Thursday, October 23, 2008
The housing market continues to haunt the economy and the banking sector, with foreclosure filings up 71% over the year. Consumer wealth is and has been declining substantially, with home values and equity values in a free fall, job losses mount, and the economic downturn is now showing its ugly face in the hard economic data. Going forward, the housing market faces stronger headwinds with falling incomes and stressed credit conditions, but it will recover.
With Fannie Mae and Freddie Mac now explicitly backed by the U.S. government, there is no reason that this market will not “stabilize.” Eventually, home buying will be so affordable that resisting would be futile.
On Friday we get another piece of the housing market puzzle, September existing home sales, which are expected to post positive monthly growth with the leading indicator - pending home sales - posting a 7.4% surge in August. You know my thoughts on the pending home sales report, so I look at high frequency data for better clues.
Mortgage Rates were declining quickly in August
The chart illustrates the weekly 30-year fixed conventional mortgage rate – in levels and the 4-wk. moving average – since the beginning of the year. Mortgage rates fell in August and September, increasing the affordability of a home buying. Provided that lending standards are not too tight, home buying should rise with demand.
Mortgage Applications were rising in August
The chart illustrates the weekly change in the number of mortgage applications – in levels and the 4-wk. moving average – since the beginning of the year. Mortgage applications rose through September 12, indicating that consumers are jumping on the increased affordability. Provided that applicants with proper income credentials are approved, home buying should rise.
On Friday, I expect that the existing home sales will post a slight increase, perhaps as much as 1-2% since August. However, for the same reasons that I argue that existing home sales will post a September increase, October and/or November existing home sales may decline. In the charts above, mortgage rates started to ascend October and applications declined. This is slightly disconcerting when the entire U.S. economy is looking for signs of stabilization in the housing market.
I believe that the sales market has already bottomed
The chart illustrates the percentage change in existing home sales over the month and since last year. Monthly existing home sales have been extremely volatile since the beginning of the year. Potential homebuyers are slightly confused – reacting to any market shift in prices, interest rates, or lending standards. However, on an annual basis, existing home sales are slowly ebbing back from a decline over the year (sales got as low as -23% over the year in February) to simply no growth (sales were down -10% over the year in August). And at some point – likely late next year – growth will likely be slightly above zero.
The longer-term trend indicates that sales have already bottomed. On a monthly basis, October and November may post negative numbers, but that will probably be an aberration in the data. Credit conditions are slowly stabilizing, and when the banking sector does initiate a more normal business environment (however, slight that may be), bankers will make mortgage loans.
However, huge risks abound. This morning, Bloomberg reports that foreclosure filings are still increasing sharply – up 71% in the third quarter of 2008 since last year, and there is still a lot of supply to work off. Just because existing home sales are slowly ebbing back to “no growth” over the year, doesn’t mean the market is healthy.
The bigger they come the harder they fall, and the housing monster was big. However, it is nice to see baby steps toward a recovery in sales, which by the way, is just the first step.