The report below was originally published at 9:05AM EST by Josh Steiner and Allison Kaptur of our Financials Team, which does the bulk of our firm's work on housing. Below, they provide a detailed update to our 1Q11 Macro Theme of Housing Headwinds Part II. While consensus scrambles to figure out inflation's impact, we think it's worth highlighting a form of deflation that will limit consumer ability to absorb price increases in 2011. If you are a qualified institutional investor and would like to hear more about their work on the fins, rates, credit, housing and financial regulation, please email firstname.lastname@example.org.
Multifamily Starts Drive Headline Number Higher; No Good News for Single-Family Homes
While the headline starts number for January was reported 14.6% higher this morning, all the strength came from multifamily starts. Multifamily Starts (2 or more family homes) nearly doubled, increasing 78% MoM. Multifamily Permits fell 24% MoM. As the charts below demonstrate, multifamily starts and permits are a volatile series.
In the single-family space, which is relevant to the homebuilders, there was no good news. Single-family starts decreased 1% to 413, and single-family permits decreased 5%. Interestingly, permits had been steadily rising since September, so the January data is a reversal. This is only one data point, but we will be watching this trend closely to see if it continues.
Bigger picture, the permits and starts data along with the purchase applications data, which we cover below, suggest the Spring selling season is off to a rocky start - a sharp contradiction to the enthusiasm put forward by six of the top ten homebuilder CEOs. We would also highlight the rising cost pressures homebuilders are facing based on the significantly higher year-over-year costs in lumber, copper and oil (see our note from 2/11/11 on this topic for details).
The chart below shows the relationship between single-family starts and unemployment (shown inverted on the right axis). Historically, increasing construction jobs have helped pull unemployment back down. Thus far in the current cycle, this pattern does not look likely.
MBA Purchase Applications fall 6%
MBA Purchase Applications fell 5.9% WoW on a seasonally adjusted basis. Refinance applications fell 11% WoW to the lowest level since July 2009. While it remains early in the spring selling season, signs of strength remain elusive. On a year-to-date basis, Purchase Applications are at the same level as they were in 1996.
Zillow data shows high level of negative equity
According to a report from Zillow Inc., a real estate website, 27% of mortgaged single-family homes (or 15.7 million homes) were in a negative equity position as of 4Q10. This number climbed versus the prior quarter, when 13.9 homes were underwater. The number of underwater homeowners was drive by two factors. Falling home prices pushed more borrowers into negative equity positions, while a slowdown in foreclosures meant that fewer seriously delinquent borrowers were evicted. Work from Laurie Goodman at Amherst and others has demonstrated that negative equity is highly predictive of borrower defaults, so a rising level of underwater borrowers should be a significant concern.
Housing Market Index: Deja Vu at 16
The Housing Market Index, which measure builder confidence, remained unchanged for a fourth month in a row in February, holding steady at 16. The chart below shows the HMI composite metric against new single-family starts. By any historical measure, the current level of activity is very low.
Obama Budget Proposes Cut to Mortgage Interest Tax Deduction
Obama's 2012 budget proposes cutting itemized deductions by 30% for the affluent (those making over $250,000). Not surprisingly, the National Association of Realtors has already begun aggressive lobbying to get this proposal dropped.
Page 40 of the budget proposal reads:
"Reduce the Itemized Deduction Write-off for Families with Incomes over $250,000. Currently, if a middle-class family donates a dollar to its favorite charity or spends a dollar on mortgage interest, it gets a 15-cent tax deduction, but a millionaire who does the same enjoys a deduction that is more than twice as generous. By reducing this disparity and returning the high income deduction to the same rates that were in place at the end of the Reagan Administration, we will raise $291 billion over the next decade."
Joshua Steiner, CFA