It's the demographics, stupid

Analysts continue to base their forecasts for the US housing market on the economic conditions. It no longer works (see discussion). Rephrasing James Carville's quote, "it's the demographics, stupid".

Case-Shiller Comp-20 housing index MoM vs. forecast (Bloomberg)

USA Today: - The situation is "being created by smaller inventories" of homes for sale, said Everett King, president of ERA King Real Estate in Birmingham. Pent-up demand and fewer homes on the market are letting sellers charge about 5% more than six months ago, he said. "Anything between $350,000 and $400,000 just goes at the asking price."

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All the subscribers to the housing Armageddon theories, just look at the data - the US housing market is beginning to recover

The US housing's bubble and its spectacular end left a indelible mark on people's view of residential property markets. Sadly the idea of a "permanent" US housing market decline has been drummed into the heads of numerous, often well educated and otherwise open-minded people. Hoards of angry bloggers keep spewing the same line over and over again - housing prices will fall "forever" because of the shadow inventory, etc., etc. People, including many in academia, would deny a housing market improvement even if it stared them in the face. Positive housing news cause many to experience what psychologists call "cognitive dissonance", as they desperately attempt to rationalize away the data that doesn't conform to their views.

The housing market bottom has to come some time, and as predicted at the beginning of the year (which really angered some of the folks described above), 2012 seems to be that year. Nobody is talking about a recovery of prices to the bubble years or even a robust growth in housing. We all know the issues. But on average across the US, home price declines have stopped.

Multiple data points are now suggesting that is indeed the case. A sudden spike in the FHFA housing price index is one of those points. A 1.8% monthly increase in March is the largest monthly move in recent years.

FHFA housing price index MoM SA

Our friends at ISI Group are continuing to see more recent improvements in April and May in their house price survey. That is in spite of otherwise jittery economic conditions in the US and the mess in Europe. Of course year over year the index is still down - we are not expecting any miracles here. But on a month-over month basis, the trend is unmistakable. This and other housing indices will be up from current levels this time next year.

ISI Group: - House prices are continuing to improve in may. ISI's house price survey, which covers over 40 residential real estate agents around the country, continued to improve this week, suggesting existing house prices, which surged in April, improved further in May.

Source: ISI Group

There are other indicators pointing to improvements, such as the stabilization in lumber prices in spite of the recent sharp drop in commodity prices.

Perhaps the best data point would be to hear it from the people on the ground - the realtors. The National Association of Realtors maintains a tremendous database and has done a thorough job in monitoring the health of the housing market. Their latest results indicate that distressed sales are beginning to taper off, the number of first time buyers is increasing, and prices are stabilizing.

NAR: - Lawrence Yun, NAR chief economist, said the housing recovery is underway. “It is no longer just the investors who are taking advantage of high affordability conditions. A return of normal home buying for occupancy is helping home sales across all price points, and now the recovery appears to be extending to home prices,” he said. “The general downtrend in both listed and shadow inventory has shifted from a buyers’ market to one that is much more balanced, but in some areas it has become a seller’s market.”

Here is the video.

SoberLook.com

With housing weak, the “non-distressed” component of the market may be stabilizing

According to CoreLogic, the US housing market continues to stay weak. After a reasonably stable summer, the housing pricing impacted by the global markets, have disappointed. The Case-Shiller Composite-20 seasonally adjusted index showed a post-summer decline as well - in fact touching new lows.

Case-Shiller Composite-20 SA: Source: Bloomberg

The situation looks quite gloomy going forward as well:

• Almost a quarter of all homes have “negative equity”
• The new lending criteria is quite restrictive
• The law surrounding loan sales is shifting (Massachusetts)
• Rules surrounding foreclosure remain uncertain
• A great deal of uncertainty still surrounds Fannie and Freddie as well as the FHA

Unless it’s a clean solid credit with a big downpayment, banks don’t want to touch it. Credit officers want to keep their jobs and there is little upside for them in taking on risk.

Having said that, Capital Economics took the CoreLogic data, adjusted it for seasonality, and extracted data for homes that are “non-distressed”.  The chart below shows month over month percent changes in price for the whole data set as well as the non-distressed component. The contrast between the two is quite sharp (down 3.2% YTD vs. up 0.2%).

That means the market may become bifurcated, with the non-distressed component doing somewhat better. This hypothesis is in part supported by the recent earnings results from Toll Brothers:

Reuters: Contracts for new homes rose 15 percent to 644, with a value of $390.0 million, up 24 percent. The average price of new homes under contract rose to $606,000 from $565,000 a year earlier. … Toll ended the quarter with a backlog of 1,667 homes under order, up 12 percent. The backlog was valued at $981.1 million, up 15 percent.

The non-distressed housing stability can also be seen in new single-family home sales which are by definition "non-distressed":

Reuters: Sales of new single-family homes in October edged up 1.3 percent to a seasonally adjusted 307,000-unit annual rate, the fastest pace in five months, the department reported.

This improvement in the non-distressed sector is obvously encouraging, but all bets are off should the US GDP take a turn for the worse next year.  Unfortunately the price of one's home continues to be linked to the situation in Europe.

SoberLook.com

B F Skinner, the Fed, and the housing market

Here is a psychologist’s perspective on the housing bubble: it may just be the result of positive reinforcement. Burrhus Frederic Skinner, a US psychologist was an early pioneer of the "reinforcement" construct in behavioral science.



Here is the definition of what's called Positive Reinforcement:

Positive reinforcement is an increase in the future frequency of a behavior due to the addition of a stimulus immediately following a response. Giving (or adding) food to a dog contingent on its sitting is an example of positive reinforcement (if this results in an increase in the future behavior of the dog sitting). Note that in order for positive reinforcement to be effective, the stimulus doesn't need to be intentional.

What does this have to do with housing? Well over the last 20 years or so the Fed has been providing stimulus to the housing markets and built up a nice positive reinforcement process.

Here is a chart showing the Fed Funds target rate and the Case-Shiller YOY housing price changes. One can point to 3 cases (particularly the last case) when slower growth in housing prices was quickly followed by an accommodative action by the Fed. Whether or not the Fed was actually trying to prop up the housing market is irrelevant - the reason for stimulus has nothing to do with developing a certain response behavior.




This is to a large extent what got banks, consumers, and rating agencies behaving in ways they did with respect to housing. Sadly some of the roots of this crisis may just come down to the basic concept of stimulus-response.

Housing contunues to get pounded but the rate of decline is slowing

The housing market is maintaining its massive decline. Here is the Case-Shiller composite of 20 cities home prices:



The pace of year over year drop may be slowing a bit:



The bottom is still way off, but the rate of decline may be no longer as severe.

From MarketWatch:

On a month-to-month basis, prices in 20 selected cities fell 0.6% in April, with declines in 11 cities, compared with a decline of 2.2% in March. The overall annual pace of decline has slowed, said David Blitzer, chairman of the index committee for Standard & Poor's, which compiles the Case-Shiller index.

"Thirteen of the 20 metro areas also saw improvement in their annual return compared to that of March. Furthermore, every metro area, except for Charlotte, recorded an improvement in monthly returns over March," Blitzer said in a statement. "While one month's data cannot determine if a turnaround has begun; it seems that some stabilization may be appearing in some of the regions."