Tag Archives: Residential Investment

CR: Housing: The Two Bottoms

Housing: The Two Bottoms

by Bill McBride on 3/03/2013  

Last year when I wrote The Housing Bottom is Here and Housing: The Two Bottoms, I pointed out there are usually two bottoms for housing: the first for new home sales, housing starts and residential investment, and the second bottom is for house prices.

For the bottom in activity, I presented a graph of Single family housing starts, New Home Sales, and Residential Investment (RI) as a percent of GDP.

When I posted that graph, the bottom wasn’t obvious to everyone. Now it is, and here is another update to that graph.

Starts, new home sales, residential InvestmentClick on graph for larger image.

The arrows point to some of the earlier peaks and troughs for these three measures.

The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.

For the current housing bust, the bottom was spread over a few years from 2009 into 2011. This was a long flat bottom – something a number of us predicted given the overhang of existing vacant housing units.

We could use any of these three measures to determine the first bottom, and then use the other two to confirm the bottom. But this says nothing about prices.

Residential Investment and House pricesThe second graph compares RI as a percent of GDP with the real (adjusted for inflation) CoreLogic house price index through December.

Although the CoreLogic data only goes back to 1976, look at what happened following the early ’90s housing bust. RI as a percent of GDP bottomed in Q1 1991, but real house prices didn’t bottom until Q4 1996 (real prices were mostly flat for several year). Something similar happened in the early 1980s – first activity bottomed, and then real prices – although the two bottoms were closer in the ’80s.

Now it appears activity bottomed in 2009 through 2011 (depending on the measure) and house prices bottomed in early 2012

Read more at http://www.calculatedriskblog.com/2013/03/housing-two-bottoms.html#1F67BIuweRXEJesB.99

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CR: Understanding the Existing Home Sales Report

Understanding the Existing Home Sales Report

by Bill McBride on 1/23/2013  

The reporting on the Existing Home sales report was pretty negative yesterday even though I thought it was a solid report. And some of the positive reports were about prices – the NAR reported “The national median existing-home price for all housing types was $180,800 in December, which is 11.5 percent above December 2011” – and I completely ignore the median price.  What gives?

First, on prices, the median is impacted by the mix, and the mix changed in 2012 with fewer low end foreclosures.  I think the median price should be ignored during periods when the mix is changing (with all the repeat sales indexes available, I mostly ignore median prices all the time).

And on sales, the lead for many articles was that seasonally adjusted sales declined in December compared to November, and that sales were below the consensus forecast.   There were some suggestions that this called into question the “housing recovery”.   Nonsense.

What is a “housing recovery”?  There are really two recoveries: House prices and residential investment.  Most people – homeowners and potential buyers – focus on prices, and for prices we should use the repeat sales indexes, and not the NAR median price (repeat sales indexes include Case-Shiller, CoreLogic, etc).  What matters in the NAR report for prices is inventory and months-of-supply.  And inventory is at the lowest level since January 2001, and months-of-supply fell to 4.4 months – the lowest since May 2005.

But for GDP and jobs, the key is what the Bureau of Economic Analysis (BEA) calls “residential investment” (RI) .  For existing homes, only the broker’s commission is part of GDP, but for new homes the entire sales price is part of GDP.  There are some spillover effects from home sales (furniture, landscapting, etc), but those aren’t included in RI.

Residential Investment ComponentsClick on graph for larger image.

This graph shows the components for RI as a percent of GDP. According to the BEA, RI includes new single family structures, multifamily structures, home improvement, broker’s commissions, and a few minor categories (dormitories, manufactured homes).

Usually the most important components are investment in single family structures followed by home improvement.

Right now home improvement is the largest category, but new single family structures will be the largest component soon.  Broker’s commissions is usually the third largest category and is relatively small compared to single family investment and home improvement.

So if existing home sales decline there is a minor impact on RI and GDP.  When we talk about the “housing recovery” for jobs and GDP, existing home sales are mostly irrelevant – the focus should be on new home sales, housing starts and home improvement.

On home improvement, from the NAHB: Remodeling Market Remains Strong in the Fourth Quarter

The Remodeling Market Index (RMI) reached 55 in the fourth quarter of 2012, increasing five points from the previous quarter, according to the National Association of Home Builders (NAHB). This is the highest reading since the first quarter 2004.

An RMI above 50 indicates that more remodelers report market activity is higher (compared to the prior quarter) than report it is lower. The overall RMI averages ratings of current remodeling activity with indicators of future remodeling activity.

“Remodelers are optimistic about the outlook for slow and steady market growth in the new year,” said 2013 NAHB Remodelers Chairman Bill Shaw, GMR, GMB, CGP, a remodeler from Houston. “Professional remodelers reported more work from large and small projects as well as overall home repair.”

Finally, as I mentioned yesterday, as the number of distressed sales decline, the number of total sales might decline too – but we need to look at the number of conventional sales – and conventional sales have been increasing.  That is probably a sign of a healing market.

I don’t expect much of an increase in existing home sales in 2013, and I wouldn’t be surprised by a decline depending on the number of foreclosures this year. But I think the housing recovery will remain fairly strong with new home sales and housing starts up sharply again this year.

Read more at http://www.calculatedriskblog.com/2013/01/understanding-existing-home-sales-report.html#8L4G2HQkf3Tf4D2h.99

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