|
New Home Sales |
December '08 |
January '09 |
February '09 |
March '09 |
|
March release |
371 |
322 |
337 |
340 (F) |
|
April release |
372 |
331 |
358 |
356 |
|
Delta |
+1 |
+9 |
+21 |
+16 |
New home sales were up, no down, no up. Numbers for new home sales were both up and down depending on your reference. Let me explain. The sales figures for February reported that sales had increased to an annual rate of 337,000 homes (up from 322,000). Ahead of last Friday’s report, analysts were forecasting 340,000 to be reported. In fact, the rate was 356,000 but February was adjusted to 358,000 such that March sales were a “drop” from February. Taken as a whole, though, it was a positive report. All revisions were up and the inventory numbers improved.
At one time we thought inventories represented 13.3 months of supply. Taking into account all revisions, that figure peaked at 12.5 months of supply and now stands at 10.7.
In absolute terms, the inventory of new homes for sale: 311,000 is at its lowest since the last recession in 2001. The stocks in homebuilders have rallied significantly with KB Homes (KBH) and DH Horton (DHI) both up over 50% YTD and up 30% since the beginning of April. If you missed the rally, I would be cautious to think that homebuilders are about to become growth stocks from here. Purchasing a quality builder like these or Toll Brothers (TOL) and selling out of the money call options might be the best play for the coming months.
Existing home sales fell by 3% from February to March to an annual pace of 4.57 million homes. The best that can be said for this figure is that the sales are bouncing along the bottom. When graphed (as shown below), there is a fair bit of month to month fluctuation and the drop this month is within that. I would be hard pressed to make the case that a recovery is underway.
Mortgage Rates is holding below 5% and has leveled off at 4.8%. Freddie Mac’s (FRE) reading on 30-year fixed rate mortgages has continued to drop but it does appear to be flattening out. The Federal Reserve is doing its part to buy mortgage debt in the open market and force rates low. While targets of 4.5% and lower have been bantered around, it is unclear if rates will go any lower. It is equally unclear whether it matters. Mortgage rates are historically low but will buyers be more willing to come to the market at 4.6% interest rate that weren’t tempted at 4.8%? Unlikely. It is probably best for the Fed (which meets this week) to imply, “We won’t keep driving these rates down forever. Lock in now, while you can.” Might they go lower? Maybe but at least such a call by the Fed would get on-the-fence shoppers to think, “I had better lock in and buy now.”
Foreclosure Rates are back on the rise. March data from RealtyTrac showed foreclosures are now shifting into full gear as banks and government sponsored entities (GSEs like Fannie (FNM) and Freddie) have done away with moratoria and dumping foreclosed houses on the market. This makes up a good portion of the existing home sales in recent months. Even more concerning was that rates for defaults, the first stage of the foreclosure process (above), resumed an upward trend.
Socially, this is a terrible development but for the economics of the housing market, it is likely akin to finally ripping a Band-Aid off quickly. For much of last year, there have been calls for dropping prices to fire sale levels to allow for a “clearing of the market”. Data from western states, particularly California, demonstrates that at a low enough price, there are buyers.
Valuation of toxic assets might soon be possible. A clearing of the market, if that is what is happening, has one important silver lining. U.S. housing is at the epicenter of the global financial crisis, not because U.S. home builders or the construction industry are so important to the global economy. Such companies can hurt or help U.S. GDP by a percentage point or two but they are not the trillion-dollar problem. The trillion-dollar problem is that banks and other financial companies around the globe hold financial assets that are tied and leveraged in some way to U.S. mortgages.
These assets are bundles of mortgages or bundles of options on mortgages or bundles of insurances contracts (CDS) on mortgages. Ultimately, the value of these bundles will be determined by the number of underlying mortgages that prove worthless. It is not that everyone has defaulted on the underlying mortgages, simply the fear that everyone might. Selling a home at whatever the price for whatever the reason closes out the mortgage and brings much needed certainty to the market.
Reaching and passing the peak in defaults and foreclosures will finally allow for the pricing of these assets to take place with reasonable assumptions. This might mean some bundles, like highly leveraged collateralized debt obligations (CDO), truly are worthless. Other bundles, such as residential mortgage backed securities (RMBS) that hold mostly mortgages directly might be worth 35¢ on the dollar. This will be good or bad news depending on who is holding them and what price it has been marked to already. In the worst case, though, bad news will replace uncertainty, a good development for markets.
The silver lining is that: with a clearing process, however painful that is, price discovery of toxic assets becomes possible.
From the latest monthly data, it is hard to argue yet that the housing market has started to recover. Recovery can’t start, though, without first stopping the freefall. Most major indicators except Case-Shiller are pointing to the fact that the bottom of the cliff has broken the fall. That does not mean that recovery will be fast and furious. The recent run up in the price of homebuilders is probably overdone but this isn’t the point. With so many global financial assets tied to the default rates and payments from mortgage and other U.S. real estate related assets, finding out the hard way where the bottom is has benefits beyond the housing market itself.
Disclosure: No positions
Housing Data: A View From the Bottom of the Cliff
I am writing this on the eve of the release of the S&P/Case-Shiller Index of housing prices. While the index is the last of the monthly housing data to be released in April, I am quite certain the data won’t change the conclusion: home prices are still falling. At least as measured by Case-Shiller, this will continue well into next year with declines likely to be smaller as the year progresses. The rest of the data: housing starts, inventories, new home sales, existing home sales, foreclosures, etc. all seem to reinforce a different conclusion. We have landed hard at the bottom of the cliff.
Optimists will say that the “recovery is underway” and pessimists will say that “we are far from a healthy housing market.” Both are right, of course, but those views imply different assessments of the trajectory ahead. So far, there are no indications that the near term (between now and the end of the summer) we will do much more than bounce along the bottom. The best that can be said based on the latest housing data is the freefall is over because we have smacked hard against the bottom. As described at the end, hitting the bottom however forcefully and painfully has a silver lining. But first the data:
