So How Good Was Housing Data in March?

In the three weeks since I described how housing was near a bottom in sales activity, it has almost become fashionable to be optimistic on housing. Even the latest BusinessWeek cover story, titled: “Signs of Life”, focuses on the equilibrium that the hardest hit markets appear to have reached. Optimistic thinking was reinforced by a flurry of encouraging monthly housing statistics released in recent weeks. Of course, one month of data does not a trend make. Additionally, some skeptics have rightly pointed out that housing data from the dead of winter can be misleading when seasonally adjusted. I decided to dive deeper into the latest round of data.

Any and all optimism in looking at housing data stems from monthly data of activity from the beginning of 2009. Any year over year data looks terrible and will continue to for some time. Based on monthly data, some observes have commented that the housing market was showing signs of life ahead of the September 2008 collapse of Lehman Brothers. If this was true (or was simply reading of tea leaves), any momentum reversed itself last fall and the market collapsed further. Cautious optimism retreated until very recently but is making a comeback from some favorable February data.

New home sales were up for the first time in 7 months, increasing 4.7% in February. While these numbers are small relative to (less than a tenth of) existing home sales there was much to be encouraged about in the February numbers. Sales in absolute terms and seasonally adjusted annual rates were up over January. Inventories declined in both absolute terms (from 340,000 homes to 330,000 homes) and when expressed in terms of months of supply. Even the revisions to January numbers were favorable. I had quoted the U.S. Census Bureau that January home sales were at an annual pace of 309,000 with 13.3 months of inventory. These were revised to 322,000 and 12.9 months respectively, meaning January was never as bad as we thought. February sales stood at an annual pace of 337,000 and 12.2 months of inventory.

The skeptical view is three fold. First, all numbers are considerably worse that February of last year. Second, the increases are not statically meaningful. Lastly, one month does not make a trend. Yet compared to recent history of steep sales rate declines, a good case can be made that the momentum finally hit a wall (or a floor in this case). Conclusion: Clearly Positive.

Existing home sales rose by 5.1% from January to February to an annual pace of 4.7 million homes. When graphed (as shown below), it is hard to argue that the numbers are bouncing off of some kind of a floor, more like they found a new bottom to bounce along. The positive points of the data include 1) all four regions of the country experienced sales increases and 2) the west was up 30% over February of 2008. Inventory of unsold homes increased in absolute terms but were flat at 9.7 months worth of inventory. The rates are no longer declining but such was true last fall. The rate had been hovering at 4.95 million unit annual pace with a slight upward trend until the last September’s financial panic. Sales are now hovering around at just over 4.6 million with a slight downward trend if anything. Conclusion: Neutral.

Mortgage Rates pushed meaningfully below 5% for the first time ever and now sit at 4.78%. Freddie Mac’s reading on 30-YR fixed rate mortgages dropped below the 5% threshold for one week in January but then edged back up for the following month. It has now been in a downward trend and below the 5% level for three weeks running following the Federal Reserve’s March 18 FOMC meeting. They declared increase purchases of mortgage debt and the start of a program to buy longer term Treasury notes to bring down. While this might be bad for the strength of the dollar and long term inflation prospects, it is positive for home affordability. Mortgage applications, particularly refinancing, have been up in the weeks since that meeting. Conclusion: Clearly Positive.

MICA showed the first meaningful drop in mortgage defaults (15.7%) and “cured” mortgages increased by a third.

This lesser-known monthly figure comes from mortgage insurance companies and does not represent the whole market but combined with numbers from the industry group Hope Now shows that efforts to prevent foreclosures are starting to reach a meaningful scale. Hope Now was instituted in mid 2007 and is billed as “an alliance between HUD approved counseling agents, mortgage companies, investors and other mortgage market participants that provides free foreclosure prevention assistance.”

The two biggest criticisms of Hope Now have been that it is too small in scale to be meaningful and not enough mortgages were actually being modified. There are between two and three million mortgages that are at least 60-days behind and in some stage of the foreclosure process with 100 thousand to 200 thousand entering those categories each month. A year ago only about 50 thousand mortgages were actually being modified each month and more than half were re-defaulting. In February, Hope Now tracked 134 thousand mortgage modifications and another 110 thousand repayment plans putting the total number of “workouts” close to a quarter million. Even if half default again, half don’t and progress can is being made to keep people in their homes.

There is no reason to believe that the programs announced by the Obama administration won’t add to the momentum. That is, all except the effort to allow bankruptcy judges to modify mortgage (known as “cramdown”), of which I am skeptical. My negativity simply stems from the fact that the number of judges (measured in the hundreds) is too few to impact numbers on a national scale. Conclusion: Encouraging.

FHA is reporting rising defaults. The Wall Street Journal reported on March 31^st that the percentage of “serious delinquent” mortgages in their portfolio now stands at 7.5%. The Federal Housing Administration does not publish regular numbers but simply described that the level is up from 6.2% from this time last year. Such an increase is understandable and likely does not represent any new trend, simply a problem moving away from the private sector towards the government.

During the housing boom private lending market had become so liberal that almost anyone could get credit, making FHA programs almost irrelevant three years ago. Then private lenders began tightening credit over a year ago by requiring reasonable (10% to 20%) down payments and higher FICO scores. Many mortgage insurance companies increased their premiums and refused to insure mortgages with loan-to-value (LTV) ratios of 95% or 97%, particularly in distressed markets. Would-be home buyers that no longer qualified in the private market flocked to the FHA in 2008. It is not surprising then that the credit problems is now tracking that move from private companies to the FHA, which provides mortgage insurance for first time and low income home buyers. Conclusion: Neutral.

The Office of the Comptroller of the Currency of the U.S. last week detailed rising mortgage delinquencies throughout 2008. In a report looking at the quarter by quarter progression of the delinquency problem, two big points were emphasized. First, housing defaults had become more than a subprime problem by the end of last year. Secondly, modified mortgages defaulted again more than half the time. The report made one important but self-evident observation: re-default rates are high when modified mortgages don’t result in lower monthly payments.

This can be reconciled with the Hope Now data by understanding that mortgage modifications were largely ineffective a year ago. It did document that the percent of modified mortgage resulting in lower monthly payments for the homeowner were on the rise and that these changes were about twice as effective at preventing re-defaults. While important, the report serves as a comprehensive look at the past yet provides little new data. Conclusion: Neutral.

Case-Shiller data demonstrated another month of breathtaking declines in home prices. The widely reported S&P/Case-Shiller Home Price Index showed that downward pressure on home prices remains unchecked. The index declined 19% year over year. The most recent data reported last week reflects January rather than the February data but that hardly matters. As described in my previous article, this measure will be the last one to turn positive. Contained in the price data was a shift in the steepest declines from areas like Southern California and Miami to more stable markets like Chicago and Charlotte. The graphs below show the month on month price declines for the Los Angeles (left) and Chicago (right) areas. It is clear that the monthly declines are moderating in the hard-hit Los Angeles area but have picked up recently in the Chicago area. Conclusion: Negative.

Additional encouraging data came from housing starts that were up for the first time in 8 months, increasing 22% in February. Homebuilder KB Home’s quarterly results showed increasing orders. Its shift to smaller homes and focusing on fewer communities has been beneficial. The directional call on a bottoming housing market may have been timely last month. Home prices, however, may still be a year from their bottom.

It does appear that the worst is over for the worst markets. At the same time, rising unemployment is having an effect on the housing in non-distressed areas of the country. While it is not straight up from here, it is reasonable to expect the recent spate of positive indicators will combine with improved home affordability, lower interest rates, thawing credit markets, and government incentives will get the U.S. housing market moving in the right direction by this summer.

Disclosure: No Positions.

Comments

[BigJake]

FHA is reporting rising defaults - sounds NEGATIVE to me
The Office of the Comptroller of the Currency of the U.S. last week detailed rising mortgage delinquencies throughout 2008 - sounds Negative to me.

Yet you say neutral. Me thinks you must have money tied up in the REIT's? Just sell already so you can be objective!

2009 Apr 06 10:32 AM

[rogersails]

"Mortgage Rates pushed meaningfully below 5% for the first time ever and now sit at 4.78%"
Hard to see this as a positive. It represents a massive government subsidy on top of government suppressed interest rates, both of which are probably unsustainable. Without such subsidies, and rates returning to market norms, or worse, historical stagflation levels, the numbers would be truly horrific.

2009 Apr 06 11:12 AM

[Doug Poretz]

Statistics can be deceiving -- I just posted an article (drawing on four years experience as VP of NVR and numerous consulting assignments with other homebuilders) tinyurl.com/co7dpw that explains that the vigor of first time homebuyers is basically meaningless to the bottoming process because they are buying those houses from creditors and distressed sellers who will not use their proceeds to buy another house, as in a normal market. The difference is that under normal circumstances the seller of the first home becomes a buyer of their first move-up home and the people that sell that house become buyers of their second move-up home and thus a food chain is created and the market becomes vibrant. But that doesn't happen when the seller of the first time home doesn't become a buyer of another home. So the figures of "health" in the market are basically meaningless except for the fact that inventory is being absorbed for an eventual recovery.

Additionally, the low mortgage rates are not impressive because the qualifying standards are so high and because appraisals are so fluid that they are torn up at the settlement table and new debt:equity ratios need to be established, sometimes killing the deal.

We are so far off from a residential real estate bottom. "Glimmers of hope" may exist, but that flicker of light that you may see from them is very faint and very off in the distance.

2009 Apr 06 11:35 AM

[mrbill]

"FHA is reporting rising defaults."

"Conclusion: Neutral"

"The Office of the Comptroller of the Currency of the U.S. last week detailed rising mortgage delinquencies throughout 2008."

"Conclusion: Neutral"

Talk about spin.

"Case-Shiller data demonstrated another month of breathtaking declines in home prices."

"Conclusion: Negative."

Why is this bad? Do you have kids, do you want them to be priced out of the market thanks to artificially low interest rates and other government subsidies such as tax credits? And what effect will low interest rates have on the cost of living for everyone including home buyers in two to five years? Is it better to pay $1 million for a $500K home if you get an interest rate of zero? Artificially low interest rates and subsidies are great, you save a couple of hundred on your monthly mortgage, but end up paying several hundred more on higher property taxes, food, energy, and fuel.

2009 Apr 06 11:51 AM

[Fighting Yoda]

Housing continues to have three major problems – rising foreclosures, rising inventory, steeply falling prices. Nothing at all is positive. Tiny uptick in sales is due to falling prices and lowering of interest rates- a trend that would lead to bottoming, but we are nowhere close. Home prices are only at late 2003 levels, lot more to go. Unabated job losses for the foreseeable future cannot be good for housing.

To quote Meredith Whitney: “banks will continue to write down their mortgage assets as home prices decline further than lenders expected.”

2009 Apr 06 12:37 PM

[HardwoodFlooring]

It seems amazing that a 2% default on home mortgages has escalated into an unstoppable wave of economic destruction. But it has. I’d like Meredith Whitney to explain that one to me. How does 2% take down 100% of the market? CDOs?


50% of the people in this country do not have a mortgage. Of the other 50%-75% have been in their home for 10 years or more.

For the past 3 years it has been impossible to get a home equity. Jumbos are almost impossible to get and take months to process.

Since 06 housing starts have fallen off a cliff to as low as 400K single family homes and are now around 500K. By all measures the sustainable level of housing is 1MM of new single family home units a year. We have been below that for going on 2 years.

So what, no big deal. It’s just that we are bottoming out in a kind of flat bottom or flat line. Will we get out of it, yes, when in the next 6-12 months. That’s 4 years of housing being at its lowest levels on record. That is what it is going to take. At least now we can see the end. 12 months ago we could not. Well there is an old expression "liars figure and figures lie". Data points can be massaged and manipulated to meet an ends. The best thing to do is look at it objectively.

Pricies falling is not a big deal. Part of the reason prices are falling is that you have too look at what is being bought- foreclosed homes, short sales et al. Of course the median is dropping particularly when Jumbos are impossible and take months to get. Let fist time home buyers seep-up that inventory. Great- new homes aren't being built anyway.

2009 Apr 06 03:44 PM

[Jason Rines (iThinkBig)]

I am waiting on buying a couple of distressed properties until the fall. I am in New England. I expect another 15% decline in home prices (at least). Affordability is no longer a creative mortgage or low long-term rates it's about a 3-1 income to price ratio.

2009 Apr 06 04:25 PM

[Lin]

Re Hardwood Flooring

A 2% rate of defaults causes lenders to crash because of the " extreme amount of leverage " that was used in doing these loans. 40-60;1

2009 Apr 06 10:47 PM

[HardwoodFlooring]

Lin, Well actually it was becasue the Banks were then taking the Cash Flow from these mortgage trounches and using the trounch as equity then borrowing on that 40x. So your right but then when you borrow 40x on top of what the default was you compound the losses. Still it doesn't make sense.

I would like to see an investigation into this whole mess....

2009 Apr 07 10:26 AM

[billp37]

New construction in the Albuquerque, NM faces probable water and electricity shortage problems.

home.comcast.net/~bpayne37/abqwater/ri...

2009 Apr 07 12:36 PM