Tuesday, July 28, 2009

Economists jolted by housing data

Economists are getting jolted by positive surprises on the housing front. William Wheaton's forecast of household formation demographics stabilizing housing prices (see Housing prices, a different perspective ) may be in play now, but skeptical forecasters continue to ignore the signs. They obviously have good reasons to be skeptical. The two forecasts from JPMorgan (below) are well thought out and backed up by other data, but completely off the mark.

The New home sales forecast from JPMorgan:

New home sales are expected to fall 2.0% M/M to 335K annualized in June. New housing demand appears to be stabilizing at a very depressed level as June’s expected sales results are within the recent 330-355K range that has been established over the past five months. Several housing indicators are pointing to a decline in new home sales for June. The 30-year mortgage rate jumped 56 basis points to 5.42%, the highest since last November. The rising stock of foreclosed properties (primarily in the resale market), which are priced to sell, will continue to weigh on new home sales. The National Association of Homebuilders housing market index fell in June with unchanged readings for both traffic and current sales activity. And finally, due to affordability concerns, the Conference Board and University of Michigan survey attitudes on home buying were also softer in June. Going forward, tighter credit conditions and rising unemployment are expected to restrain demand. Excessive inventories and a rising stock of foreclosed homes available for sale will weigh heavily on new home sale prices. In addition, with completed new homes taking a record 11.5 months to sell, further price concessions by home builders will be necessary to move properties.

The actual number was up 11% to 384. Here is the chart of the number of new one-family home sales:

The Case Shiller forecast from JPMorgan:
After sliding 0.6% in April, the Case Shiller home price index for the 20 largest cities likely fell 1.0% M/M in May for an annual decline of 18.3%. April’s decline and May’s expected fall are improvements over the prior six months, when the average monthly decline was 2.4%. However, May’s accelerated rate of deflation is due to the rise in foreclosures in the Nevada, California and Florida markets where inventories are already excessive and in the Detroit and Chicago markets, where the automobile industry is experiencing more intense difficulties. Areas where sub-prime lending was less pervasive (Denver, Dallas) will do relatively better. Home sale prices are expected to remain under pressure as a glut of distressed properties are coming on the market, inventory levels remain excessive, mortgage underwriting standards have tightened considerably and unemployment is expected to drift higher over the remainder of the year. We expect a further decline of 5-10% in the Case Shiller index over the next year.

The actual number was a M/M increase of 0.45% and a YoY decline of 17.6%. Here is a chart that shows the Case Shiller index (composite of 20 cities):

On a month-over-month basis it's easier to see signs of stabilization.

In addition to the sales and price data, the BAS-ML housing conditions index (below) is showing stability.

Source: JPMorgan

It's difficult to see housing prices going back to their peak levels for years (possibly decades) to come, and we may be at a "false bottom". However the data showing stabilizing sales and a slowdown in price declines are hard to ignore.

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