Existing home sales, median home price data and new residential construction data will be released later this week. To understand and predict these reports you really need to understand the causal relationships with other data sources (listed below). For example, demand for housing starts with demand for shelter, which is largely driven by household formation rates. The Affordability Index juxtaposes the relative affordability of buying a home verses renting a home. Home sales rates and the trajectory of median home prices illustrate where we are in a cycle - recovering, stabilizing, declining. Consumer Confidence and Capacity (employment/unemployment rates) create the emotional currency that most effects a buy/rent decision. Given the trends in the underlying data, we predict the modest, positive trend to continue for existing home sales, home prices and new residential construction this week.
Demand for shelter:
Household formation rate – doubled in 2011, and increasing overall, but continues to slip in the 18-34 year-old cohort (prospective first time homeowner pool). Overall positive for housing demand but not overwhelmingly.
Options - buy or rent?:
Affordability rate – record high making the economic argument for buying vs renting.
Buy now or later?:
Existing home and new home sales rate up 10 percent year-over-year. Demand is high and increasing.
Median home prices – every reputable index has bottomed and median home values are up five percent year-over-year. Value trends are up and are likely to continue up creating urgency to buy sooner than later.
Mortgage rates – lowest in history but in a precarious place given the fiscal cliff and deficit spending. More likely to go up then down which creates urgency to lock in.
Existing home inventory – down 20 percent year-over-year and at six months supply which is back to normal for a healthy market.
New home inventory – down to 144,000 units or 4.5 months supply, which is a historic low.
Confidence & Capacity to Pay:
Unemployment rate down to below eight percent for the first time in four years. New jobs being created slightly above the rate of new entrants to the workforce. Overall a neutral to slightly positive for the housing market.
Consumer confidence rate – is up but remains near 20-year lows. Overall a neutral to slightly positive for the housing market.
Consumer spending – up modestly in the last six months and shows consumers feeling wealthier. Slight positive for housing.
The results of the New Residential Construction data, scheduled to be released on Wednesday, will likely be explained by Friday’s numbers in the Existing Home Sales and Median Price report.
Existing home sales and median existing-home prices have been bellwethers for the housing recovery. In September, the National Association of Realtors reported a remarkable six-month increase in home sale prices, and a nearly 10 percent year-over-year increase. Existing home sales also climbed 7.8 percent from July to August, representing a 9.3 percent year-over-year increase.
Unfortunately, the gains seen by existing home sales and median home prices have come at the expense of new residential construction. New home inventory remains at a historical low of 4.5 months of supply. Housing starts saw some declines and minimal increases over the summer of this year. Moreover, new construction today remains dismal compared to historical levels.
New residential construction remains at levels half of historical norms, in terms of its contribution to GDP. And, while existing sales are clearly bouncing back, new home sales continue at a lackluster pace. As context, consider that it has taken nearly six years to clear a mere 430,00 in new housing inventory.
The housing market, especially this new home construction, can’t recover fully until the job market rebounds. What is not clear is the sequencing of the causal relationship between housing and employment and other factors. It's the chicken and egg scenario – the job market will recover when the housing market recovers, but the housing market (specifically new home construction) can’t recover until the job market improves. Given the trends we’ve observed, we expect slower, modest, but positive movement in the two reports to be released this week.