Friday, February 10, 2012

Where is the Housing Bottom?

The Mortgage Corner

The housing bottom is really a function of incomes, jobs, and inventory of houses for sale. All three indicators are favorable for housing sales to pick up this year. But prices have to bottom first. The main price indicators are the monthly S&P Case-Shiller and FHFA price indexes that supervise Fannie and Freddie telling their direction. Another indicator that tells us when housing markets are improving is weekly mortgage application totals put out by the Mortgage Bankers Association.

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Graph: Calculated Risk

Mortgage applications increased 23.1 percent from one week earlier (last week’s results included an adjustment for New Years Day), according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 13, 2012.

“Interest rates dropped last week due to continuing anxieties regarding the fragile economic situation in Europe,” said Michael Fratantoni, MBA’s Vice President of Research and Economics.  “With mortgage rates reaching new lows, refinance volume jumped and MBA’s refinance index reached its highest level in the last six months.  Purchase activity also increased as buyers returned to the market after the holiday season.”

image

Graph: Calculated Risk

The Refinance Index increased 26.4 percent from the previous week to its highest level since August 8, 2011. The seasonally adjusted Purchase Index increased 10.3 percent from one week earlier to its highest level since December 12, 2011.

And builder confidence in the market for newly built, single-family homes continued to climb for a fourth consecutive month in January, rising four points to 25 on the latest NAHB/Wells Fargo Housing Market Index (HMI). This is the highest level the index has attained since June of 2007.

"Builder confidence has now risen four months in a row, with the latest uptick being universally represented across every index component and region," noted Bob Nielsen, chairman of the National Association of Home Builders (NAHB). "This good news comes on the heels of several months of gains in single-family housing starts and sales, and is yet another indication of the gradual but steady improvement that is beginning to take hold in an increasing number of housing markets nationwide -- and that has been shown by our Improving Markets Index. Policymakers must now take every precaution to avoid derailing this nascent recovery."

Privately-owned housing starts in December were at a seasonally adjusted annual rate of 657,000. This is 4.1 percent below the revised November estimate of 685,000, but is 24.9 percent (±18.3%) above the December 2010 rate of 526,000.

image

Graph: Calculated Risk

But Single-family starts increased 4.4 percent to 470,000 in December - the highest level in 2011, and the highest since the expiration of the tax credit. This should give a boost to 2012 growth.

Another upside surprise was signs of increased employment. Momentum is building in the labor market. Payroll jobs in January advanced 243,000 after jumping 203,000 in December (originally 200,000) and rising 157,000 in November (prior estimate up 100,000). The net revisions for November and December were up 60,000.

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Graph: Econoday

As for some time, says Econoday, private payrolls outstripped the total, increasing 257,000 in January, following a gain of 220,000 in December. So we are seeing a reason for the jump in builder confidence.

Existing-home sales might also pick up, because of the fire-sale prices. Total housing inventory at the end of November fell 5.8 percent to 2.58 million existing homes available for sale, which represents a 7.0-month supply at the current sales pace, down from a 7.7-month supply in October.

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Graph: Calculated Risk

We know that it’s the combination of a better jobs market and even increased household formation that increases the demand for housing. Demand is increasing in spite of some 4 million homes somewhere in the foreclosure process. Maybe a key is that the younger, echo boomer generation is creating more households. Household formation has fallen drastically since 2007, so maybe this is the year when it will return to historical levels.

Harlan Green © 2012

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