Positive News on the Housing Market

December 7, 2009 | 113 Comments

The Housing Market seems to be bouncing back slowly accousing to this recent news from the Housing Sector.

·        October Pending Home Sales + 31.8% y/y and +3.7% vs Sept / Now 42% above the low set in Jan 09 / At highest level since 3/06.
 
·        Price Declines, low mortgage rates, $8,000 buyer incentive, improved consumer confidence cited as factors.
 
·        Activity could slow in Nov due to previous uncertainty regarding the extension of the $8k credit, but activity is expected to rebound heading into Spring ’10.  Macro concern is that a weak employment market could limit future growth.
 
·        Figures may be somewhat distorted due to issues regarding the length of time needed to complete Short Sales of REO property.
 
·        Banks have been slow to add more foreclosed inventory to the market so far.  By some estimates as many there are as many as 5.4mm distressed properties listed for sale.
 
·        Regionally, seasonally adjusted pending sales increased across all regions with the exception of the West. The breakdown is as follows: Northeast (+19.9%), Midwest (+11.6%), South (+5.4%), and West (-11.2%).

Pending Home Sales Rise for the Ninth Consecutive Month
As a reminder, this index is based on a national sample typically representing about 20% of existing home sales. An index reading of 100 is equal to the average level of contract activity during 2001. Notably, the National Association of Realtors has stated that a closer relationship exists between annual index changes as compared to month-over-month comparisons.
The Data:
Pending Home Sales Index (PHSI) = 114.1 (seasonally adjusted annualized rate)
(Up 31.8% y/y, up 3.7% versus September, and ahead of consensus estimates predicting -1.0% month-over-month decline)
The Takeaways:
Contract activity increases for the ninth straight month. The PHSI increased 31.8% y/y and 3.7% from September and is now 42% above the record low for the index set in January. The index now stands at its highest level since March 2006. Notably, this is the first time in the history of the index (dating back to 2001) that pending home sales have trended higher for nine consecutive months. Record price declines, historically low mortgage rates, FHA loan availability, improving consumer confidence, and the $8,000 federal first-time buyer tax credit are all factors that have compelled potential buyers to enter the market, in our view.
Activity has increased ahead of the tax credit expiration but could slow next month. First-time buyers have been active in the market ahead of the tax credit expiration, and we believe the presence of this group has supported sales activity into October. However, given the prior uncertainty surrounding the tax credit extension and due to the pulled-forward effect from the previous tax credit deadline, we would not be surprised to see sales activity (as measured by the PHSI) slow in November. Looking ahead however, we believe the recent extension and expansion of the housing tax credit should provide a nice tailwind to the spring 2010 selling season, although the incremental benefits are likely to have diminishing returns. Supporting our view, the Realtors Association noted in today’s release that, “we could see a temporary decline in closed existing-home sales from December until early spring when we get another surge, but the weak job market remains a major concern and could slow the recovery process.”
Unusual conditions may be influencing the data. As a reminder, the PHSI is based on contracts signed during October, which would generally translate to existing home transactions in November. However, due to delays related to short sales and issues regarding the new appraisal rules, the National Association of Realtors (NAR) has noted that it is taking approximately two months to complete sales in the current environment. Moreover, it is not clear how many sales simply remain delayed versus being cancelled altogether. Thus, while we view this steady trend of increasing “pending” activity as a sign of improved demand, we remain cautious of reading too much into the magnitude of the increase in the individual monthly data points due to the aforementioned issues surrounding this data series.
Activity in the South improves while the West declines. In our view, it is important for investors to focus on the South and West regions as these are the areas with the most distressed housing inventory and where public homebuilders are most active. Positively, activity in the South improved 5% relative to September and is up 32% y/y. The West, however, was the only region to witness a decline (-11%) relative to September. While sales activity appears to be moderating in the West, it has been the strongest region in terms of sales activity over the past year and we would note that listed inventory is down considerably in many markets.
Distressed inventory remains the concern. While housing data points have generally signaled improving sales activity, we continue to be on high alert for another potential market setback due to the risks posed by a variety factors, including the unprecedented pipeline of distressed inventory (5.4 million homes as of September 30, by our estimates). For now, the good news is that the banks have avoided foreclosing/repossessing homes in numbers that, thus far, have prevented a flood of new, heavily discounted inventory from entering the market. However, we would note that a significant increase in bank-owned home liquidations could quickly reverse many of the positive trends we have witnessed as of late.
Additional Details: The non-seasonally adjusted Pending Home Sales Index increased 28.6% year-over-year and increased 5.6% month-over-month in October. Regionally, seasonally adjusted pending sales increased across all regions with the exception of the West. The breakdown is as follows: Northeast (+19.9%), Midwest (+11.6%), South (+5.4%), and West (-11.2%).
 
Article by: Ross Lipman
Vice President/ Investment Services
Ameris Bank
834 Savannah Highway
Charleston, SC 29407


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