Better Housing Numbers Could Boost GDP Growth

In June, new home sales shot up by 11.0% relative to May. The seasonally adjusted annual rate was 384,000 up from 346,000. Granted, that is still 21.3% below the 488,000 level a year ago -- and not even in the same area code as the peak of almost 1.4 million back in late 2005 (see the first chart from Calculated Risk, which is the source of all three charts in this post). Still it is a very good sign.

Just as importantly, the level of inventories continues to drop, with 282,000 houses available for sale, down 2.8% from May and down 35.2% from a year ago. This has dropped the months-of-supply metric to just 8.8 months from 10.2 in May and 10.7 months a year ago (see the second graph). While this is still well above the 6.0 months that would indicate a healthy market (months of supply were generally around 4.0 during the bubble, but I would not expect a return to those levels), we are clearly making very significant progress in clearing the inventory overhang.

Just one note of caution -- the inventory numbers do not include high-rise condos, so in those markets where condo towers are a big part of the housing market, the inventory numbers are probably understated.

Historically, residential investment is a key driver in getting an economy out of a recession, with the pick-up in new house sales actually starting during the recession, clearing out inventories and allowing new construction to start again in an economically viable way. As the third graph shows, the absolute level of new housing inventory is actually very low now by historical standards.

Keep in mind that the inventory data (and the sales numbers, for that matter) is a raw number and is not normalized by population growth. For well over a year now, my housing mantra has been, "more new starts bad, more new home sales good." Increasing housing starts had simply been adding to the inventory and making the problem worse.

At this point, though, that should be changing. Going forward, an increase in housing starts will be evidence of a real recovery in the economy. This news should get the homebuilders flying. For a quick trade, consider some of the financially stronger builders like Pulte Homes (PHM) and D.R. Horton (DHI). I would still shy away from some of the more leveraged names like Beazer (BZH).

I am not expecting a sharp increase. However, residential investment has been regularly subtracting 1.0 or more points from GDP growth in recent quarters on a direct basis. The absence of a negative is a positive, and the slower decline in residential investment will be a big part of the reason that second quarter GDP will show a much smaller decline in activity than we saw in the fourth or first quarters.

It is possible that we will even see some positive GDP growth in the third quarter, although I am still leaning towards a small decline in the third quarter and a small positive number in the fourth quarter. However, for a change, residential investment will not be at the core of our problems. Commercial Real Estate will be the big problem going forward, not residential.

Digging deeper into the numbers, the increase in sales was widespread, with three out of the four regions participating and doing so with gusto. Only the extremely large South region posted a decline of 5.3% on a month to month basis, and are down 34.4% from a year ago. New home sales in the Midwest soared by 43.1% and are now up 5.8% on a year over year basis. The small Northeast region also posted an eye-popping 29.2% increase for the month, but sales levels remain 11.4% below year ago levels. Out West, sales were up by 22.6% for the month and are 9.6% below June of 2008.

It is important to recognize just how important the South is to the new home market -- even with the decline, it was responsible for 46.1% of all new home sales; a year ago it was responsible for 55.3% of sales. The weakness there masks the dramatic improvement in the rest of the country.

What was responsible for the jump in sales? Certainly the first time homebuyer tax credit (part of the stimulus package) played a role. Sales of new houses priced under $200,000 jumped to 48% of the total sales up from 37% a year ago. First-time homebuyers tend to buy low-priced starter homes, not higher priced McMansions. The mix shift (and possibly some price cutting) caused the median price of a new home to fall to $206,200 from $219,000 in May and $234,000 a year ago.

Even as activity starts to pick up, I would expect prices to remain under pressure for the rest of the year. Lower mortgage rates in May also likely played a role (there is a bit of a lag), so it will be interesting to see if the backing up in mortgage rates in June will put a damper on July sales. The action by the Fed in buying up lots of Fannie Mae (FNM) and Freddie Mac (FRE)-backed paper is getting some traction in the real economy.

It now seems likely that we have reached the bottom in housing at least in terms of activity. Pricing will take a bit longer, and we still are at a very low level of activity, but it does not seem likely to fall further. Things are not great, but they now look like they are getting better, not worse.

This is a very important green shoot for the economy. It is the most positive housing report we have seen in about two years, and housing has been at the core of the economy’s problems.

[click to enlarge charts]

Comments

[Moon Kil Woong:]

Hmm so banks loan to people to buy houses at l;ow rates only if Freddie Mac or Fannie Mae promise to buy them. Then They sell them to Fannie Mae and Freddie Mac. Then thesae mega companies owned and backed by the government which are virtually insolvent and filled with bailout capital have to sell their bad loans top the Fed and Treasury just so they have enough capital to continue to by defunct loans.

Even with that, bank mortage loans are down close to 3% YoY and the only ones being sold are ones bought by Freddie Mac and Fannie Mae. Sure, thank goodness that we had a seasonal uptick in home loans this summer like normal, but it's almost impossible to call this market sustainable or even healthy. If the Fed raised rates to curb inflation, which they inevitably will have to do, the whole house of cards is liable to collapse again.

In general if you are a speculator, you buy houses when rates are high and prices are low (paying mostly cash is best at this point) and sell them when rates are low and prices are high. In this case, buying when the Fed is at Zirp is the exact opposite of the rate cycle you want to be at if you want to make a profit buying property.

Jul 28 05:16 AM

[CautiousInv...:]

You make a good point in saying "the absence of a negative is a positive, and the slower decline in residential investment will be a big part of the reason that second quarter GDP will show a much smaller decline in activity than we saw in the fourth or first quarters." Anything that stops subtracting grom the economy is statistically helpful.

Going forward, new home builders must continue to compete with the growing supply of REO properties acquired through foreclosures which will continue to put downward pressure on margins. Foreclosures show no sign of abating.

Secondly, builder activity mus eventually align itself with new household formation which is expected be around 600,000 per year, with some fraction of these units will buying a new home. This will lead to a market vastly smaller than the recent peak production of 1.4 million units.

Lastly, increases in interest rates along with expiration of the housing tax credit will eventually take its toll. Housing is likely to help the recovery but its effects is likely to be small and certainly not what it has been in the past.

Jul 28 07:51 AM

[Trading Alpha:]

The decreasing supply of homes for sale is not the market clearing itself but people pulling their home from the market because it was listed for too long and has gone stale. They don't like the price it must be sold at. This is not a healthy sign. The decrease in supply of for sale homes needs to match up with the increase in sales for this to be a true clearing.

Jul 28 07:56 AM

[markfl:]

I would like to have seen some analysis of seasonal adjustment factors.

"The news sounds better than it looks … despite the jump in sales in June, new home sales remain at very low levels, and the not seasonally adjusted data show a total of 36,000 homes sold nationwide in June, the lowest sales total for June since 1982. –Richard F. Moody, Forward Capital"
blogs.wsj.com/economic.../

Jul 28 09:01 AM

[Susan Weerts:]

The headwind I see are
1. The housing demand after July started to slow down. Most of the house sales during the year happen between March and July, just before the school year starts.

2. rising unemployment.

3. incoming mortgage resets and higher foreclosures

Jul 28 12:05 PM

[RiskAverseA...:]

Bottom in housing? Dream on, baby! Enjoy your little bump. Have you no sense that, someday, your descendants will read what you wrote at this, the precipice of spectacular collapse and shudder to learn what a dope they're related to? How blind to reality must you be to attempt catching a falling knife in one of the most illiquid assets in existence? Stop smoking those green chutes. They're FANTASY and they're messing up your mind...

Jul 28 10:10 PM

[Belome:]

Is there any info on how many houses the banks are keeping off the market because they own them 200K under the market value?.... no I didnt think so... good luck cleaning that inventory off the market.

Jul 29 12:06 AM

[Jim Tressor:]

I think it's also interesting that GDP growth may be connected to the amount of light a country emitts. Here is a cool article about why looking from space can help us verify GDP numbers: www.mindreign.com/en/m...

Aug 12 10:48 AM