The Commerce Department announced yesterday that housing starts rose by an annualized, seasonally-adjusted pace of 717,000 in April (per an article featured on TheStreet.com, the consensus expectation was for 680,000 new units).
Perhaps not surprisingly, various analysts and commentators have spun the data to fit their needs. One story in BusinessWeek, for instance, suggested that in spite of the most recent gains, the rate of home construction is only half of what is considered a healthy level. On the other hand, Brian Wesbury, Chief Economist at First Trust, is more optimistic about the nearer-term fate of the housing industry. His commentary on the recent data cited month-over-month growth of 2.6% and 29.9% year-over-year growth as definitive proof that the recovery in housing is unfolding.
Earlier this year, I too joined the chorus of pundits reciting expectations for improvements in housing in months to come. However, from my perch, despite the shoring up of sector fundamentals that has occurred, I will the consider the call to have been wrong if prices do not reverse course in short order. WIth that said, it is with interest that I note that both the 10- and 20-city composite FiServ/Case-Shiller Home Price Indices increased on a month-over-month basis in February–this early stage improvement comes after the two indices lost ground in each of the previous nine months.
Obviously, one data point does not a reversal make, however, even the largest inflections start as miniscule counter-trend moves. Let us now turn to an examination of the data for greater perspective.
To assess the merit of the idea of improving home prices going forward, I have applied my preferred momentum measure, the Coppock Guide to the home price series. The Coppock Guide is a fairly simple indicator, but it has proved highly reliable in identifying bottoms. The output is shown on the chart below.
As is evident from the graphic, Coppock momentum for the 20-MSA composite bottomed in December 2011, and now looks poised to improve at least into 2013. Supportive momentum should foreshadow additional gains in housing prices.
Technical studies aside, analysts such as Josh Levin, of Citi Investment Research & Analysis, have made the (compelling) case that much of the structural excess housing supply has been worked off as a result of the low level of units completed during the downturn. In a piece he put out last Fall (“Getting Leaner But Staying Bloated”, 9 Sep 2011), Levin estimated that by 2H12, the entire housing supply overhang would be absorbed. He believes that the decimation of prices in years past owed largely to the flooding of the market with inventory. Sopping up the remaining overage should lead directly to an abatement of housing market price pressures, per Levin’s thesis, and should also result in an increase in employment, a ramp up in ancillary economic activity and ultimately engender greater consumer confidence–a benefit for risk assets of all stripes.
While Levin does concede that the bulgy foreclosure pipeline poses a risk to a housing recovery, I am reminded of a lesson I learned (the hard way) after calling the big top in 2007 and watching equity prices erode to less than 50% of peak values. Following that bloodbath, even markets advanced meaningfully in the Spring of 2009, I was disinclined to recommend equity exposure, as I perceived capital markets and economies broadly to be facing a daunting litany of headwinds with very uncertain outcomes. As we all know, the market tore higher in the months that followed.
Many moons later I was still kicking myself for having arrived so late at such a grand party, when I came across an interesting piece by Chris Caton, Chief Economist at BT Financial. Chris’ analysis was provocative but the most striking element of this missive was a line which seemed to precisely articulate the painful lesson I was forced to internalize. That maxim appears below:
“Markets don’t turn when they see the light at the end of the tunnel, they turn when the dark stops getting darker.”
While the light at the end of the tunnel may not be evident just yet, a combination of fundamental and technical data suggests that the dark has likely stopped getting darker for the housing sector.
A recent survey conducted by the Urban Land Institute suggests that the nation’s leading real estate analysts and economists expect the industry to improve through 2014. This is to say that the housing recovery call has gone mainstream. Nonetheless, proponents of the bear interpretation still abound. To wit, the Securitized Products Team at Morgan Stanley Research just Monday reiterated their expectation for the FiServ/Case-Shiller Index to fall by an additional 5-8% this year. They expect soft prices particularly among non-distressed transactions and driven by tight mortgage credit availability (see Morgan Stanley Strategy Forum, 14 May 2012). While I absolutely acknowledge the disparate paths of distressed and non-distressed real estate markets, the FiServ/Case-Shiller Indices (presumably) capture both segments of the market. Moreover, since my analysis of the 20-city composite supports the argument for price appreciation rather than depreciation, I am giving the bull case the benefit of any doubt. In this instance, I am content to rub elbows with the herd.
New lows in the FiServ/Case-Shiller Index in months ahead would call this thesis into question.