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By Jason Stipp and Robert Johnson, CFA | 06-27-2012 11:00 AM

What a Housing Turn Means for the Economy


Jason Stipp: I'm Jason Stipp for Morningstar.

Several pieces of housing data point to a positive trend in that area of the market, but what does it mean for the economy? Here with me to offer his take is Morningstar's Bob Johnson, our director of economic analysis.

Bob, thanks for being here.

Bob Johnson: Great to be here.

Stipp: We did have several pieces of housing data over the last few days. I'd like to run through them and get your take on the results and what they mean for the housing market.

Let's start with builder sentiment; maybe you wouldn't key in as much on consumer sentiment, but the builder's sentiment is actually a bit more meaningful to you.

Johnson: Yes, absolutely, because the homebuilders see the traffic and unlike a lot of other sentiment [reports], [the homebuilders sentiment report] isn't how you feel, it's how much traffic has come through, how many sales you have--it's a very statistical thing. And that number has now moved up from 28 to 29. There were some fears that it would fall backward after we got through that big boom in the spring that was weather-related, but now we've actually moved up to 29, which is the highest it's been in this recovery. It's well off its lull of 11, but still below the norm of 50.

Stipp: So, there's a still a long way to go until they get back to a more normal market, but it's good to see improvement there.

We also got permits data--this is folks expecting to build in the future. This could be a leading indicator. That also looks pretty good.

Johnson: Last week we got both the permits and the starts data, and both on a year-over-year basis looked very good.

The permits, which is the biggest looking-ahead number, at 780,000 was the biggest number we had seen since 2008 on that front. So, that was probably the most bullish set of the numbers, but even the year-over-year starts were up, and we're now getting close to 40% off of the bottom. 

Some people will say, well, I think housing is about to turn. Well guess what--it has.

Stipp: So, seeing those permit data is a good sign that whatever positive things we're seeing now will be continuing, hopefully, in the future.

We also got existing home sales data, and this one looks pretty good, but it was also held back by something. What's your take on that number?

Johnson: Now most of the numbers we're going to talk about today--the new home data and whatever--most of those numbers are up in the 20%-plus range, and this metric was up 10% year-over-year, which is still a very positive trend to where it's been. But it's being held back by the lack of what I call quality inventory. There is really not a lot of homes for sale. In a lot of markets, people go [home shopping] and there is really nothing for sale.

Stipp: I know of this shadow inventory that people were worried about; it has been hanging out there for a while. But you're saying these quality homes [aren't available]; there are not enough homes. If you're going out and looking for an existing [quality] home, you can't find one. Why is that, especially given that we were worried about all these homes that were going to flood the market?

Johnson: Well, there are a few things happening. One is, in real estate it's always local. Everybody read the story this week in The Wall Street Journal about San Francisco, and how impossible it is to find housing in that market, and there are probably several markets like that where it's nearly impossible to find housing that is near major work centers with good job prospects. And then there are other markets that are out in the middle of nowhere with long drives to work. Those houses are languishing and will probably continue to languish.

Stipp: And so those homes maybe you wouldn't even necessarily consider inventory if nobody is going to even look at them anyway?

Johnson: That's right. And you know, it may sound a little funny if I say that we would have had more sales if there was more inventory, but the way you can really see that is that the median price of a home went up, and again it's not necessarily the right way to look at pricing data--we'll talk about some other numbers that are a better way to look at it--but the median home price was up over 8%. That's a really great number. Now that more relates to a mix of homes, but it speaks to the fact that there's a shortage of low- to mid-priced quality homes.

Stipp: So, eventually will this correct? If the home prices are moving up, and folks who don't need to move, and don't want to sell in a bad market, will the prices eventually get to a point where they feel like the market is healthier now--I want to move, I haven't been able to or didn't want to [before], but now I might put my house on the market, and that could maybe self-correct the inventory issues?

Johnson: I'm really hoping that it will. ... Prices cure a lot of evils, and if prices move up a little bit, the supply will come out. And by the way, one other source of supply that has stopped a little bit is some of the foreclosure activity, and some ... reports this week also showed that delinquencies on mortgages for the 30 to 60 [days overdue], and 60 to 90 [days overdue] bucket are down considerably from where they were.

So, I think the other thing that's happened is that people, because they've got more jobs, have been more current on their mortgages. And then on some of the [foreclosures] that were already in the pipeline, the banks have found that they're much better off modifying a mortgage than saying, hey, you're out of here, and foreclosing on the home, throwing it out in the market, depressing prices, and they've found out that that doesn’t work.

For a while, it seemed like [the banks] were holding back, because all of the legislation and all the other stuff, but now they have found it's in their own best interest, self-interest, to modify some of these loans--and they are.

Stipp: Some very interesting trends there on the existing home sales, certainly some good context to think about when you look at that number.

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