Housing and Real Estate – Easy Pod (January 8, 2013)
Housing and real estate were at the center of the most recent financial crisis, so it should be obvious why it is an important part of our economy …
For a “Quick ‘n Easy” read, just review the labeled white boxes, then skip to my “Easy Take” summary at the end. You can review any charts/graphs afterward. I want to make sure no one is intimidated by the length of my posts, even though I’m trying to making them easy …
NOTE: You may be reading an outdated analysis. Please see my latest Housing and Real Estate Easy Pod for more info.
I’m continuing with a feature called “Easy Pod” – a collection of indicators that help portray the current status of something. In this post, that something is housing and real estate. Let’s first review a few key concepts that are important to know about housing and real estate: (you can skip to below the first horizontal line if you’ve read this Easy Pod in the past)
- There are two basic kinds of real estate, residential and non-residential. Residential refers to places where people live. Non-residential includes things like businesses, office buildings or warehouses.
- For residential real estate (this is what we’ll refer to as “housing”) there are new homes and existing homes. The difference should be fairly obvious. New homes are looking for their first owner, while existing homes already have an owner.
- “Inventory” is how many of something you have available to sell. When we talk about the current inventory of new homes, we are talking about how many new homes are available to be sold. When inventory is high, that makes it more likely that prices will be lower. Remember, it’s the “supply and demand” basics here. If you have too much of something, people will pay less for it. The way we try to measure inventory in housing is by comparing how many unsold homes there are versus how fast homes are selling. That’s why you’ll see things like “8 months inventory.” It means that, at the current rate of home sales, it would take 8 months to get rid of the extra inventory.
- Sales levels and prices are definitely related to one another. If you see home sales slowing down, it means that homes are not in as much demand, so chances are good that prices will go down. You have to look at the combination of housing prices, sales and inventory to get a good feel for what’s going on.
There are a number of indicators that describe what’s going on in housing and real estate, and there are even some people who combine these indicators into one number (an index) to give a summary. In this “Easy Pod” I will show you indicators and indices that I like to follow. Check back regularly for updates.
Special note: You’ll notice a bunch of my charts shown below come from Calculated Risk. This is a must-see for information on the economy. I visit this site multiple times every day. Bill McBride does a fantastic job of analyzing the most important economic data and events, putting them in context.
Last Easy Pod: September 4, 2012
|Indicator (Click for details – only works if full article is open)||Current Rating (change since last Easy Pod)|
|New Home Sales||Negative|
|NMHC Quarterly Survey of Apartment Market Conditions||Positive (upgrade)|
|NAHB Housing Market Index (HMI)||Neutral|
|Easynomics Real Estate Price Stability Index||Neutral (downgrade)|
Indicator: New Home Sales | NEGATIVE
Easy Intro: None yet | Link to Source: Click here | Latest Date This Info Represents: November 2012
Quick ‘n Easy
Every new home that is built and sold adds to the Gross Domestic Product (GDP), helping our economy grow. Unfortunately, in November 2012, new homes were selling at an extremely low rate. The good news is that the trend has generally been pointed upward with a bit of a hiccup in the last couple of months. Fortunately, not too many new homes are being built so that the ones in inventory (still on the market) can get cleared out at a normal pace.
Easy Description: Statistics that tell us how many new single-family homes (basically a building for one family, not apartments or condos) were sold. It also tells us about the selling price of those homes and the unsold inventory of new homes (waiting to be sold).
Latest Reading: If sales in November 2012 were to continue at that rate for a whole year, there would be 377,000 new homes sold. This “annualized” rate is 4.4 percent higher than last month’s revised rate, and it is 15.3 percent above the rate from the same month last year. The median sales price (half of homes sold for less than this amount, the other half sold for more) was $246,200. That is a whopping 14.9 percent higher than the median price one year ago! There were 149,000 new homes still for sale (inventory), so at the current pace it would take about 4.7 months to sell the remainder.
Also, take a look at my latest new residential homes inventory months of supply trend analysis to see where the trends are headed.
Implications: The pace of new home sales had largely been moving sideways for some time but appears to have been rising since August 2011, according to myanalysis. The last couple of months, we’ve seen a hiccup in the data, perhaps due to storm effects, but it’s possible the trend will continue higher from here. The “4.7 months of inventory” part is key to understanding that home builders have done a pretty good job of adjusting to market conditions. Because so few homes were being sold, they dropped the number of homes they built way down, which means that supply decreased and prices didn’t decrease as much. (Quick refresher on “supply and demand” – when something has a bigger supply than there is a demand for it, sellers are forced to lower the price so that buyers will have a greater willingness to buy it.) We are at incredibly low levels of new home construction, which is why that inventory months of supply figure is not way above historical averages anymore. Before the housing boom, the typical months of inventory level was around 6 months. At the 6 months level, prices tend to be stable.
So, what happens if new homes start selling again? Builders will start making more homes, which will push up supply just enough to keep up with the new demand so that prices don’t move too much in one direction or the other. The kind of massive price increases we saw in the housing boom were unsustainable, just as massive price decreases from this point would have to be temporary, too. Market forces will always push things toward a “healthy” equilibrium.
But regardless of the fact that the inventory number is looking pretty decent, this number of sales (377,000 annualized rate) is just awful. And when fewer homes are being sold, that’s less economic growth. The sale of a new home is just like the sale of a car, television or clothes – someone made something and sold it, which adds to the GDP. What we’d like to see from here is a continued increase in new home sales numbers while keeping that months of inventory right around the 6 month mark. That would mean the housing market is on its way to greater positive contributions to the GDP report without having any false imbalances in the system.
Easynomics Rating Methodology: The long term average is about 672,000 new homes sold per year. I’d like to see numbers that are within 15 percent of that average. Therefore, I will give this indicator a rating based on the average of the last three months’ annual selling pace: Above 772,000 is “positive”; below 571,000 is “negative”; anything between is “neutral.”
Indicator: Housing Starts | NEGATIVE
Easy Intro: None yet | Link to Source: Click here | Latest Date This Info Represents: November 2012
Quick ‘n Easy
The sale of a new home begins with the start of a new home. We want to see high numbers of homes built at the same time as we see high volume of new home sales. In November 2012, we were at very low levels of housing starts because the sales volume was very low. But housing starts and permits are both significantly higher than they were at the same point last year, pointing to growing strength (or at least diminishing weakness) in the housing market.
Easy Description: This report provides two key pieces of data. First, it tells us how many privately-owned housing units have been started. Second, it reports how many building permits were issued for privately-owned houses. Changes in the building permits number should, in theory, predict what will happen in housing starts because you get the permit first and then start building. This is not believed to be true by everyone though.
Latest Reading: If housing starts were to continue at the pace we saw in November 2012, after one year there would be 861,000 new homes started. This “annualized” rate is 3.0 percent lower than the previous month’s revised figure but a whopping 21.6 percent above the rate for the same month last year. The annualized rate for building permits was 899,000. This is 3.6 percent higher than the previous month’s revised figure and an incredible 26.8 percent above the rate for the same month last year.
Implications: These rates are extremely low, as you can see in the chart. On one hand, we want the number of housing starts to be high because building a house creates jobs. On the other hand, if too many houses are built compared to the demand for those houses, their selling price will drop and all homeowners will see the values of their homes go down, causing people’s net worth to decrease. What we’d like to see is a higher rate of housing starts in response to or in conjunction with an increase in the rate of sales of new homes (see the new home sales numbers elsewhere on this page). It looks like this has been happening, albeit slowly. If this trend continues, we might expect to see the months of supply of new homes start inching back upward again (bad if it goes higher than about 6 months). On the other hand, if the home builders know something the rest of us don’t, and they are correctly anticipating greater demand for new homes several months from now, then things will be just fine.
Easynomics Rating Methodology: Over the last 10 years, there have been an average of 1,354,000 housing starts per year. I’d like to see numbers that are within 15 percent of that average. Therefore, I will give this indicator a rating based on the average of the last three months: Above 1,557,000 is “positive”; below 1,151,000 is “negative”; anything between is “neutral.”
Indicator: NMHC Quarterly Survey of Apartment Market Conditions | POSITIVE (upgrade)
Easy Intro: None yet | Link to Source: Click here | Latest Date This Info Represents: October 2012
Quick ‘n Easy
A survey shows a nice balance between people looking to rent apartments compared to the number of empty apartments available. This is a classic “supply and demand” situation that is now back in equilibrium after being tipped in favor of demand recently – so, it means the price of renting may stay about the same in the near future. This won’t necessarily encourage people to buy rather than rent, but then the improving housing price picture is already doing some of that.
Easy Description: This index is based on a survey of top-level executives in apartment-related firms. They basically ask them how things are going in their markets in terms of finding people to rent apartments. If there are more people looking to rent than there are vacant apartments available, conditions are called “tight.” Readings above 50 indicate that, on balance, apartment markets around the country are getting tighter. Tight market conditions will eventually lead to better housing indicators because when apartment conditions are tight, that drives up the price of apartments. And the higher that price is, the more likely someone is to try purchasing instead of renting.
Latest Reading: 56 (Possible range = 0 to 100 with 100 being the “tightest” market where demand overwhelms supply)
Implications: After two consecutive readings that showed an overly tight market (much more demand than supply), the latest survey puts things back into a nice equilibrium. The higher readings were supporting high rent prices, which would eventually support higher housing prices. But the equilibrium is better now because we don’t want to see rents become unaffordable either.
Easynomics Rating Methodology: In the housing market, if things get too far “out of whack” with respect to nearly anything, it doesn’t matter which direction … it’s a negative. We don’t want a bubble or an overly pessimistic crash. Therefore, I will give this indicator a rating as follows: 35-65 is “positive”; 66-80 or 20-34 is “neutral”; above 80 or below 20 is “negative.”
Indicator: NAHB Housing Market Index (HMI) | NEUTRAL
Easy Intro: None yet | Link to Source: Click Here | Latest Date This Info Represents: December 2012
Quick ‘n Easy
A survey of people in the home building industry shows that conditions in the market for new homes and the amount of interest in buying these homes is still slightly on the low side, but it has clearly improved since late 2011 and is at its highest level in over six years. About as many home builders think conditions are good as those who think they are bad.
Easy Description: This is based on a survey of members of the National Association of Home Builders (a trade association). It asks them to rate market conditions for the sale of new homes right now and in 6 months, and it also asks them to rate the amount of traffic of people interested in buying the new homes. It combines the answers to these three questions into one number between 0 and 100.
Latest Reading: 47 for December 2012. This is two points better than last month’s revised figure. It is now at the highest level since April 2006!
Implications: Despite a clearly significant rise in this index since late 2011, the actual level is still slightly on the low side, historically speaking. But we are firmly entrenched in the middle range. Home builders are basically telling us that it is a mixed picture for selling homes – about half are saying it’s good and half are saying it’s not, but conditions are definitely improving. Notice that changes in the HMI look like they predict the changes in the number of single-family homes that are started. Thus, we can expect that there will be a rise in the number of new single-family homes built in the coming months.
Easynomics Rating Methodology: I will give this indicator a rating as follows: 67 or higher is “positive”; 34-66 is “neutral”; 33 or below is “negative.”
Economic Indicator: Easynomics Real Estate Price Stability Index (EREPSI) | NEUTRAL (downgrade)
Easy Intro to Easynomics Real Estate Price Stability Index | Latest Date This Info Represents: November 2012 (contains estimated portion)
Quick ‘n Easy
An index designed to look at the stability of home prices indicates that, thru November 2012, we are below equilibrium – home prices are about 8.18 percent below a theoretical stable point. If trends in months of supply and price/rent ratio continue, the index would rise higher, indicating that a “reverse bubble” may form by about April 2013.
Easy Description: This index is an average of three indicators that help ascertain whether home prices are above or below historically normal levels: 1) new homes inventory months of supply, 2) existing homes inventory months of supply and 3) price-to-rent ratio. For more info on what these mean, click on the “Easy Intro” above.
Latest Reading: Thru November 2012, the EREPSI is at positive (+) 8.18 percent, which means prices are 8.18 percent lower than the stable point. The November reading is based on actual values for the “months of supply” components but uses an estimate for Case-Shiller HPI. For recent trends, you can read my latest analysis on new residential homes inventory months of supply or existing homes sales and inventory months of supply.
Implications: After a strong move up starting in July 2011, the index mostly plateaued from December 2011 through July 2012 before recently turning upwards again. If trends in supply and inflation continue, it looks like the index will slowly rise over the next several months forming a “reverse bubble” where prices of homes would be artificially low and should be pressured to rise.
Easynomics Rating Methodology: In the housing market, if things get too far “out of whack” with respect to price-to-rent ratio and inventory, it doesn’t matter which direction … it’s a negative. We don’t want a bubble or an overly pessimistic crash. Therefore, I will give this indicator a rating as follows, based on the most recent month with actual “months of supply” data to use in calculations: Within 7.5 percent of zero in either direction is “positive”; within 15 percent of zero in either direction (but not closer than 7.5 percent) is “neutral”; farther than 15 percent from zero in either direction is “negative.”
A move toward a more balanced level of tightness in the apartments market was countered by a move away from the equilibrium in housing prices (i.e., prices are now too low compared to where they should be). We have 1 positive, 2 neutral and 2 negative indicators this time. Using a scale of positive=3, neutral=2 and negative=1, this yields an average rating of 1.8 out of 3 (versus 1.8 out of 3 last time), which falls in the middle third of the possible range. In other words, my set of indicators for the housing and real estate market currently combine into a “neutral” rating, consistent with growth but below historical rates.
The group of indicators I’m following here suggest that we’ve really turned a corner in housing in 2012. They don’t suggest that housing is going to be the kind of force in the economy that we’ve seen in the past. But it’s a HUGE deal if housing can stop being a negative force and provide some positive. We’re not out of the woods, but it does seem that we’ve found the trail and are walking along it – finally.