Monday, March 24, 2014

The Housing Market Is Cramping Up

The housing market keeps sputtering along.  While disappointing, this should not be surprising.  Housing was the last big segment to hit bottom.  This was a bubble-busted collapse. Housing had so far to fall that it did not hit bottom until the recession was almost officially over.  Housing starts were still dragging the bottom of the cycle months after the recession had officially ended. 

Consequently, housing started its recovery after other segments of the economy and has mirrored the trends in other industries.  It has been a long, tedious, series of fits and starts.  Just when you think promising growth has started, it stalls out.

Because of the housing’s impact on freight and the general economy, it’s a good time to check in on the state of this industry:

Housing Starts:

February Report: 907,000 (annual rate). -0.2% vs. January, -6% y/y

Trend: Housing Starts began to recover in 2009, but unfortunately haven’t gotten very far. 

Based on history and population growth, a healthy market now would be around 1.5 million starts.  This means that even when using December’s higher number, we are still 30% below where we need to be.  FTR is forecasting Housing Starts to average around 1 million (annual rate) in Q1 and then grow slightly each quarter.  This would make 2014 a good year compared with the last few, but still poor compared to the 1.5 million baseline.

Building Permits

February Report: 1,018,000 (annual rate). +7% vs. January, +7% y/y

Trend: Building Permits started to increase in October 2013 so it appears bad weather has hurt the total this winter.  Building permit numbers should continue to rise each quarter at a modest rate.

Home Builder Confidence

March = 47, February = 46, March 2013 = 44

Trend: The index had increased for eight straight months before declining significantly in February.  The index registered its second straight month below 50.  A reading below 50 indicates builders are negative about future market growth.
New Home Sales

January Report: 468,000 (annual rate). +10% vs. December, +2% y/y

Trend: Positive, but like Housing Starts, we have a long way to go.  New Home Sales have been very slow to recover and we should be above 700,000 in a healthy market.

Existing Home Sales:

February Report: 4.6 million, -0.4% from January, -7.1% y/y

Existing home sales are actually declining after hitting a peak in mid-2013.  They are back to where they were in 1998.

Home Inventories

March Report: Inventories are increasing moderately, but remain at very low levels. Inventories will have to increase to fuel a recovery and support normal sales levels, but sales are not sufficient to cause inventories to rise just yet.  This is a symptom of our cautious business environment.  Some analysts believe the very low inventory levels are holding back the housing recovery by pushing up prices and stifling demand.  Preliminary reports (NAR) have existing home sales up 6% in March.

Housing Prices

Core Logic reports prices up 12% y/y in January.  Prices continue to rise but are still 17% below the peak of April 2006. Also, 4 million homes returned to positive equity in 2013, but over 13% of residential properties with a mortgage still had negative equity at the start of the year.

The Big Questions:

Why are Housing Starts so low?

There are fewer first-time home buyers.  College graduates who would normally buy houses don’t have jobs, have high student loan debt and are delaying marriage.  Household formation was very low from 2008 to 2010.  It started to improve in 2011, but is still below the historical average.  There is large pent-up demand here, but without jobs and a growing economy this market isn’t moving.  Home builders do not need to build inventory if there are not first time buyers.

In addition many smaller builders were wiped out during the recession.  Those that survived are facing very tight credit conditions.  Large builders remain very cautious and are having problems finding enough skilled labor for the projects they have.

Why are Existing Home Sales So low?

Buyers are facing tighter credit, limited inventories, higher prices and higher mortgage rates.   You still have a high percentage of homes underwater, cautious buyers and sellers, and limited mobility due to a sluggish job market.

What happens next?

The housing market may
be taking a "squat"
Housing usually leads the economy, but it was the last sector to crash and thus has lagged the economy since 2009.  For housing to rebound, the general economy has to be functioning in a normal state.  There has to be growth and stability to support the housing market before it can flourish.

Compare it to a world-class distance runner who has a bad case of the stomach flu.  All the parts that make him world class are still functioning well.  His legs, his feet, his lungs are all exceptional. But he is not going to run very fast, nor very far, under these conditions.  Other parts of this economy: employment, financial, risk-taking, consumer confidence, are going to have to heal before housing has a solid base to launch.

(This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)