Real estate enthusiasts are well aware of the seasonal strength usually seen in the business in the springtime. However, so far this season it has been hard to find sign of a spring fling, save perhaps in the performance of the iShares Dow Jones US Real Estate ETF (IYR), up 16% year-to-date through May 8. As far as real estate data are concerned, we have seen only weak indications of better activity thus far. Perhaps the most compelling evidence so far came this past Wednesday, but it was a questionable sign at that. Real estate remains in need of confirmation from its monthly measurements. Thus, it is still premature to say whether housing is ready to shift into a higher gear yet, especially considering the latest industry data and recent economic realities.
Reported last week, the Pending Home Sales Index edged up 1.5% in March, which was better than the 0.7% increase expected by economists. However, March's growth was also lifted as a result of its comparison with a downward revised prior month change, which was revised to -1.0% from -0.4%. Excluding the effect of the revision, the growth was nothing to write home about. The Pending Home Sales Index is an important leading indicator, offering insight into activity in the existing home market. It measures contract signings, not closings, which are measured by the Existing Home Sales Index.
Last reported for the month of March, the Existing Home Sales Index slipped in its annual pace to 4.92 million from 4.95 million the month before. While still representing a 10.3% increase year-to-year, the monthly result offered no sign of a spring pickup either. Neither did the latest New Home Sales Index [pdf] offer much sign of anything special. The New Home Sales Index edged up in March to an annual pace of 417K, up from 411K in February, but it fell short of economists' consensus expectations for a sales pace of 419K.
The new home market did find some inspiration in the last reported Housing Starts report [pdf], but it was false inspiration. The report showed the annual pace of housing starts broke a million, reaching 1.036 million in March, versus 968K the month before. Unfortunately, the increase was all on multi-family construction projects, where many can be attributed to rental property construction. That is not really good news for the broad real estate market. The annual pace of starts for single-family projects actually decreased in the period and the pace of permitting fell as well, deflating the data-point's impact on housing stocks like PulteGroup (PHM).
Up until now, we have been discussing March, however, mortgage activity increased in the much more recent week ending May 3, according to the Mortgage Bankers Association (MBA). The MBA reported Wednesday morning that its Market Composite Index climbed a steep 7.0% through the period, driven by both refinancing activity and applications tied to home purchases. The MBA's Purchase Index, measuring activity tied to home acquisitions, increased 2% on a seasonally adjusted basis. The index actually rose to its highest point since May of 2010, which is very encouraging. The shares of Bank of America (BAC) and Citigroup (C), two major mortgage lenders, gained sharply (1% to 2.5%) on the day, at least partly due to this information.
Indicating that something else may also be at play, the MBA's Refinance Index gained 8% against the previous week, rising to its highest point since December of 2012. Still, it's not as if severely lower mortgage rates catalyzed the change, as the effective rates for conforming and FHA sponsored loan balances actually increased through the period, while other loan types moderated slightly. However, the latest jobs report, which was widely seen as positive for the economy, may have helped some people on the fence to move forward faster out of concern that mortgage rates could move higher on an improved economic outlook.
Thus, it may be that seasonal spring strength could kick in now for real estate. The mortgage data just discussed is fresher than the information provided by the monthly housing data, which mostly covered March. However, if evidence of intensified activity does not begin to show up in the monthly data for April or May, it would understandably be due to a U.S. economy that remains heavily burdened by unaccounted for unemployment and other domestic and external forces, including Europe. Those forces could very well continue to drag on the real estate recovery, which is still also working through its own inventory issues and operating in an altered financing environment. In any event, I see real estate in most markets and classification segments as offering a special opportunity now, whether the economy gains more traction in the near term or not.