Is There A Silver Lining In Housing?

This morning U.S. new home sales were reported for the month of April and rose 7.3% month-over-month, climbing to 323K versus 301K in March.  Initially, this was treated as a positive data point by the market as the Homebuilding Index, represented by the ticker XHB, was trading up almost a percent in early trading.  Unfortunately, despite marginal sequential improvement, the April number is representative of a continuing bleak long-term trend.   


As outlined in the chart directly below, while the months of supply dropped to the second-lowest level since 2006, it is still well above the long term range of 4 – 5 months. 


Is There A Silver Lining In Housing? - 1


Further, our Financials Team has authored a long-term displacement theory as it relates to new home sales.  In effect, the theory postulates that because of the massive over-building that occurred, it will take a commensurate period of under-building to bring the market back to equilibrium. According this analysis:


“In May of last year the government reported that new home sales came in at a 300k annualized rate (seasonally adjusted), which was the lowest rate of new home sales ever recorded since the data series began in 1963. Based on our cumulative displacement model, new home sales would need to remain at 300k for approximately the next 10 years in order for this cycle to fully play out and be consistent with the prior three cycles.  The green circle shows where we were a year ago on this chart, and the yellow circle shows today.”


The chart below highlights this analysis and the cumulative time until the new homes market will be back in balance.


Is There A Silver Lining In Housing? - 2


The new home market is, of course, only a small part of the overall housing market.   In fact, based on the most recent annualized monthly numbers, new home sales are roughly 6% of the overall market.  Therefore, even if we are seeing marginal sequential improvement in new home sales, it is not necessarily indicative of any real change in the housing market.  In fact, the existing home market is likely a much better indicator of where new home sales are going than vice versa.  In the existing home market there is definitely no silver lining.


The April numbers for existing home sales was reported last week and were down -0.8% from March to an annualized number of 5.05MM home sales.  At the same time, inventory jumped, as reported by the National Association of Realtors, to 3.87 million homes on the market, which is a +9% increase compared to March.  On a months-supply basis, inventory rose to 9.2 months from 8.4 months in March.  


 The impact of this large amount of inventory is, logically, that home prices continue to decline absent a commensurate build-up in demand. The median price of an existing home was $163,700 in April, once again according to the National Association of Realtors, and down -5% versus a year ago.  The year-over-year decline moderated slightly in April compared to the -5.9% decline in March.  Since the series is not seasonally adjusted, sequential changes are not meaningful in analyzing price. 


The other key metric we watch, which will be reported for the most recent week tomorrow, is mortgage applications for new home purchases.  This is one of the best measures for future home purchases and it dropped -3.2% week-on-week last week, though did tick up +2% year-over-year.  The chart below shows the long term trend in mortgage applications, which suggests what we already outlined above, which is that housing demand remains quite weak, despite mortgage rates at near all-time lows.


Is There A Silver Lining In Housing? - 3


As a potential bright spot, our Financials Team also recently noted the following:


“Purchase apps for 2011 YTD are 5% below the full-year average for 2010, but are down 17% YTD vs. the comparable period last year.  Given that the next few months will mark easier comps as we lap the post tax-credit doldrums of summer 2010, it's looking possible that overall demand may be close to flat in 2011 relative to 2010. Should demand start to stabilize, this would mark a definite positive inflection from the secular falling demand trend that's been in place since 2005. Recall that our home price model is driven by 12-mo lagged demand.”


If the purchase applications do turn, this would indeed be an inflection point and something to keep front and center as a way to gauge an improving housing market, but so far any turn is minimal at best.


Also on the negative side of the ledger is the current debate and discussion over the Federal Housing Authority in Washington.  The Republicans circulated a proposal Monday that proposed to both increase the size of down payments from 3.5% to 5%, and to also decrease the size of the loans.  The issue is scheduled to be discussed Wednesday at a House Financial Services subcommittee hearing led by Rep. Judy Biggert (R-Ill.).


Despite the sequential pick-up in new home sales, we still don’t see a silver lining in the U.S. Housing Market.  As Housing Headwinds continue to percolate, that also supports our Q2 Macro Theme titled Indefinitely Dovish which postulates that the Federal Reserve will keep rates lower longer than investors expect.


Daryl G. Jones

Managing Director

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