Lower home prices and government stimulus efforts have spurred demand and pared the supply of existing homes to the fewest in two years, while sending new-home inventory to a 16-year low.
While the American commercial construction and real-estate market is getting worse, there can be no denying the residential housing market has been improving. Many people along with myself still believe prices in some areas have more to fall. But that doesn't mean new housing sales and starts can't continue to grow. And new construction creates jobs more than falling prices.
Declining new home sales markets tend to bottom in January. And this seemingly endless 5-year continuous decline ended this January 2009 at new historic lows. This bust surpassed every other American real-estate decline since the 1960's. The magnitude of this decline is even more amazing when you consider America has more than double the number of house holds we had back in the 60's.
Sales of new homes rose for the fourth month in a row in July, increasing an estimated 9.6% (highest percentage increase in 4 years) to an annual rate of 433,000, the Commerce Department reported Wednesday. Economists had estimated new home sales would increase to a 390,000 rate, according to the median of 71 projections in a Bloomberg News survey. July’s sales pace was the highest in 10 months and exceeded all estimates. The seasonally adjusted sales rate was the highest since last September. The fourth consecutive increase in sales adds to the growing body of evidence that the residential housing market is finally expanding again after sinking to a record-low sales pace of 329,000 in January (see chart above).
Sales are being boosted by more affordable prices, low mortgage rates and government incentives to buy homes. Still, unemployment, rising foreclosures and falling prices are keeping some buyers on the sidelines.
With historic high unemployment there remains ample reason to doubt whether this increase in sales can be sustained in 2010, particularly given that the first-time buyer tax credit is set to expire Nov. 30th. It's believed to have accounted for around 35% of the sales increase this year. You can bet the real-estate industry has been lobbying for an extention.
This chart (above) plots the unemployment rate (inverted) againest new housing starts. It's no suprise there is a relationship. But note how unemployment usually continues rising even as new home sales begin rising. Just more proof New home sales are a leading economic indicator while unemployment is a lagging indicator.
Improvements in the unemployment rate lagged behind the start of a recovery by an average six months, according to Berson, the former chief economist of Washington-based Fannie Mae.
Existing home sales already have reached that marker, gaining for the last four months. Single-family housing starts improved for the last five months, two months short of the recovery average, and new-home sales jumped 9.6 percent in July, the most in four years, halfway toward the average eight months of consecutive gains before the onset of economic improvement.
The American housing sectors importance has grown
A review of the last 10 USA recessions since World War Two shows 80% (8) of them were preceded by substantial problems in housing and consumer durables. Except for the downturn after the Korean War and the 2000-01 internet and telecom collapse in business equipment and software investment, it has been a consumer cycle not a business cycle. And with 35 years of a declining American manufacturing sector the housing sectors importance to America's GDP and jobs has risen.
Economist Dr. Edward Leamer (UCLA Professor) published a report back in 2007 whose conclusion summation was the report title: Housing Is The Business Cycle
Residential construction and home sales led the way out of the previous seven recessions going back to 1960, according to David Berson, chief economist of PMI Group, a mortgage insurer in Walnut Creek, California. Home resales gained strength an average four months before the end of a recession, single-family housing starts improved for seven months, and new-home sales grew for eight months.
This chart (above) shows how New Home sales grew off the bottom of the last four biggest housing down markets and includes the current market. The above graph compares the current recovery with four previous housing recoveries. The recoveries are labeled with the month that single-family housing starts bottomed. Notice how we've now had four months increase but you can see how weak this looks realitive to the past. And if this chart were adjusted for the current number of households relative to the much lower number of the past the size of this historic bust is gigantic.
The second graph (below) shows the same data, normalized by setting the bottom for single-family housing starts to 100.
This graph shows that housing starts usually double in the two years following the bottom. Starts increased 80 percent over two years in the recovery following the Jan 1991 bottom, and 136 percent in the recovery following the Jan 1970 bottom.
Housing starts usually double in the two years following the bottom.
If starts doubled over the two years following the Jan 2009 bottom, single-family starts would recover to 715 thousand by Jan 2011. And looking at the first graph some people might think single-family starts might recover to a 1.1 million rate within 2 years. Bill McBride at CalculatedRisk.com who created these charts believes that's very unlikely.
Bill McBride does believe the bottom is in for housing but expects the recovery to be sluggish due to an excess in existing housing units, and decline in homeownership rate. His view does appear to represent the consensus view of everyone I've heard speak. I'd add a return to more historical higher down payments and tighter underwritng standards will hold demand down, along with high unemployment and underemployment.
Fresh "Green Shoots" can be found in multiply locations.
Exhibit A: Portland home sales jumped in July, marking the first year-over-year increase in sales for any month since early 2006. A total of 3,375 new and resale houses and condos closed escrow last month in the Portland metro area. That was up 9.3% from June and up 5.8% from a year earlier. The number of homes sold in July was the highest for any month since August 2007, when 4,242 sold.
Exhibit B: Seattle home sales rose above last year's level for the first time in more than three years last month amid relatively robust sales below $300,000. The median sale price fell, ending its three-month streak of month-to-month gains. A total of 4,221 new and resale houses and condos closed escrow last month in the Seattle area. Last month's sales rose 2.5% from the prior month and were 8.8% higher than a year earlier. July's sales total was the highest for any month since October 2007, when 4,434 homes sold. Last month's annual gain for total sales ended 37 consecutive months of year-over-year declines.
Exhibit C: Phoenix-area home sales climbed above a year ago for the seventh consecutive month in July but dipped below June as purchases of foreclosed properties continued to wane. The region’s decreasing reliance on sales of heavily discounted, lender-owned homes helped the median sale price inch higher for the third consecutive month. A total of 10,288 new and resale houses and condos closed escrow in the Phoenix metropolitan area in July, down 4.1% from June but up 27.7% from a year ago. Total home sales were the highest for the month of July since 2006.
Exhibit D: Las Vegas home sales rose above a year ago for the 11th consecutive month in July as investors and first-time buyers continued to target lower-cost, post-foreclosure properties. A total of 5,311 new and resale houses and condos closed escrow in the Las Vegas metro area last month, down 3.8% from June but up 28.5% from a year ago. It was the highest sales total for any July since 6,530 homes sold in July 2006. July marked the 16th consecutive month in which sales of existing single-family detached houses rose on a year-over-year basis. The 3,925 single-family house resales last month were the highest for any July since 4,555 sold in July 2005. Resale condos have seen an annual sales gain for 13 straight months and in July sales were the highest for that month since 2005.
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