New home sales may be stable, but still too low

April new home sales were 323,000 units at seasonally adjusted annual rates, better then expected, up 7.3% from March’s 301,000 pace and 17.8% above the low set in May, 2010.   First chart shows how sales collapsed in 2007 through 2008, bottoming out 78% below their level in December 2005.  Sales of existing homes also dropped but by only 44% in the same time period.   Despite their larger collapse, new  home sales appear less volatile in recent months than existing home sales. One small hint of improving new home markets is in the ready supply of new homes shown on the second chart – months supply has been dropping over the last year as sales stabilized.

Sales of New and Existing Homes

Reports and gossip point to foreclosures and strict credit requirements for mortgages as two big problems for home buyers in most markets and nothing in today’s new homes sales numbers can erase these worries.  For the moment we should take the recent stability in the sales rate as a positive step to eventual recovery.

Supply of News and Existing Homes for Sale

Economic Update: New Home Sales Rise 7.3%

Sales of new single-family homes rose 7.3% in April, to an annual rate of 323,000. The rate is higher than the 303,000 expected by the consensus, but is down 23.1% from last April, when sales were boosted by the homebuyer tax rebate. The median sales prise rose 4.6% from a year earlier, to $217,900, the first increase since December.

Sales rose in all four Census regions, with the largest increase in the West. The supply of homes for sale fell 2.8% to 175,000, a 6.5-months supply at the April sales pace, down from 7.2 months in March and just slightly above the 6.2 months in April 2010.

The numbers were some of the best we have seen for housing this year, and suggest we are coming to a stable point for sales and maybe even prices. New home sales are counted when the contract is signed, and thus often lead existing home sales.


Highlights Of April’s Existing Home Sales

U.S. existing Home sales showed weakness in April in all regions except the Midwest.

Below are some of the highlights of April’s Existing Home Sales Report:

  • Existing home sales were down 0.8% based on the completed transactions in April. This decline in sales comes after an increase in March. However, existing sales were down 12.9% year over year, and the 12-month change has been mostly negative since June 2010.
  • Existing home sales peaked in September 2005 and declined about 30% through April 2011. However, existing sales improved significantly during late 2009 through early 2010, primarily as a result of the U.S. government’s now-expired tax incentives.
  • Existing sales declined in all regions except the Midwest in April. Existing sales in the South decreased 1% in April and are 9.3% below their April 2010 level. Existing sales in the Northeast declined 7.5%, but declined 32.1% year over year. Existing sales in the Midwest increased 5.7% in April, but declined 16.4% from a year ago. Finally, existing sales in the West declined 1.6% and are up 0.8% year over year.
  • Existing condominium and co-op sales dropped 3.1% in April, and single-family home sales dipped 0.5%.
  • The national median home sale price was $163,700 last month, down 5.0% from April 2010, and down across all regions on a year-over-year basis.
  • April’s official inventory is 3.87 million homes, up 9.9% since March. The months’ supply increased to 9.2 months in April from 8.3 months in March at the current sale pace. This does not include the unofficial shadow inventory, which remains the key concern for the housing market recovery in addition to the high unemployment rate.
  • High levels of distressed sales are likely to push home prices lower because distressed homes are usually sold at a discount. Distressed sales were about 37% of total sales in April, down from 40% in March. Distressed sales were 33% of April 2010’s total.

For the full report, click here: US Existing Home Sales Showed Weakness In April In All Regions Except The Midwest

The chicken or the egg? Isn’t housing supposed to lead the recovery?

In most recent economic recoveries, residential construction has led the general economic recovery.  Home purchases are very sensitive to interest rates, which tend to be their lowest at the end of a recession. Consequently, interest sensitive purchases, such as homes and automobiles, are the first to rebound at the start of a recovery.

This time around we seem to be witnessing an anomaly.  As seen in the chart below, housing starts, both total and single-family, remain around their 30-year lows.  This recent housing crisis has clearly been significant enough that even low interest rates (average 30-year conventional mortgage below 5%) cannot spur new construction.  Housing will not make any real contribution to the economic recovery until supply and demand equilibrium is back at a level that stimulates new homebuilding.  When that will happen remains the big question.

Total and single-family housing starts in the US, 1980-present

Chicago’s condo market is the weakest among five major MSAs

With the April 28th release of February 2011 data for the S&P/Case-Shiller Home Price Indices, we saw a significant fall in condo prices in the Chicago area.  The index reported an average condo price decline of 3.1% in February versus January.  The data look worse if you view the market over the prior six months or so.  The monthly declines in January 2011, and December, November and October 2010 were 5.4%, 2.0%, 1.6% and 2.5%, respectively.  Since July, the market is down about 18%, and posted an annual rate of -13.8% with the report on February’s data.

The S&P/Case-Shiller Home Price Indices cover five condo markets – Boston, Chicago, Los Angeles, New York and San Francisco.  The chart below compares the index levels for the five markets, rebased to 1995 = 100.  It is apparent that the Chicago market never saw the rate of price appreciation of the other four during the 2002-2006 run-up.  But what is also apparent is that over the past two years Chicago has seen the most significant retrenchment.  On average Chicago prices are back to their mid-2000 levels.  The other markets, while well below their 2006/2007 levels, have done a better job in holding on to their relative values.

S&P/Case-Shiller condo price indices for five major MSAs

Using 1995 = 100 as a benchmark, the New York condo market is about 163% above that level, meaning the average condo can still sell for more than 2 ½ times what it did in 1995.  Boston, Los Angeles and San Francisco are about 156%, 130% and 124% above their respective 1995 levels.  Chicago, however, is seeing average condo prices only 36% above their levels of 16 years ago.

S&P/Case-Shiller home and condo price indices for five major MSAs

Looking at home and condo price data, you can see that both markets are weaker in the Chicago area than the other four MSAs.  Chicago home prices posted an annual growth rate of -7.6% in February, more than double the decline of any of the other four.  As noted above, the condo market is down 13.8% versus February 2010.  The chart below illustrates the differences between New York and Chicago over the past 16 years.  In both markets – home and condos – it is clear that Chicago neither saw the price appreciation that New York did in the 10 years leading up to the market peak.  And once the markets turned in 2007, Chicago gave up almost all of its value, with home prices and condo prices only 13% and 7% above their 2000 levels, respectively, and only 39% and 36% above their 1995 levels, respectively.

S&P/Case-Shiller home and condo prices indices for Chicago & New York

Economic Update: Housing Starts

Housing starts dropped 10.6% in April, to an annual rate of 523,000 from an upwardly revised 585,000 in March. The consensus was for 570,000 starts.  Starts are down 12.8% from April 2010, when the tax rebate program was in full swing. Single-family starts dropped 5.1% to 394,000, while multi-family plunged 28.3% to 114,000. Starts rose in the Midwest and West, but fell in the Northeast and the South. Weather may have been a factor in the 23.0% decline in the southern states. Permits, which are less affected by weather than starts, fell 4.0% to 551,000. Although the report is weaker than expected, the drop is somewhat offset by the upward revision to March starts, from the 549,000 reported a month ago. Still, the decline shows that the housing market remains very weak.

Are we back to normal, whatever that is

Everyone understands that the last few years of boom and bust in housing were anything but normal. But none of the people thinking about buying or selling, or just trying not to worry about their home’s value, know what a normal housing market would look like.   Two common measures of how far out of line home prices may be are based on comparing home prices to rents and to income.  Looking at these data (see chart) since 1987 using the S&P/Case-Shiller 10 city composite index, we are not far from normal now.  Prices are a high compared to rents and just about on target compared to incomes.   The market seems to be saying that while the price of a house is probably in line with incomes, it is still a bit high compared to current rent rates so there may be is a weak case to be made for waiting to buy for a while.

Back to 1987-2000 Prices

Price:Rent and Price:Income Ratio

The data in the chart use the S&P/Case-Shiller 10 City Composite for price.  The rent rate is based on the CPI index for primary residence rental cost and the income number is from the Federal Government’s data on disposable personal income per capita.  The ratios were scaled to be 100 in January 1987.  What’s normal?  Looking at the chart and at other S&P/Case-Shiller data, normal was defined as 1987-2000, before the housing boom really got going.  In that period, the average price:rent ratio is 105.5 and the average price:income ratio was 92.1,  Current data (February 2011) is 118.3 for price:rent and 90.6 for price:income.

Both these measures often find their way into realtors’ pitches about neighborhoods or when to time a purchase.  The New York Times earlier this week carried a survey of price:rent ratios in several cities showing that in some places things were reasonable while in a few others prices still seemed high compared to rents.

Look Under the Hood to Know Homebuilders ETFs

Takeaway:  ITB is a more concentrated ETF play than XHB regarding homebuilder companies.

Before I get to talking about homebuilder ETFs, here are a few words about the 2011 spring selling season for new homes. Not good. I see tepid demand with signs of modest traffic for new homes this season, and think prospective buyers are being cautious in most local markets. However, pricing trends appear to be firming or are not declining as much as was the case in 2010.

In April 2011, the National Association of Home Builders (NAHB) said homebuilders were competing against high numbers of foreclosed and distressed properties, which have been holding prices and appraisals down. This has made it challenging for prospective buyers to sell existing homes.

A pocket of strength I see is the lower priced house category, which generally serves first-time home buyers. These buyers have more flexibility than move-up or repeat buyers, who have to sell existing homes. Also, affordability has come from very attractive prices relative to historic levels and low mortgage rates. But I caution, you have to be able to meet the tighter credit guidelines.

Two weeks ago, the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) came out. This showed the index staying at 16. This is well below recovery levels, where measures above 50 indicate that more builders view sales conditions as good. Two of the three measures posted April declines.

According to HMI, the metric for current sales conditions fell one point to 16, while sales expectations for the next six months dropped three points to 23, its lowest level since October 2010. One bright spot was the index for traffic of prospective buyers, which rose a point to 13 in April, its highest level since June 2010.

Moving on to homebuilder ETFs, I have a neutral fundamental outlook for the homebuilding sub-industry. Assuming improved demand going into 2012 with price stability, I see most publicly traded builders in a favorable competitive position after reducing cost, retiring debt, and increasing cash positions over the past few years. Year to date through April 29, 2011, the S&P Homebuilding Index was up 3.7%, this compares to the consumer discretionary sector up 8%, and the S&P 1500 Index up 8.8%.

By reading the names of these two ETFs, most investors would think they directly play the homebuilders. However, it’s not that simple, and we explain below.

The iShares Dow Jones US Home Construction Index Fund (ITB 13 Underweight) has 28 holdings mostly related to homebuilder stocks. Where as the SPDR S&P Homebuilders ETF (XHB 18 Marketweight) has 35 holdings made up of a more diversified basket of building products, homebuilders, home furnishing retail, home furnishings manufacturers, and household appliance companies.

ITB uses the Dow Jones US Select Home Construction Index, while XHB applies the underlying holdings of the S&P Homebuilders Select Industry Index. We will look closer at the holdings, because the index does not provide a complete picture of what makes up each of these ETF securities.

Regarding top 10 ETF holdings, ITB has all ten holdings related to homebuilder stocks, which collectively represent 58% of the total ETF assets from holdings reported as of February 28, 2011, and with an S&P ranking as of May 4, 2011. The homebuilding stocks are 64% of the total ETF assets. Of the companies in the top 10, no stock is ranked 5-STARS (Strong Buy) by S&P, three are ranked 4-STARS (buy), two are ranked 3-STARS (hold), four are ranked 2-STARS (sell), and one is ranked 1-STARS (strong sell).

On the other hand, XHB’s home construction profile has only one homebuilder stock in its top ten holdings and the homebuilder stocks are only 28% of the total ETF assets reported as of March 31, 2011, and with an S&P ranking as of May 4, 2011. A year ago, the number of homebuilder stocks in the top ten was higher as a percentage of total ETF assets, but I think they may have underperformed other non-homebuilding stocks in XHB’s holdings.

The top 10 holdings for XHB were 38% of the total ETF assets. Of the companies, no stock is ranked 5-STARS (Strong Buy) by S&P, three are ranked 4-STARS (buy), four are ranked 3-STARS (hold), two are ranked 2-STARS (sell), no stock is ranked 1-STARS (strong sell), and one is not ranked.

For these ETFs, I would position ITB and XHB as tactical investments, versus core or strategic holdings in an investment portfolio. I see these being used to gain a more concentrated position to drive above market performance. As with all investments, I point out that investors should look to make selections that are suitable for their investment objectives and risk profile.

Positive Implications: SPDR S&P Homebuilders ETF (XHB 18.69 Marketweight)

Negatives Implications: iShares Dow Jones US Home Construction Index Fund (ITB 13.15 Underweight)

Continued Challenges for the U.S. Market: FHFA House Price Index Declines in Feb.

The 1.6% decline in the February FHFA House Price Index indicates that home prices will remain weak. This will likely have a negative effect on the U.S. housing market and the performance of the underlying collateral in U.S. residential mortgage-backed securities. The amount of shadow inventory (which S&P defines as outstanding properties whose borrowers are {or recently were} 90 days or more delinquent on their mortgage payments, properties currently or recently in foreclosure, or properties that are real estate owned), slow sales, and the high unemployment rate continue to be key concerns for the U.S. housing market. We can expect U.S. home prices to face continued challenges and remain weak through the spring as existing home sales slowly improve.

The Pacific region has seen the biggest growth in home prices in the past decade, increasing 116.3% (NSA) from 2000 through the mid-2007 peak, and decline, falling 36.2% (NSA) since the peak. During the same time period, the Mid-Atlantic home prices increased 90.4% (NSA) through the peak and declined only 12.8% (NSA) through February 2011. (See Chart)

For the full report, “The February FHFA House Price Index Fell In ALL Regions Indicating Continued Challenges For The U.S. Housing Market” published on April 22, click here

The posts on this blog are opinions, not advice.  Please read Standard & Poor’s disclaimer at [hyperlink]


Will spring selling season confirm improved new home sales?

Takeaway: Home sales are up 11% in March versus February, but they are still low historically.

I think there still is a low level of conviction that a housing recovery is underway. Whether you look at the most recently published data from S&P Case-Shiller Home Price Indices, or government data on housing starts and new residential sales for March 2011, these are certainly not the best of times for homebuilders. However, I do not think they are the worst of times either.

For housing sales, my take is that the glass is half full, for existing and new homes that is, since data have been picked up on a month to month basis. As seen in government data for March 2011, new residential home sales rose 11% month to month, but they are still down 22% year over year. The inventory of new homes for sale is 7.3 months at the current sales rate, the recent figure from the U.S. Department of Commerce. The March average sales price was $246,800, roughly flat with the February 2011 data.

So being the optimist, I am of the mind frame that housing will bounce along the bottom this year from weak housing demand, but I think things will post some signs of recovery going into 2012.

I also want to point out that the housing recession has made for record affordability in terms of purchasing a new home, given low mortgage rates, but credit guidelines are much more strenuous than in the past. Last week, mortgage applications rose 5.3%, which was the first increase in four weeks, as prospective homebuyers took advantage of low home prices and low borrowing costs. Mortgage rates for a 30-year fixed mortgage are still just below 5%, but I foresee rates rising from these low levels a year from now.

As everyone knows, location is everything in the housing market. While some local markets are coming back, they are far and few between. Pockets of strength are evident in coastal areas of California and select communities in the Northeast and Mid-Atlantic regions. But I think government data on new homes sales by region, month to month, have not provided any strong conviction of strong versus weak regions. In my opinion, data from the entire spring selling season, which is April through June, will give us a better idea of regional housing trends.

So, what’s a homebuilder to do to get things moving? In the market, we are seeing select price incentives by builders, but few if any in the industry are loading up on “spec” built homes, the ones that are built with the intention of “finding” a buyer. To me, this measure tends to highlight current market conditions and sheds some light on homebuilder sentiment regarding near term housing demand for their home communities.

Lastly, home community building data for the publicly-traded homebuilders, mostly the largest homebuilders, have been trending higher, not lower, over the past six months. Also, land and finished lot acquisitions have trended higher versus a year ago for homebuilders. I think these are good signals that the glass is half full for the housing market. Stay tuned.

In terms of names, I see the following companies being better positioned in this housing market, given strong balance sheets, diversified geography, and experienced management teams: Lennar (LEN 19 ****), M.D.C. Holdings (MDC 29 ****), and Toll Brother (TOL 20 ****). We see these housing companies and one ETF being worst positioned in this housing market, given higher exposure to weak Sunbelt markets, or to exposure to first time buyer markets, which remains weaker than other product categories (adult communities, mid-range, and luxury homes): DR Horton (DHI 12 **), KB Homes (KBH 12 **), Meritage Homes (MTH 26 **), Ryland Group (RYL 18 *), iShares Dow Jones US Home Construction Index Fund (ITB 13 Underweight).

Positive Implications: Lennar (LEN 19.36 ****), M.D.C. Holdings (MDC 28.52 ****), Toll Brother (TOL 20.25 ****)

Negatives Implications:

DR Horton (DHI 11.50 **), KB Homes (KBH 11.80 **), Meritage Homes (MTH 24.60 **), Ryland Group (RYL 16.20 *), iShares Dow Jones US Home Construction Index Fund (ITB 13.42 Underweight)

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