Summary
We believe that the recovery will be W-shaped and that April was only a false bottom. Our estimate is that there will be a slowing beginning in December, and that we will hit the true bottom in summer of 2010.
Analysis
Several months ago, we told our clients we thought we were entering a "W" shaped recovery, with the "first leg up" in the W driven by four things:
1. Tremendous affordability for those who are currently paying rent,
2. The $8,000 federal tax credit, which is currently set to expire on 11/30/09,
3. Government-backed FHA, USDA, Freddie Mac and Fannie Mae lending programs that offer far more aggressive loans than a bank would make, and
4. Positive media reports about rising median home prices, which are primarily driven by a location mix shift away from the poorer areas of town, but also driven by price stability at the lower end of the market.
Since then, sales volumes and pricing have stabilized in many areas. Our monthly survey covering about 2,000 new home communities (and available for free to all participating home builders) shows that:
-Sales rates have stabilized at about 1.5 sales/month/community,
-Prices net of incentives are relatively flat in California, Texas, the Northeast and the Midwest, and primarily
at the lower price ranges in most areas,
-Standing inventory per community has fallen from 6.0 homes last July to 3.2 homes today, and
-Builders are starting more homes per community than they have in a long time.
However, traffic through the sales offices remains low, and most of the buyers are first-time buyers motivated by the $8,000 tax credit and monthly payments that are comparable to their rent. Without the tax credit, sales and pricing would still be declining.
Our best estimate is that sales slow substantially in December and throughout the first quarter of next year because of the demand "pulled forward" by the tax credit, and that the market stabilizes when job growth turns positive, which will hopefully be next spring or summer. The recovery will be driven by the pace of job growth,
mortgage rates and decisions made by the government on whether to continue or discontinue the incentive programs.
mortgage rates and decisions made by the government on whether to continue or discontinue the incentive programs.
While we believe there is another leg down, we don't believe that the decline will be that much further, so smart investments made with a long-term perspective should pay off handsomely. With plenty of short-term money chasing deals right now, smart investments are tough to find. Longer-term investments tend to be more appropriately priced.
Economic Growth............................................................................D
The economic growth indicators showed some signs of improvement this month, but still remain weak overall. The preliminary estimates of second-quarter real GDP growth showed an annualized drop of -1.0%, which is a large improvement from the -6.4% decline in the first quarter. There was some positive news in employment this month:
the most recent headline unemployment rate declined one-tenth of one percent this month to 9.4%. Although job losses have slowed, the total labor force decreased at a more rapid pace due to workers retiring or giving up looking for employment, resulting in a falling unemployment rate. Regardless, the unemployment rate remains near
its highest level since 1983. In addition, the measure of unemployment that includes part-time workers looking for full-time work, declined to 16.3%. The economy has lost 5.7 million payroll jobs in the last 12 months, or approximately 4.2% of the total. Mass layoff events - job cuts of more than 50 jobs - also declined slightly this
month, yet have increased 61% year-over-year. The Core CPI (all items less food and energy) declined to 1.5%, while the Full CPI fell to -2.1% in July.
The economic growth indicators showed some signs of improvement this month, but still remain weak overall. The preliminary estimates of second-quarter real GDP growth showed an annualized drop of -1.0%, which is a large improvement from the -6.4% decline in the first quarter. There was some positive news in employment this month:
the most recent headline unemployment rate declined one-tenth of one percent this month to 9.4%. Although job losses have slowed, the total labor force decreased at a more rapid pace due to workers retiring or giving up looking for employment, resulting in a falling unemployment rate. Regardless, the unemployment rate remains near
its highest level since 1983. In addition, the measure of unemployment that includes part-time workers looking for full-time work, declined to 16.3%. The economy has lost 5.7 million payroll jobs in the last 12 months, or approximately 4.2% of the total. Mass layoff events - job cuts of more than 50 jobs - also declined slightly this
month, yet have increased 61% year-over-year. The Core CPI (all items less food and energy) declined to 1.5%, while the Full CPI fell to -2.1% in July.
Leading Indicators...........................................................................D
The leading indicators were mixed this month, although many have improved since the beginning of the year. The Leading Economic Index continues to improve, reaching 4.5% in June, which is up from 2.4% in May. Stocks have continued their multi-month rally and, as of the end of July, the S&P 500 had risen 34% from February's lows. Home builder stocks also performed well in July, increasing over 22% in the past month, and have declined just 6% year-over-year. The price of crude oil has trended up since February, but fell 8% in July from June, reaching an average of $64.09 per barrel.
The leading indicators were mixed this month, although many have improved since the beginning of the year. The Leading Economic Index continues to improve, reaching 4.5% in June, which is up from 2.4% in May. Stocks have continued their multi-month rally and, as of the end of July, the S&P 500 had risen 34% from February's lows. Home builder stocks also performed well in July, increasing over 22% in the past month, and have declined just 6% year-over-year. The price of crude oil has trended up since February, but fell 8% in July from June, reaching an average of $64.09 per barrel.
Affordability......................................................................................C
This month, affordability worsened slightly due to a small uptick in median sale home prices. As a result, the housing-cost-to-income ratio increased to 28%, but remains very attractive and is well below the peak of 44% during this housing cycle. The median-home-price-to-income ratio also remains very attractive, currently equal to
3.4 and still below the historical average of 3.7. The 30-year fixed mortgage rate fell to 5.25% by the end of July, but remained above the sub-5% levels experienced in prior months. The share of ARM applications reached 5.4% in the last week of July, according to the Mortgage Bankers Association, primarily due to the rise in fixed mortgage rates. However, the share of ARM applications remains extremely low when compared to peak levels above 35%
of total loans in early 2005.
Consumer Behavior..........................................................................D
Consumer behavior deteriorated this month, as Americans became slightly more pessimistic about the U.S. economy. The Consumer Confidence Index, which had improved from March to May, declined for the second straight month, reaching 46.6 in July. Also, both the Consumer Sentiment Index and the Consumer Comfort Index
declined in comparison to the previous month. American's personal savings rate continues to skyrocket, reaching 6.9% year-over-year for a total of $769 billion in savings - the highest level since 1993. Since the recession started, the U.S. has been hammered with falling home prices and a crumbling stock market, resulting in a loss of more than $10 trillion of wealth in the past year and equal to a total U.S. net worth of $50.4 trillion in the first quarter of 2009.
This month, affordability worsened slightly due to a small uptick in median sale home prices. As a result, the housing-cost-to-income ratio increased to 28%, but remains very attractive and is well below the peak of 44% during this housing cycle. The median-home-price-to-income ratio also remains very attractive, currently equal to
3.4 and still below the historical average of 3.7. The 30-year fixed mortgage rate fell to 5.25% by the end of July, but remained above the sub-5% levels experienced in prior months. The share of ARM applications reached 5.4% in the last week of July, according to the Mortgage Bankers Association, primarily due to the rise in fixed mortgage rates. However, the share of ARM applications remains extremely low when compared to peak levels above 35%
of total loans in early 2005.
Consumer Behavior..........................................................................D
Consumer behavior deteriorated this month, as Americans became slightly more pessimistic about the U.S. economy. The Consumer Confidence Index, which had improved from March to May, declined for the second straight month, reaching 46.6 in July. Also, both the Consumer Sentiment Index and the Consumer Comfort Index
declined in comparison to the previous month. American's personal savings rate continues to skyrocket, reaching 6.9% year-over-year for a total of $769 billion in savings - the highest level since 1993. Since the recession started, the U.S. has been hammered with falling home prices and a crumbling stock market, resulting in a loss of more than $10 trillion of wealth in the past year and equal to a total U.S. net worth of $50.4 trillion in the first quarter of 2009.
Existing Home Market.......................................................................D
Although the existing home market remains extremely weak, a few indicators improved this month. The seasonally adjusted annual resale activity in June increased 3.6% from the previous month to 4.89 million homes, but remained down 0.2% from one year prior, according to the National Association of Realtors (NAR). The median resale home sale price increased in June to $181,600, according to NAR, but has fallen 15% from one year ago. By comparison, the Case-Shiller index, which tracks paired sales, fell a record 19% in the first quarter compared to
the beginning of 2008. The supply of unsold homes fell in June to 9.4 months of supply, yet remains high compared to historical levels. The pending home sales volume remained flat compared to the previous month, but increased
Although the existing home market remains extremely weak, a few indicators improved this month. The seasonally adjusted annual resale activity in June increased 3.6% from the previous month to 4.89 million homes, but remained down 0.2% from one year prior, according to the National Association of Realtors (NAR). The median resale home sale price increased in June to $181,600, according to NAR, but has fallen 15% from one year ago. By comparison, the Case-Shiller index, which tracks paired sales, fell a record 19% in the first quarter compared to
the beginning of 2008. The supply of unsold homes fell in June to 9.4 months of supply, yet remains high compared to historical levels. The pending home sales volume remained flat compared to the previous month, but increased
New Home Market............................................................................D
Many indicators in the new home market have improved since last month, but the overall market remains weak. Builder confidence improved in August, following a steady upward trend since reaching bottom in January. The median new home price reversed the gain experienced last month, falling to $206,200, according to the Census Bureau, and has fallen 12% year-over-year. The median new home price can fluctuate greatly month-to-month, as it is dependent on the mix of housing types sold during that period. The seasonally adjusted new home sales volume increased in June compared to May, resulting in 384,000 transactions. The inventory of new homes for sale has trended down since January and is currently at 8.8 months of supply, and the unsold completed homes component of that amount equals 4.0 months of supply.
Many indicators in the new home market have improved since last month, but the overall market remains weak. Builder confidence improved in August, following a steady upward trend since reaching bottom in January. The median new home price reversed the gain experienced last month, falling to $206,200, according to the Census Bureau, and has fallen 12% year-over-year. The median new home price can fluctuate greatly month-to-month, as it is dependent on the mix of housing types sold during that period. The seasonally adjusted new home sales volume increased in June compared to May, resulting in 384,000 transactions. The inventory of new homes for sale has trended down since January and is currently at 8.8 months of supply, and the unsold completed homes component of that amount equals 4.0 months of supply.
Housing Supply.............................................................................F
The supply of housing generally increased on a seasonally adjusted basis, but remains very low compared to history. Seasonally adjusted new home construction starts increased slightly in June, due to the gain in singlefamily starts. Despite the recent increase, construction levels remain near their lowest level on record since at least 1959. Total permits increased in June as a result of an increase in both single-family and multifamily permits. Seasonally adjusted total permits have fallen 52% year-over-year, however, and remain near their lowest level since the Census Bureau began recording permit statistics in 1960. The annual new home completion volume held steady in June at 818,000 units and has fallen 28% over the last 12 months. Second-quarter homeowner vacancy
fell to 2.5%, but remains well above the long-term average of 1.5%.
The supply of housing generally increased on a seasonally adjusted basis, but remains very low compared to history. Seasonally adjusted new home construction starts increased slightly in June, due to the gain in singlefamily starts. Despite the recent increase, construction levels remain near their lowest level on record since at least 1959. Total permits increased in June as a result of an increase in both single-family and multifamily permits. Seasonally adjusted total permits have fallen 52% year-over-year, however, and remain near their lowest level since the Census Bureau began recording permit statistics in 1960. The annual new home completion volume held steady in June at 818,000 units and has fallen 28% over the last 12 months. Second-quarter homeowner vacancy
fell to 2.5%, but remains well above the long-term average of 1.5%.
John Burns consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
