Housing Recovery - Hope and Reality
Every year for the past three years there have been recurring calls for a housing bottom and recovery. The importance of an eventual recovery in housing should not be dismissed as it is a critical component of an economic recovery due to the large multiplier effect of each dollar spent. The recovery in housing would signal that a foundation for a more lasting economic recovery would be in place. That is the hope anyway.
However, as we have discussed in the past (see here, here, and here) the reality is that while housing construction and sales may have bottomed after the largest decline in history, it is highly likely that a correction in prices likely has further to fall particularly if interest rates rise for any reason. The one overlooked issue is that while it is likely that housing may have found its natural bottom — a bottom and a recovery are entirely different things.
During the past couple of weeks there has been a tremendous amount of ink spilled in the press about home sales, both new and existing, starts and permits which all showed some very modest improvement. It is important to note that the improvement in the data is welcome news. It is a bit premature, however, for it to be called a recovery. With mortgage rates currently below 4%, employment somewhat stable, major banks continuing to stall the foreclosure process and the home buying season moving into full swing — we should see improvement in the housing data. If we weren't — that would be very bad.
The current "bottom," and I use that word loosely, in housing appears to have occurred in late 2010. However, we also saw a "bottom" in 2009 as well. With continued support to housing from artificially depressed interest rates, bailouts, write downs, forgiveness, tax credits and incentives — housing data does appear to show a bottom.
The most recent release of April's data, on the surface, appears to support the media's proposition that housing is in a continued recovery process. Not so fast. The problem with the April data, on a seasonally adjusted basis, is that this was the warmest April in six years and the second warmest in the past 31 years. The unseasonably warm weather, combined with the lowest amount of precipitation in a decade, has artificially influenced the adjusted data in much the same way as we have previously discussed regarding the employment data. While April did show a rebound it came on the heels of two monthly declines and failed to fully recoup the previous losses. What was worse is that on a non-seasonally adjusted basis this was one of the weakest Aprils in the past decade for existing home sales.
If you look at the first chart you can see that even with the many supports discussed above combined with depressed prices and unseasonably warm weather it takes a rather strong magnifying glass, and much "hope," to say that a recovery is here.
Apart from new and existing home sales the housing starts, permits and completion data does not look much better. Considering these data points are still at the lowest levels since data began to be collected there is very little evidence that a recovery is officially underway. When these data points are combined with new and existing home sales we can argue the case for a housing bottom. However, a bottom and a recovery in housing, as stated previously, are two vastly different things.
This is evident by the data coming from the home building companies themselves as they continue to curb their inventory. This is a needed but defensive posture by the homebuilders and inventory has declined to a 5.1 month supply. Even given lower inventory levels it is still taking nearly 8 months to complete a sale. The reality is that the demand for homes remains extremely constrained and any negative shock to the economy could quickly turn the recent modest improvements back on their head.
In order to really know what is going on in housing we need to look at the proverbial "forest for the trees" by examining what is happening to the total number of houses. We know that many housing units have been converted into rental properties in recent months as excess homes are sitting vacant. As full-time employment remains elusive, a large and available labor pool suppresses wages and access to credit remains tight - the dream of "home ownership" has slipped from the grasp of many Americans. However, as the population continues to expand, "renting" becomes the preferred choice. The chart shows the percentage of homes that are "occupied", either by a renter or homeowner, as a percentage of the total number of housing units in the U.S. There are two important issues in this chart. The first, and most obvious, is surge in homes being rented versus owned. The second is that home occupancy rates are only 1/2% higher today than they were during the recession. As I stated before — you must look very hard to find a housing recovery here.
One issue that will continue to confound the real estate market in the near term is the level of inventory that is being held off market for various reasons. This does not include the shadow inventory held by banks which is an additional issue. As we have stated in previous reports the housing market is driven by the activity "at the fringes" between those actively seeking to buy a house versus those with "for sale" signs in their yard. Today, roughly 1/3 of all homeowners are under water on their mortgages. Therefore, it is no surprise that many are holding homes as long as possible hoping for a price recovery. However, at some point these "vacant" houses, along with the excess shadow inventory and trapped homeowners, will come to market either due to force or desperation. The excess supply will continue to pressure home prices, more supply than demand, in the future further exacerbating the problem for those already drowning in their home.
Ultimately there is only one truth to whether there is really a housing recovery or not. How many people own a home? If new and existing home activity, as seen in recent reports, is truly on the rise then we should see the number of individuals that are "home owners" on the rise as well.
The chart shows the home ownership rate in the U.S. As of the latest quarter the level of home ownership has declined back to levels last seen in 1980 before the Savings & Loan crisis. That particular real estate related debacle had a profound effect on the real estate market at that time as homeowners mailed their keys back to the banks. It was then that the government set up the Resolution Trust Corporation to efficiently dispose of the houses that were required to be foreclosed on. While the level of home ownership "bottomed" in the early 80's it took more than a decade before housing, and consequently home "ownership" truly began to recover.
While there is a tremendous amount of hope for a housing recovery in 2012, just as there has been during the last 3 years, the simple reality is that a "real recovery" may be a very long time away. A weak economic environment growing at a sub-par rate, burdened by excessive debt levels which sap potential growth, high unemployment and rising temporary work suppressing wages, tight credit standards and trapped borrowers all work against a housing recovery at the current time. Unfortunately, for many Americans, the dream of home ownership turned into a horrifying nightmare. The psychological impact caused by the housing bust is also something that will impede a real housing recovery in the future until the painful memories have faded into the mist.
Is there a bottom in housing? It is entirely possible. However, for all the reasons stated herein, both financial, economic and psycholgoical, the "calls" for a housing recovery may be a bit premature. This is particularly true if our estimation of an economic recession in the next 18 months comes to fruition. The strains on the housing market caused by a recession will cause a secondary decline in housing. The reality of a recession is not a question of "if" — it is only a question of "when" and how bad will it be?