Homebuilders: Proceed With Caution

The S&P500 homebuilders’ index jumped 10% yesterday following a report from the National Association of Realtors (NAR) that U.S. house sales bounced 2.9% in February. The uptick was taken as a sign that buyers were returning to the housing market, spurred on by knock-down prices offered on foreclosed properties.

But we might proceed with more caution than what the jump in homebuilder stocks suggests. For one thing, the increase in house sales represents the month-to-month change in NAR’s seasonally adjusted indexes for January and February. These month-to-month changes not only have noise in them typical of short-term comparisons but rely on mathematical extrapolations (to calculate seasonal adjustments).

A less variable measurement that controls for seasonality without extrapolations is the year-to-year rate of change. On that basis, the picture doesn’t appear to be as rosy: sales this February were down from February of last year by 25% (adjusting for the extra day). From January of this year to the same month last year, they were down 23.5% -- i.e. the year-to-year change slows deceleration in sales.

Besides, do higher sales matter anyway when house prices continue to tumble? The NAR noted that the median price for resale housing was down 8.2% from a year earlier. The S&P/Case-Shiller national home-prices index showed a 10.7% drop in January from a year ago.

The declines are expected to go deeper. Home prices went up 75% in the six years to 2006 while the U.S. median household income only rose 15%. The recent decline still leaves a quite elevated ratio of house prices to income. Moreover, the rising tide of resetting adjustable-rate mortgages means that foreclosures can be expected to build this year and well into 2009.

It would be surprising if the consequent reduction in housing wealth due to falling prices did not substantially curtail spending by consumers, which, in turn, would likely feed back into the job market. Unless Congress comes up with measures to halt or blunt the impact of foreclosures and fire-sales, a rising wave of job losses will take many buyers out of the housing market in addition to the resetting of adjustable rate mortgages.

Comments

[notsosmart]

dont believe the trade orgs. dont believe the lobby,s.everything is spin for their own enrichment.if possible double check all the statements & figures.

[billddrummer]

Great point. I've said for years that until homes become more affordable (i.e., prices fall to match median incomes), sales will languish. In Northern Nevada, the affordability index dropped from 55% to 12%, yet home sales soared, in part because of the number of exotic mortgage products that allowed less-qualified buyers to purchase housing. Since those programs are gone, traffic and sales have dried up.

Sellers are finally getting a clue to what 'real value' is in the marketplace. But it's taken a long time to bring them into reality. The fact that sales rose in February over January isn't as significant as the fact that current sales are down 25% from last year.

Until prices drop to the point where the average American can afford to purchase, don't expect the housing market to 'recover.'