Wednesday, January 27, 2010

Housing Market Data Indicates Price Trend Improvement

John Lounsbury from The Street analyzes the home price data from Case-Shiller, NAR, and FHA to conclude that housing recovery is still far off. Housing prices and sales of existing homes are showing an overall trend of improvement, while sales of new homes is heading downward. See the following post from The Street.

The widely followed Case-Shiller Home Price Index out this morning showed a decline for November compared to October, but just barely.

The Composite-10 Index, covering 10 of the largest metropolitan housing markets, was $158,490 in November, down from $158,820 in October. The broader Composite-20 showed similar results, with a decline from October of 0.2%, the same as the Composite-10.

Compared to a year ago, prices for the two indexes were down 4.5% (Comp-10) and 5.3% (Comp-20). The year-over-year rates of price decline continue to improve, as shown in the graph provided by S&P Case-Shiller below.

Because the Case-Shiller (C-S) index reports a three-month moving average, the effect of the end of the 2009 first-time home buyers tax credit is muted compared to the data from the NAR (National Association of Realtors).

The November declines in the NAR existing home prices were -1.2% from October and -5.7% year over year. When the NAR data is viewed through the prism of a 3-month moving average, the numbers are even more different from the C-S results. The 3-month moving average changes are -1.4% month to month and -7.2% year over year for the NAR data.

I can only attribute this to the geographic scope of the two surveys: C-S monthly surveys cover only 10- and 20-city markets, whereas NAR is a national survey. The implication is that the improvement trends (declining more slowly) are lagging outside of the 20 major markets.

Another monthly housing price index was also published today by the Federal Housing Finance Agency. This report, which covers homes sold with FHA conforming mortgages, found that prices rose 0.7% for November from October. Year over year, November was up 0.5%. This indicates that homes with FHA mortgages are behaving better than the complete market. The FHA conforming market is restricted to mortgages less than about $420,000, the limit for most areas of the country.

The fourth home price measurement is the New Home Median Price compiled by the U.S. Census Bureau. That report for December will be issued Wednesday.

The following graph shows the behavior of all four indexes since the housing market prices peaked in early 2007.

The messages from this data are mixed. Key observations:

  • The quadratic trend lines for C-S and FHFA are cupped (curving toward the up side) indicating price trend improvement.
  • The NAR quadratic trend line is domed (curving downward) indicating price trend degradation.
  • The new home price quadratic trend line is nearly linear indicating little trend change. The seasonal cycling effect is obvious in the NAR data.
  • All four curves are above their quadratic trend lines, a positive situation.
  • The three-month moving averages are all very close to the 12-month moving averages. This is a neutral situation.

Sales volumes are much more problematic. Last week's bombshell was the dramatic drop in existing home sales reported for December by the NAR. The established trend in sales volume had appeared to be headed up, as shown in the following graph. It appears that the December sales volumes for existing homes may have returned to an extension of the gradual up slope that existed before the market was distorted by the first time home owners' tax credit.

Meanwhile, new home sales volume has declined throughout the second half of the year, even in the face of the tax credit. It looks very much as if new home sales may again reach the low levels of early 2009.

The December data due from the Census Bureau Wednesday will go a long way toward determining how likely the lows in numbers of new homes may not yet have been reached.

This is not good news for the home builders, such as Toll Brothers(TOL Quote), D.R. Horton(DHI Quote), Hovnavian(HOV Quote), Pulte Homes(PHM Quote), KB Home(KBH Quote)and Lennar(LEN Quote).

Has housing stabilized? Maybe in some regards, but it remains to be seen how an additional two to three million foreclosure homes becoming available in 2010 will impact the market. It is unlikely that the new home segment of the market will stabilize until the wave of foreclosures comes to an end, which may well after 2010.

What we may see is the existing home market continuing to slow its decline and going through a broad bottom over the next one to two years, but the new home market may well not bottom for some time.

For new homes, which have a higher cost per square foot, it's all a matter of supply and demand. New homes will continue to face an over supply of existing homes and a weak demand based on price point.

This post has been republished from The Street.

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