Should We Believe In The Housing Recovery?

by: Robert Brusca

Before we went crazy with mortgage securitization and extending the reach of Freddie Mac and Fannie Mae, the US housing market was a series of local markets. What the extension of Fannie and Freddy and the sweep of derivative securities did was make the market seem like it was one.

And that is one of the reasons housing failed so badly. A house is not a dollar bill. The same house will not have the same value everywhere. The most over-told truism about real estate is that value is about location, location, location. And of course no two houses have exactly the same location.

So as we look at the housing market, we need to be circumspect. There are many who want to make broad, sweeping statements about housing as recovering, or as never to recover, about prices as stabilizing or having much further to fall. Let's realize that whatever broad sweep we can put on the sector, there are going to be pronounced regional and micro-market differences.

Housing is going back to its roots, and value will be determined by region, the location of the residence and all that will be fortified or undermined by the stability of the local economy, as economic recovery is spreading very unevenly across America.

Having said all of that, we have a new NAHB report in hand. The report is very current: up to date though February. The home builders tell us that the overall index jumped in February to 29 from 25. 1-family sales and expectations for six months ahead each jumped.

The forward-looking index is the 17th largest monthly gain in that series to date; it spans 325 observations going back to early 1985. It's a very impressive gain that among all observations stands in the top 6% of all month-to-month increases. The index for single family sales rose to 30 from 25 and also makes and an impressive one-month move that is in the top 22% of its range. Something is happening in housing.

What is further interesting about this month's home builders index is that it is a single statement about the market getting better, yet all markets are not getting better. The regional indices fell in the Northeast and in the South, while they advanced sharply in the Midwest and in the West. There is no theme here that I can see. In the winter months I am always wary of weather effects, yes even on people looking at houses. Good weather matters. And that does affect markets. But what we see in February is that "traffic," the component most likely to be weather-affected, rose by the least.

A lot of economic reports are starting to shake the rust off. Most importantly are the jobs reports. Now pessimists can say what they want about the falling rate of unemployment but the job creation numbers from the BLS household report, its payroll survey and the separate ADP survey as well as falling weekly jobless claims are pretty hard and firm data that point to improvement.

I understand people being skeptical of the dropping rate of unemployment. For that reason I posted two articles to explain some of the longer term forces that are finally catching up with the economy.

We do not have problems with Democrats or Republicans much as we have problems with both of them, and with the economics policymaking in general in this country. Stagnant wages and a poor trade policy are importantly behind people's decisions to withdraw from the labor market and that withdrawal leaves less support for economic activity. Still when activity shows signs of picking up as it surely is doing, it's a good idea to wake up and pay attention.

One of the most contentious issues right now is the role of interest rate rates. I think there is some illusion that low interest rates are supporting housing right now. One reason for that is that, taken naively, the home affordability index is in the 99.4th percentile of its 10-year range and even higher in its 40 year range. The data are pretty remarkable. But market rates are not what they seem.

Banks provide much less access to current low rates. This has three effects: it encourages people to think buying a house is easier than it is, it hides the degree of expense an actual buyer with a less than stellar credit will pay, and it encourages people to opine that when rates rise, housing prices will be further crushed because a rise in rates will lift the cost of payments for any given house price putting downward pressure on the price of the house.

This latter argument is quite prevalent. But the important thing to see is how little current house prices are dependent on current mortgage rates. Look at the small amount of activity, for one. Cash purchases of existing homes are climbing. Most people do not have access to the best rates and are not buying houses based on these best rates. So when interest rates go up, as they will, the impact on house prices will not be as mechanical as those who are bearish on housing presume.

When housing recovers -- as it may be doing right now -- people will be in denial about it, and housing will be recovering in some areas while it will remain in a funk in other areas. Housing is going back to its roots. Housing is becoming local.

From November of 2007 through about September 2011 the divergence between the four main economic regions and the overall NAHB assessment has been very low. Such uniformity is the result of an economy in recession. I have a chart demonstrating this effect on my blog, using long lived consumer sentiment data on age cohort dispersion.

The regional housing data are not long long-lived enough for their own separate treatment on this score. But the message in the data is clear. Housing depends a lot on confidence and when national confidence is low, it is low everywhere, compressing regional difference. When recovery sets in we get different speeds of recovery and divergences emerge. Divergence is a positive indicator. Let's not force one analytical conclusion on the whole of the US housing market. It is recovering, and that will mean different things to builders and buyers in different places.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.