to a more normal level, even today’s brightening picture can’t be taken for granted, and the Journal’s concerns about a prolonged stay at the bottom could prove true.
NAR released its latest pending home sales index figure last week and for the second month in a row the index is up. But more than that, the index has broken 100. This is significant because the only time since the housing boom collapsed that the index has broken 100 is when the home owner tax credit was in effect. The fact that the index has returned to that level a year since the credit has been in effect means the housing market is strengthening completely on its own, without any stimulus.
NAR Chief Economist Lawrence Yun is upbeat about 2012 because in a number of areas indicators are pointing upward. Not only are home sales up but housing starts are up and home prices are stabilizing in many markets and heading up in some. In areas where they’re still down, the declines aren’t that great. More fundamentally, broader U.S. economic signs are looking positive, including the all-important jobs picture. About 100,000 job are being created a month, and that could rise to 150,000—still not a quick enough pace to get us back to where we were before the downturn but the headwinds are in the right direction.