It appears lately Goldman can't get enough of bashing the economy. First the Oracle of Delphi's bank debt short-selling enabling trading desk (i.e., Hatzius of Goldman Sachs for the slower readers) had some harsh words about GDP and why at some point soon he will be once again within 0.0001 bps of the actual result, even if the short squeeze inducing ploy worked out just perfectly last time, thanks, signed Goldman prop. This time around Hatzius take the entire housing space to the woodshed. Who knows, maybe it is time for readers to do what the prop desk says this time (quadruple reverse psychology: beware).
A Renewed Sag In The Housing Markets
During the spring and summer, most US housing market indicators took a sharp turn for the better, with sales, starts, and prices all rising. This led many economists, ourselves included, to raise their housing forecasts, and some to project a “traditional” housing recovery with 20%-30% annualized growth rates in real residential investment in 2010 (the upgrade to our view left it well short of a traditional recovery).
In recent months, however, the housing news has turned less encouraging. Consider the following:
1. The improvement in new home sales and housing starts has stalled. On Wednesday, the Commerce Department reported that housing starts fell 10.6% in October to 529,000 (annualized), the biggest monthly drop since January. This likely exaggerates the weakness in the housing market for two reasons: first, the drop was heavily weighted to the more volatile (and lower value-added) multifamily sector, and second, it may well have been influenced by a wait-and-see attitude among homebuilders in the face of uncertainty about the extension of the homebuyer tax credit. But even excluding the latest drop, the recent data have been noticeably sluggish recently. After a sharp upward move (at least in percentage terms!) from 479,000 in April to 590,000 in June, housing starts have at best been treading water. Moreover, the monthly homebuilders’ index has been unchanged on net since July and thus paints a similar picture. Finally, new single-family home sales have also essentially stagnated around the 400,000 (annualized) mark.
2. Existing home sales continue to surge… By far the strongest housing-related indicator has been the turnover of homes. The September reports on existing home sales (i.e. sales which have closed) and pending home sales (i.e. signed contracts) from the National Association of Realtors showed big monthly increases in both measures, and year-on year growth rates of 9.2% for existing home sales and 19.8% for pending home sales. We do not yet have data for October, but anecdotal reports from regional realtors’ associations points to further large gains.
3. …but mortgage applications for home purchase point to a setback. In marked contrast to existing homes sales, the weekly purchase mortgage applications report—a long-standing leading indicator of home sales—has plunged in recent weeks and now stands at the lowest level in 12 years on a seasonally adjusted basis. This could suggest that the surge in existing home sales will reverse over the next few months, although it is admittedly difficult to say given the noise introduced by the uncertainty about the homebuyer tax credit (which ultimately was extended).
4. Home price indicators turn more mixed. There are some tentative signs that the increase in home prices—a major surprise earlier in the year—may be coming to an end. Although the most recent Case-Shiller index (20-city composite) showed a seasonally adjusted 1.0% increase for August, it is important to note that this information is by now quite stale, especially because the Case-Shiller data are reported on a three-month moving average basis. In contrast, there are several timelier measures which hint at a renewed weakening. The purchase-only FHFA (former OFHEO) index fell 0.3% on a seasonally adjusted basis in August, the most recent observation. For September, several indexes are showing declines, at least on a seasonally unadjusted basis. Specifically, the Loan Performance index fell 0.4%, the Radar Logic index 3.2%, and the Zillow.com index 0.1%. At a minimum, it therefore appears that the home price picture has turned more mixed. Our current working assumption is a 5%-10% drop in home prices through the middle of 2010.
5. Excess supply is still increasing. The housing vacancy report for the third quarter showed a quarter-to-quarter increase in both the rental and homeowner vacancy rates. Indeed, we can use these series to construct a “composite” vacancy rate, defined as all vacant housing units for rent or sale in percent of the housing stock. (Note that we only include vacant units “on the market” in the numerator; we exclude seasonal/vacation homes or homes vacant “for other reasons” from both the numerator and denominator.) This series is shown in the chart below. It hit 5.4% in the third quarter, the highest level on record, suggesting that excess supply remains a very serious problem for the housing market. The only slight ray of light is that the shift in the composition of vacant units toward rental units, whose per-unit value is lower, implies that the picture is a bit less bad in dollar-weighted terms.
6. The foreclosure pipeline is still rising. Two reports released this week—the Mortgage Bankers Association’s delinquency survey and the Fed’s report on loan performance at commercial banks—show that mortgage credit quality was still deteriorating quickly as of the third quarter. The chart below shows the broadest measure of troubled loans, namely the share of mortgages that are delinquent (i.e. borrowers have missed at least one payment), nonperforming, or in foreclosure. This measure now stands at 14.1% overall according to the MBA, and at 9.8% for loans on commercial bank balance sheets according to the Fed. Over the past two quarters, the pace of increase has slowed for the MBA measure, largely because the deterioration in the subprime market seems to have crested. However, the Fed’s measure of delinquent loans on bank balance sheets continues to increase quickly. Ultimately, a large share of the troubled loans are likely to end up as vacant homes on the market, which will make it harder to unwind the current excess supply quickly.
Our conclusion: while the bottom in housing starts has very likely been seen, homebuilding is likely to provide a much smaller boost to real GDP growth in 2010 than in the recovery from prior deep recessions. Meanwhile, house prices and credit quality look set continue to weigh on the US financial system, the availability of bank credit, and ultimately the pace of the economic recovery.