Home Prices Have Further To Go

February Pending Home Sales: -0.4 %.  This leading indicator for existing home sales activity pulled back in February, suggesting existing home sales (which rose 0.8% in February) will soften in March.  Pending home sales fell to 104.8 after a downwardly revised 3.8% increase the prior month, but nonetheless still rest at their second-highest level since April 2010, back when new home credits rocketed demand.  Pending sales are +8.4% over the past year, mirroring new home sale’s +12.3% and existing home sale’s +10.2% over the same period.  February showed a large 9.6% jump in existing home supply, however this fits with historical winter fluctuations, as the NAR has summed up in the following graphic:

monthtomonth inventoryhousing

In January, New home inventories hit a 13-year low at 4.1 months while existing home sales hit an 8-year low at 4.2 months. Supply shortages have consequently pushed prices to an 8.1% annual rate and the largest gain in 6.5 years (See 3/26/13: Case Shiller).  The median sales prices within the existing home sales report were 11.6% higher in February.  Lawrence Yun, NAR chief economist, does not believe we will see any relief from the supply shortage because it takes time for the homebuilders to ramp up production.


Large homebuilders, with a 25% market share, are uniquely positioned to increase production in a tight credit environment.  Indeed housing starts have gained 27.7% over the past year, but independent builders, representing a majority of the market and hampered by unavailable credit, need to ramp up production for inventories to equilibrate and price gains to soften.  Once lending requirements eases so too will prices.  The NAR expects it will take nearly a year for production to ramp up to equilibrium levels.

Housing on a Tear

January Pending Home Sales: +4.5%.  Contracts to buy homes swelled nationwide, gaining more than the 3% expected.  December’s drop was spared to only a 2% drop, from an initial 4.3% decline.  Every single region showed gains, pushing the yearly measure higher for 21 consecutive months.  The Western region showed the smallest gain, constrained by inventory shortages.  NAR economists now suggest that these lower inventories have finally shifted the supply / demand balance to favor sellers, meaning higher prices and sales. If inventories continue to remain low, the NAR expects 7% price growth this year, up from the 5-6% forecast, and 5 million homes sold annually. Nice.

  • Northeast:        +8.2%              to 84.8             +10.5% annually
  • Midwest:          +4.5%              to 105.0           +17.7% annually
  • South:              +5.9%              to119.3            +11.3% annually
  • West:                +0.1%              to 102.1           -1.5% annually

This report is so strong that at 105.9, only two months have shown higher readings, in 2007 (at 110.9) and 2010 (at 107.9, before the deadline for the sales tax credit).  With the absence of any external fiscal influences this time around, such strength signals incredible fundamental demand.  The Fed is right in their FOMC Minutes:

“Participants remarked on the ongoing recovery in the housing market, pointing variously to rising house prices, growth in residential construction and sales, and the lower inventory of homes for sale.  A number of participants thought is likely that higher home values and low mortgage rates were helping support other sectors of the economy as well, as a couple saw the housing market as having the potential to cause overall growth to be stronger than expected this year…”

CBRE February US, Europe & Asia Pacific Outlook

CBRE: US Europe Asia Pacific. Within the report divided into 3 continental regions, Asia-Pacific wins the 2013 outlook, primarily based on strong Chinese industrial production, bank loans fixed investment.  Exports from the smaller industrialized economies are growing as well, while Australia and Japan have more problems to deal with.

In the US, growth is expected to continue just like in 2012 with the notable changes confidence and housing.  Consumer confidence being the primary concern even though retail sales were robust last year  (4.7% overall, 4.4% ex-autos & gas).  Housing’s recovery can now be titled ‘sustainable’ while manufacturing is lagging and the service sector is doing rather well.

Obviously Europe is the worst of the 3 regions, and while confidence and manufacturing are at depressed levels, there is signs that the recession is bottoming out.  Still no sign on employment improvements however, that chart still goes straight down. The ratio of new orders to inventories hit a 11 month high, signaling a production rebound as demand from the US and China pull Europe form its malaise.

Northern Trust’s Million Charts

NT_Chart_Library_-_02052013  A fantastic presentation with charts on every aspect of the  global economy, from the breakdown of the CPI and dollar weighted index, central bank policy rate charts, US household & government spending, global GDP and inflation, China’s economy & growth, fixed income yield curves. spreads, option adjusted spreads, high yield metrics, default rates, global equities returns and fundamentals, commodities, demographics.

Northern forecasts an average rate of GDP of 1.85% for 2013, with just over 2% growth in the second half.  Slightly conservative compared to the street’s average 2.4% estimate.