Over the last few months, as I've been warning that macroeconomic issues would present a new stumbling block for real estate, did you take heed? While I warned that the operating gains of the large publicly traded builders would not be enough to guard their shares from market discounting on economic concerns, did you take profits? Last week, when I said much too much had been made of the latest increases in new and existing home sales, did you pay attention? Well, I hope you will now.
Last week, I said the latest modest home sales increases came on dreadfully low levels of activity, and that the real estate market was about to "contract a lethal illness" anyway. The latest data reported last week indicated still sickly pricing with a surprise decline in pending home sales to boot, leaving the situation in about the same stagnant place. After reviewing the entirety of the week's housing data, I reiterate that the housing market seems stabilized currently, but I continue to raise the alarm about what's to come.
The Pending Home Sales Index dipped month-to-month, but continued an uptrend against the prior year. A quick study of the pending home sales chart should prove comforting to those who were caught off guard by April's decline. The month produced a -5.5% slip against March, but was actually up 14.4% over the prior year. In fact, April marked the twelfth consecutive month of year-over-year improvement. Regionally speaking, the monthly decline was fueled largely by a 12% decline in the West and a 6.8% drop in the South. Midwestern activity slipped 0.3%, while the Northeast posted a 0.9% gain.
According to Lawrence Yun, the Chief Economist of the National Association of Realtors (NAR), inventory levels are at a point inspiring to home prices. Yun says that inventory levels at about 6 months supply are historically supportive of 3% to 5% annual home price appreciation. Though, the Standard & Poor's/Case Shiller Home Price Index, reported last week for March, was not supportive of that argument.
The report's city groupings, with indexes broken out for 10 and 20-city composites, declined on an annual basis by 2.8% and 2.6% in March, respectively. Still, some investors found solace in the month-to-month changes. The 10-City Composite declined by 0.1% from February and the broader reaching 20-City Composite was relatively unchanged. I suppose the celebration of such mediocre results is a sign of how low we have set the bar for real estate. Still, certain markets have real reason to rejoice. The metropolitan statistical areas (MSA) of Charlotte, Dallas, Denver, Detroit, Miami, Minneapolis and Phoenix saw annual rates of rise in March. Phoenix is even dealing with a housing shortage. Twelve cities saw home price rise in March over February, while seven experienced decline and one stayed the same.
The Mortgage Bankers Association (MBA) reported its Weekly Applications Survey Wednesday, showing mortgage applications for the purchase of a home declined by 0.6% in the week ending May 25, despite record low mortgage rates. However, even refinancing activity dropped off as Americans prepared for the Memorial Day holiday weekend.
Friday offered Construction Spending (pdf) data to round out the week's news flow. While the media painted the report as another negative for housing because the 0.3% growth reported for April fell short of economists' views, the truth is that it was not. That's because residential construction increased 2.6% over March, and single-family projects were 1.8% higher.
The housing market is improving, but that's insignificant now to investors in homebuilders, who are watching their shares retrace gains at quite a pace. The SPDR S&P Homebuilders (NYSE: XHB) fell 5.7% Friday and is down 12.9% off its recently set peak. The shares are lower despite the stabilized housing market and without regard for the market share gains of the large publicly traded builders like Toll Brothers (NYSE: TOL), PulteGroup (NYSE: PHM), D.R. Horton (NYSE: DHI) and K.B. Home (NYSE: KBH). It's because of U.S. macroeconomic concerns, just like I wrote it would be over the course of the last several months.
The market knows that the cyclical housing sector with its high-beta homebuilder shares is vulnerable, especially after the group's nascent climb. With the unemployment rate reported Friday deteriorated, investors are finally paying heed to the effects of European struggle upon the American and global economy. With so much hanging in the balance this June, risk is being appropriately priced in.