Hissss! That’s the sound of the air coming out of the housing market. At least that’s what some folks thought they heard when the Census Bureau reported a 13.4 percent dive in new home sales in July, the biggest decline in more than three years and one that coincided with a sharp increase in mortgage rates.
Don’t start writing housing’s obituary just yet. First, the residential real-estate market just got going. Only in the last two years has residential investment contributed in any significant way to economic growth. It has to make up for lost time.
Second, what might look like a lack of demand may actually be a dearth of supply.
So pour the water out of that half-empty glass. Then refill it to half full and consider some of the positives:
1) Mortgage rates and the theory of relativity. The rate on a 30-year fixed mortgage rose to 4.58 percent last week from 3.53 percent in early May, according to Freddie Mac. That’s a hefty jump. But after years of consistently falling rates, the first move off the lows tends to energize the fence-sitters more than deter potential buyers, according to Michael Carliner, an economic consultant who specializes in housing.
With house prices finally turning up late last year, that fence is becoming an increasingly uncomfortable perch. So yes, mortgage rates have risen more than a full percentage point in the last four months, and there is going to be a certain amount of sticker shock for those considering financing options for their purchase. But in the grand scheme of things, 4.6 percent is a pretty good rate for a 30-year mortgage. Just ask people who bought a home in the early 1980s and locked in at a rate of 15 percent or more.
At this point, the inability of many potential homeowners to qualify for a mortgage is still a bigger issue than rates.
2) Someone tell the builders. Among the wide array of housing indicators, the National Association of Home Builders’ Housing Market Index leads the pack in both timing (the August report was released Aug. 15) and predictive ability. The monthly survey asks builders to rate current sales, traffic of prospective buyers and expectations for sales six months down the road. Although the survey is qualitative —
the builders can choose among “good,” “fair” and “poor,” for example — the results provide an early window on the state of the market.
The NAHB index rose to 59 this month, the highest since 2005. Reports from major builders have been upbeat, although the stock market has been unimpressed. The Standard & Poor’s Supercomposite Homebuilding Index, an index of large home builders, is down 29 percent since its peak in May, technically a bear market. (The stock market has a habit of overpredicting recessions.)
3) An inventory of nothing is nothing. Lack of supply has been a feature of the new housing market as builders – once burned, twice shy – have been slow to embrace the revival of residential real estate. Single-family housing starts are up 67 percent from their 2009 low, but July’s annual rate of 591,000 is a long way from the peak of 1.8 million in 2006.
Although the inventory of new homes for sale has been inching up – to 171,000 last month from an all-time low of 142,000 in July 2012 – the increase has been in the “not started” and “under construction” categories, not in “completed” homes. “Builders aren’t stuck with a lot of unsold homes,” Carliner says.
The inventory of completed homes stood at 36,000 in July, compared with 43,000 six months ago. And the median time on the market was 3.5 months, which was typical of the bubble years. It does seem as if softer sales are a reflection of supply constraints.
4) Rising prices, less distress. Home prices have been on a tear, especially in certain areas of the country, but the rate of increase may be slowing, according to the latest S&P/Case-Shiller Home Price Index for June. All 20 cities tracked by Case-Shiller posted increases both monthly and from a year earlier in June; only six rose at a faster pace than in May.
The national home price index rose 10 percent in the second quarter of this year from the same quarter in 2012; home prices rose almost 25 percent in Las Vegas and San Francisco, which sounds positively bubbly. Should we be concerned?
Carliner says no. Prices are rebounding from lows that were depressed by the large share of distressed sales. “Now distressed sales are a smaller share of sales, so prices are going back up,” he says. “Relative to 2007, prices aren’t that high.”
Just enough to tempt a potential buyer without turning him off.
5) Help wanted: Carpentry skills a plus. You would have thought that the housing boom, bust and slow recovery would have created a surfeit of construction workers. Wrong. Reports of regional labor shortages in hot markets such as Seattle and Phoenix are popping up in the Federal Reserve’s Beige Book, in NAHB surveys and in reports from trade associations. There are 2 million fewer construction workers today than at the 2006 peak. Some have retired and moved on. The supply of new entrants isn’t sufficient to satisfy builder needs in certain areas of the country.
Add it all up, and it seems a bit too early to sound the death knell for housing.
Caroline Baum, author of “Just What I Said,” is a Bloomberg View columnist.