With all due respect to Professors Case and Shiller, the very competent founders of the index named after them, at times of inflection, the S&P Case Shiller Home Price Index is going to prove relatively useless. However well the index measures home prices, it still provides lagged data and so at times of change might reflect a different story than the present reality. This is not to say the report does not reflect current reality, but we cannot be sure based on March data. So I insist investors also review the pricing information available in other housing reports which are more time relevant. Outside of the latest pricing data, I see reason for concern in recent housing and economic data that is not reflected in the latest home price index. It makes this pricing data dangerously misleading to the undisciplined.
As we close out the month of May, the S&P Case Shiller Home Price Index was reported for the month of March. A lot can happen between March and May, especially in this industry. For that matter, this article illustrates what seems to be an abrupt shift in May itself. So, with that qualifier, let's review the data. In March, measured month-to-month, both the 10-city and 20-city home price composites were up 1.4%. That continued a recent upward trend which is also reflected in the quarterly increase and the year-over-year growth. The National Composite climbed 1.2% in the first quarter, and each of the three indices were up double-digits year-over-year in March. It's wonderful news that reflects the recovery to date in housing.
March / February
Q1 2013 / Q4 2012
Mar. 2013/Mar. 2012
Pricing is still vulnerable and has its positive and negative factors. Within earnings reports many homebuilders are discussing their own efforts to manage inventory levels so as to not disrupt price recovery in this still vulnerable period post the real estate collapse. Labor constraints are also holding new construction up a bit and constraining new home inventory, because of the flood of workers out of construction through the crisis, many of whom are no longer available to work construction. Also, population growth continues to serve the market. In contrast, a good deal of distressed property continues to find the market as well, depressing prices on a comparable basis and keeping builders cautious. For those buyers for whom new construction is not necessary, price matters most, and the best price is often found in the pre-existing property. Recently, other more critical issues have developed as well which threaten home prices and the recovery.
With all their prudent efforts, homebuilders may not be able to control the housing recovery or avoid stumbling blocks. What if outdated price indexes are not reflecting the current reality in housing? Data I have reviewed more recently show a slowing of growth, especially with marginal increases in mortgage rates. Given recent market concern about Federal Reserve "tapering," which would mean higher mortgage rates, housing stocks are finding reasons now to give back recent gains. The shares of these leading industry ideas have recently softened.
K.B. Home (KBH)
Toll Brothers (TOL)
· 52-week change is approximate as found at Yahoo Finance Key Statistics page
The latest Weekly Applications Survey by the Mortgage Bankers Association (MBA) shows a third straight week of decline in mortgage activity. We have been documenting it here, and in our last relative article entitled, A Nightmarish Development in Real Estate Finance. None of this is captured in the Home Price Index for March. Neither do you hear word of issue in the popular press yet. Indeed, the shares of major mortgage lenders are still on steep rise trajectories, with Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC) far exceeding the SPDR S&P Homebuilders (XHB) recently.
Last week's reported New Home Sales pace for April was better than March, and March was revised higher as well. We noted that new home prices were reported better within this report, after declining in March. So in this regard, the S&P Case Shiller data is agreement, though it clashes in its March message. The existing home market, however, is much larger and more important nationally. The Existing Home Sales pace for April improved against an upwardly revised rate from the month before, but was short of economists' expectations. Still, this report also showed higher prices in April.
The spring season is the most important for housing, and we recently wrote that it looked like there could be a decent season this year. I expect that is what drove April and early May activity. However, the last three weeks in May trump both March and April data, and reflect a different message. There is clearly a high level of sensitivity to mortgage rates, though it's still too early to tell if this is a temporary issue or an economic problem. Time will tell us the answer, but that time is in the future, not in March. The present indicates an inflection point for housing, however long it may last. We get no indication of that from reports covering March and April data, so investors are hereby warned. Your author here will be keeping a close eye on developments, so stay tuned.