Housing Market: The 'End of the Beginning'

The National Association of Realtors (NAR) announced some encouraging news that pending sales rose 3.2% and construction spending moved positively in March. When asked about this release in a radio interview yesterday morning on NPR's Marketplace segment, I mentioned that this means that we're perhaps reaching the "end of the beginning" in the housing market.

Back in February, it looked like there was going to be a spring-time bounce in the housing market, and it's clear by now that there's price levity in the market. As spring progresses, the bounce is defining itself in markets like Phoenix, where there is clearly buyer activity in the lower price segments. Even Las Vegas has some potential for promise depending on how you look at the data. Prices fall, markets clear.

So what did I mean by the "end of the beginning?" The S&P Case Shiller Home Price Index for February was released last week. Home prices were reported lower, but the market didn't seem surprised by the bad news - it almost expected it. When the positive news was released from NAR this week, it seemed that the markets were genuinely surprised - sort of a "Wow. Really?" But looking at the reason for these numbers, it's pretty easy to see why the March numbers were positive and perhaps the markets were just looking for a reason to rally.

There's a major mortgage refinancing boom going on right now, and while the prepayments of existing mortgage contracts are killing the returns for investors that own mortgage portfolios, it is helping to create buyer activity along with the $8000 tax credit now available. But, while the market is showing some price stabilization this spring, prices could still be headed lower later this year once we get past the normal seasonal activity. We've seen markets like Chicago take a rest on the way down in 2007 and 2008, only to fall dramatically in the second half of each year.

Let's be rational, mature adults about this. A few positive reports doesn't mean that we've hit the bottom, and that's why it's probably more accurate to say that this is the "end of the beginning" and not the "beginning of the end." It won't be until later this year once the spring season turns into the late summer and fall that we'll know whether or not the housing market can maintain its current price levels. Given the data inventory levels, the lagging effects of the foreclosure moratorium, and the ongoing rise in unemployment (reminder: April's numbers come out on May 8), rational investors and Wall Streeters know that this housing mess is going to take a while to clear.

Yes, good news offers a welcome jolt to the market, but reason dictates that a couple of percentage points about pending home sales from two months ago doesn't shape the bottom that we're looking to find. Remember, we won't know it's the "bottom" until long after it's passed. It's the "end of the beginning" because we're all finally starting to realize that it's pretty messy out there, but the fact that the massive decline in prices is causing buyer activity means there is a market-clearing price out there, and we'll be out of it. Eventually, not next Tuesday...

Comments

[cynewulf:]

The author is right. The housing market is huge. It does not turn on a dime, because so many people are in it out of necessity orfor lesser reasons that are not very speculative. these people can have a large seasonal effect and not really care much, that they are not getting the best price. First time buyers can be lured in by low interest rates. thatsa one time event, unless rates could go lower. I don't think so.

May 05 09:42 AM

[Radardoc:]

I think you're being overly optimistic Scott.

Calling anything from the NAR "data" in regards to the housing market is like relying on the teachers unions to tell you about the state of education in the country. The NAR is a group of cheerleaders that were still spreading flowers and sunshine even as the markets were falling off the cliff. They have a vested interest in keeping the sheeple buying. If your source of data has a vested interest in the outcome of the story, it will be skewed in their favor. PERIOD.

While I must acknowledge that I am probably as pessimistic as you are optimistic, I'm trying to confine my sources to data and not spin. I read the words and truly wish they were believable, but all the data I see indicates otherwise…

May 05 12:49 PM

[Scott Sambucci:]

Radardoc - "While I must acknowledge that I am probably as pessimistic as you are optimistic, " ...

I guess I'm optimistic in the sense that I think that the bad data and information is behind us, though I don't think that we're anywhere close to the end of the housing market problems. It's important to look at how the housing market holds up (or not) through the rest of 2009 to see if this is indeed a bounce or early signs of recovery. The data on inventory levels and foreclosures indicates this is a bounce, which puts the start of the recovery (the "beginning of the end") in 2010 or 2011.

May 05 01:30 PM

[Jasper M:]

I am curious how the author squares this with the coming waves of ARm resets, especially in light of rising long bond. According to the Credit Suisse (done in 2007), there is a larger wave coming at the end of 2011 than the subprime one we already dealt with. That is pretty much inventory.

There is a copy of this chart in McSwain's recent article.

May 05 01:44 PM

[Scott Sambucci:]

Hi Jasper - Per your note - "I am curious how the author squares this with the coming waves of ARm resets, especially in light of rising long bond. According to the Credit Suisse (done in 2007), there is a larger wave coming at the end of 2011 than the subprime one we already dealt with. That is pretty much inventory."

Absolutely agree with respect to some of the ARMs resetting - I've referenced this in a couple of articles, including:
seekingalpha.com/artic...

By no means am I suggesting that we're out of the woods - the premise for labeling our situation as the "end of the beginning" (and clearly NOT the "beginning of the end"...).

May 05 05:00 PM

[HardwoodFlo...:]

When FHA raises the ceiling on loans to $750K you will see a jump in home prices. But it will be fake. Fake because it won't reflect the actual value of the home being up or down just that someone was able to get a loan and close on a house. That house 3 years ago might have sold for $1.5MM. The problem today is that you can't get a JUMBO. This is adding fuel to the downward pressure on the average home price sale because you are limiting the pool of sales to FHA (Sub $430K or that range). As a result it's easy then when you compound that with distressed sales to drive down average home sale prices and crank the all-to-often cited "affordability index".

May 05 09:32 PM