Housing Market Data Doesn't Tell the Whole Story

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housing marketRadarLogicOver the past two weeks we have been bombarded with housing market data, much of it seemingly contradictory.

• On February 15, the National Association of Home Builders released their Housing Market Index for February. The Index measures confidence among home builders, where 50 is neutral, higher is positive, and lower is negative. The index was 16. Clearly the folks who build homes think the market is in trouble.

• On February 16, the U.S. Census Bureau released housing starts and permits for January. Starts were up 14 percent, having been down 5 percent the prior month, but permits fell 10 percent. What's more, the increase was apparently fueled by multifamily dwellings (read apartment houses) not single-family homes.

• On February 22, the S&P Case-Shiller Home Price Index for December was released and showed declines across the board. By the way, Radar Logic had correctly predicted this the week before.

And then last week, two of the big guys started debating the accuracy of their numbers in the media. Even the father of housing metrics, Dr. Robert Shiller, spoke up. Unfortunately, none of these experts has really zeroed in on the point: Housing markets are "busted," and the reasons are not going away.

As we pointed out in our RPX Monthly Housing Market Report, released on February 17, the RPX Composite price for the 25 major MSAs we publish was 3.6 percent below its level from a year
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ago. In fact, this was the fourth year in a row when the year-over-year comparison was negative.

So, it seems that whether or not we are in a technical "dip" we clearly remain in a falling market. Dr. Shiller said yesterday that the Case Shiller Index is still above its low point, so we are not in a "double dip" yet. Come on, Bob. Isn't it time to tell it like it is? Housing is not poised to recover. As we have been saying for months, there is simply too much inventory relative to too little demand. And as housing is a market, a fairly sophisticated one at that, such imbalance can only help prices fall. Let's look at the pieces.

On the supply side, inventory continues to grow. And as we noted above, it is not because builders are putting up new homes. It is because there are millions of homes for sale due to financial distress, many of which have been foreclosed and are being offered by the banks that own them. According to the administration's Housing Scorecard for January 2011, there are roughly 3.5 million homes for sale and another 3.5 million homes vacant, but not on the market.

This was a decrease of roughly 4 percent from the prior period, but an increase of almost 7 percentfrom a year ago. And it's within 1 percent of the level from December 2008. In addition, there were approximately 4.2 million seriously delinquent mortgages in the most recent period.

On top of that, according to the same HUD report, the number of underwater borrowers was fairly steady at 10.8 million. While there likely is some double counting, back-of-the-envelope calculations suggest there are between 10 million and 22 million homes either for sale or at risk of being for sale. Based on the most recent seasonally adjusted annual rate of existing home sales (a number that is being contested by another data provider) of approximately 5.5 million homes a year, that means that the actual supply is between 2 years and 4 years. And most TV economists are suggesting supply is 7 to 8 months. A disconnect if ever there was one. By the way, if prices continue to fall, the number of underwater borrowers goes up and the problem gets worse.

On the demand side, the numbers are a bit suspect so let's look at the drivers. Interest rates have moved up, though only a little. A bigger issue is that lenders are requiring much larger down payments. That makes sense if they think housing values are going to fall. It is the underwater borrowers who are at some risk of what's called strategic default: the walking away from a loan that's bigger than the house is worth. And then there is the very simple psychology of many buyers who think the market is still moving down, so they can afford to wait. When there is so much for sale, why not wait until the big "discount" signs appear. In simple terms, it is a buyers' market. And more supply will only make it more so.

So, where is the silver lining? Well right now there isn't one. As we come into the spring, the traditional beginning of the homebuying season, we likely will see some glimmers of "good news." Activity likely will accelerate a bit, and as a result, sellers will stand a bit firmer on their asking prices, so deals will look like they are happening at higher values. Beware that this may be noise in the face of oversupply. No doubt, the media will be filled with all the "good" news. From our point of view, it likely will appear fleeting and until there is a real effort to reduce the enormous shadow inventory, the decline will continue.
Michael Feder is president and CEO of Radar Logic Inc. Radar Logic is a New York-based data and analytics company that produces the RPX value for housing markets in the United States. Unlike most econometric measures of housing, RPX is produced daily, based exclusively on data related to actual closings. It is designed to provide a contemporaneous measure of housing values at the point of sale. For more information, please visit www.radarlogic.com.

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