Has Recovery Begun? Mixed Messages from Housing Experts
Is the U.S. housing market in recovery? It's a tough question based on the data, and its even tougher to answer based on statements from the housing market experts. Their opinions range from a strong “yes, it's in the recovery process” to “no,absolutely no recovery in sight.” So where does the truth lie? That depends on what data you choose to emphasize, it seems.
For example, the latest survey of U.S. home prices was very discouraging. The S&P/Case-Shiller Home Price Index for the largest top ten metro areas showed a 2.6 percent decrease in February over the previous year, while the index for top 20 cities fell 3.3 percent. Even more disturbing is that home prices in many cities have dropped back down to their previous cyclical lows from April 2009.
“There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing.” said David Blitzer, Chairman of the Index Committee as quoted on Forbes.com. “Ten of the 11 MSAs (metro statistical areas) that recorded index lows in January fell further in February. The one exception, Detroit, is 30% below its 2000 price level.”
The Federal Reserve has also made it clear it sees the housing market as a stumbling block to greater economic healing. The housing market is “also holding back the recovery,” said Federal Reserve Chairman Ben Bernanke during a press conference. “The foreclosure rate remains very high, and many homeowners who have avoided foreclosure find themselves ‘under water,’ meaning their mortgage debt exceeds the value of their homes.”
And the more home prices fall, the likelier it is that homeowners will 'strategically default' on their mortgages, creating a vicious cycle of foreclosure.
Yet, in the face of these depressing views of the housing market, there have been some optimistic voices saying that recovery is in progress. The National Association of Realtors has released two surveys recently showing an increase in home sales as well home prices.
Sales of existing homes for March grew 3.7 percent over the previous month and the national median price rose on a monthly basis as well – for the first time in nine months. The Pending Home Sales index for March rose 5.1 percent, compare with the February level.
NAR chief economist Lawrence Yun believes this to be positive proof of recovery.“Since reaching a cyclical bottom last June, pending home sales have posted an overall gain of 24 percent and demonstrate the market is recovering on its own,” he said. “The index means modest near-term gains in existing-home sales are likely, which would be even stronger if tight mortgage lending criteria returned to normal, safe standards.”
Given that the last two surveys were reflective of more current data (March sales information versus February price reports) it is tempting to see them as more accurate pictures. Sure, prices were down in February, but at least the national median was up slightly in March.
What is hard to refute is that a slough of new foreclosures are coming down the pipeline and will almost certainly have a dragging effect on the market. So perhaps things are starting to show signs of life on gradual, monthly basis, but the overall picture still remains murky.
Phoenix and Minneapolis saw home prices drop more than 8% annually in February, while Seattle, Portland, and Chicago recorded drops that exceeded 7%. The only positive piece of data came from Washington DC, where despite a month-over-month drop of 0.1%, annual growth rates reached 2.7% allowing it to grow its home prices 80% since January 2000 and marking a 15 consecutive month of annual growth. (Read Distressed Debt Investors Prefer Real Estate In 2011).
Blitzer all but confirmed that there has been no recovery in the housing market, noting that existing home sales, housing starts, and foreclosure activity all continued to pose an important obstacle to any broader recovery.
The Federal Reserve, with Chairman Ben Bernanke at the helm, has tried to prop up the economy through its two programs of quantitative easing. While this has managed to create a “wealth effect” and boost equities, it has been completely ineffective at helping a beleaguered housing market that continues to fall month after month. Banks still have a vast inventory of foreclosed homes going through the pipelines, which will depress prices even further. Housing, which represents an important portion of most Americans’ equity, will continue to fall in the coming months, putting a substantial obstacle in the path of any possible economic recovery.
Pending home SALES
March saw another increase in pending home sales, with contract activity rising unevenly in six of the past nine months, according to the National Association of Realtors®.
The Pending Home Sales Index,* a forward-looking indicator based on contract signings, rose 5.1 percent to 94.1 in March from a downwardly revised 89.5 in February. The index is 11.4 percent below 106.2 in March 2010; however, activity was at elevated levels in March and April of 2010 to meet the contract deadline for the home buyer tax credit.
The data reflects contracts but not closings, which normally occur with a lag time of one or two months.
Lawrence Yun, NAR chief economist, said home sales activity has shown an uneven but notable improvement.
The PHSI in the Northeast fell 3.2 percent to 63.4 in March and is 18.4 percent below March 2010. In the Midwest the index rose 3.0 percent in March to 83.5 but is 16.6 percent below a year ago. Pending home sales in the South jumped 10.3 percent to an index of 110.2 but are 10.5 percent below March 2010. In the West the index increased 3.1 percent to 103.7 but is 4.1 percent below a year ago.
“Based on the current uptrend with very favorable affordability conditions, rising apartment rents and ongoing job creation, existing-home sales should rise around 5 to 10 percent this year with sales growth of lower priced homes likely to outperform high-end homes. That means the price trend will reflect more homes sold in the lower price ranges,” Yun said.
“The good news is that recent home buyers are staying well within budget, leading to exceptionally low loan default rates among home buyers over the past two years,” Yun added.