Housing Market Update

This is a HUGE subject and I probably can't do it justice in one blog entry. But here goes.

Sales of new one-family houses in April 2009 were at a seasonally adjusted annual rate of 352,000, according to estimates released jointly last week by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 0.3 percent (±14.5%)* above the revised March rate of 351,000, but is 34.0 percent (±11.0%) below the April 2008 estimate of 533,000.

The median sales price of new houses sold in April 2009 was $209,700; the average sales price was $254,000. The seasonally adjusted estimate of new houses for sale at the end of April was 297,000. This represents a supply of 10.1 months at the current sales rate.

Below are some viewpoints from some housing pundits regarding this latest report:

• The new home sales numbers seem to confirm what the single-family housing starts and permits numbers imply — that the market for new single-family homes is flattening — indeed, that it may have hit bottom in January — and that the recovery will be a slow one. Despite improving numbers, we are not ready to say that the market has hit bottom. These numbers are estimates with large standard deviations. Because the margin of errors is big, the footnote in the press release warns, “It takes four months to establish a trend for new homes sold.” We still project that this market will start expanding in the second half of this year. –Patrick Newport, IHS Global Insight
  
  
• As opposed to the resale volumes, which increased by 2.9% month-to-month in April, new home sales remain sluggish. Plunging prices, record-low mortgage rates and an $8000 tax credit for first time buyers did not help much to push up hew housing demand. We believe, new home sales is probably a better reflection of the underlying demand than the existing home sales which have been highly boosted by the increasing foreclosure numbers recently. Nevertheless, new home inventories kept declining in April which sent the months’ supply in new homes to 2.3 month below a record of 12.4 months reached in January. In addition, the home prices kept falling and were 14.9% below last April’s levels. Even though we see builders are becoming more optimistic about the future of the housing industry and there is some stabilization in housing demand, surging foreclosures, rising mortgage rates and high unemployment rates will weigh heavily on new home sales and will prevent a sharp rebound in the housing market in the near future. –Yelena Shulyatyeva, BNP Paribas
  
  
• New homes are now sitting on the market for a median 10.9 months before selling, and completed homes still comprise an extraordinarily high share of total homes for sale. While sales have stabilized within a fairly narrow range over recent months, there is little to suggest that the sales rate will post a meaningful and sustained increase any time soon. Despite the Fed’s efforts, mortgage rates are heading higher, while the ongoing erosion in the labor market and tougher mortgage lending standards will continue to act as drags on sales. It is true that the first-time buyer tax credit is stimulating sales, but this will not be sufficient to sustain a meaningful increase in new home sales. –Richard F. Moody, Forward Capital
  
  
• Even with some normalization of unsold inventory of newly constructed homes, it’s unlikely that the real estate market can support any significant pick-up in homebuilding activity in the foreseeable future. That’s because foreclosure activity is still increasing and these properties are flooding the market. –David Greenlaw, Morgan Stanley
  
  
• The report was a bit of a mixed bag, as the weaker than expected gains in new home sales will likely be offset by the improvement in the inventory data. –Millan L. B. Mulraine, TD Securities
  
  
• This is a bit disappointing, given the hefty increase in homebuilder sentiment in the past couple of months. The relatively late Easter might have restrained activity, we suppose, but we cannot be sure. Either way, we still think the combination of very low mortgage rates and falling inventory will entice people back into the market in greater numbers over the next few months. –Ian Shepherdson, High Frequency Economics
  
  
• Looking ahead, reports from homebuilders indicate that activity picked up in April and then a bit further in May, led by first-time homebuyers attracted by steep price declines at the bottom end of the market. The same appears to be true of existing homes, where first-timers are being tempted by deeply discounted properties coming out of foreclosure. Therefore, while sales rates may well have bottomed, it seems clear that gains in activity will remain concentrated in lower priced homes. However, supply will remain enormous, particularly with increased competition coming from distressed sales of existing homes. This suggests that prices will continue to edge lower at the bottom end of the market even as demand for these homes picks up a bit –Joshua Shapiro, MFR Inc.
  
  
• Although new single-family sales were a little below expectations in April, we judge the data to be consistent with a bottoming out in new housing construction activity as also suggested by single-family housing starts and permits and the NAHB’s housing market index. Perhaps the most constructive indicator is the decline in the number of homes for sale in April, both in absolute terms and in relation to sales (though the months’ supply remains elevated). The latest mortgage delinquency data for the first quarter remind us that there are still very significant problems in the housing market. –RDQ Economics

Here are a few charts that depict the current housing situation:
Lower prices and historically low borrowing costs have increased affordability. The average 30-year mortgage rate was 4.81% in April, down from 5.00% in March and 5.92% in April 2008, Freddie Mac data show.

The housing industry hopes demand is stirred by the $8,000 tax credit for first-time home buyers included in the Obama administration's economic stimulus package. However, tighter mortgage lending standards and rising unemployment are working against sellers. The unemployment rate in April climbed to 8.9% from 8.5% during March.

Regionally last month, new-home sales were flat in the Midwest and the Northeast. Sales fell 3.8% in the West and climbed 1.9% in the South.The market is bedeviled, however, by foreclosures. Buyers are gobbling distressed property, priced cheaply, and passing up on new homes. This restrains construction, hurting builders as well as the kinds of commerce that feed off new subdivisions and might otherwise emerge -- in the form of shopping malls, for instance.

Last Wednesday, the National Association of Realtors reported existing-home sales increased 2.9% to a 4.68 million annual rate. About 45% of the 4.68 million were foreclosures and short sales. The median home price dropped 15.4% to $170,200 from $201,300 in April 2008.

About half of the new foreclosures were in four states: California, Florida, Arizona and Nevada, according to the report. Measuring both old and new defaults, 11 percent of all mortgages in Florida were in foreclosure at the end of the first quarter, the highest in the U.S. In Nevada, it was 7.8 percent, in Arizona, it was 5.6 percent, and in California, it was 5.2 percent. New Jersey’s foreclosure inventory was 4.3 percent, New York was 3 percent, and Massachusetts was 2.8 percent.

It is important to note (once again) that the monthly data is statistical noise at 0.3% with a ±14.5% margin of error; the annual fall of 34% is statistically significant.

The usual headlines got it wrong:

• Bloomberg: New-Home Sales in U.S. Climbed 0.3%

• Marketwatch: Home sales up a paltry 0.3%

• Reuters: US new home sales rose 0.3 percent in April

• Associated Press: April new home sales inch upward

• WSJ: New-Home Sales Rise as Prices Tumble

The bottom line... we cannot accurately state (in a statistically significant manner) that home sales went up in April 2009. But, we do know confidently that sales fell (between 23% and 45%) year over year.

But the real question is...have we reached bottom yet in the housing market???

Maybe.

Quote of the week

“Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect. In some ways, predicting the economy is even more difficult than forecasting the weather, because an economy is not made up of molecules whose behavior is subject to the laws of physics, but rather of human beings who are themselves thinking about the future and whose behavior may be influenced by the forecasts that they or others make.”

Federal Reserve Chairman Ben Bernanke at the Boston College School of Law commencement, May 22, 2009

Confidence is climbing

The Conference Board Consumer Confidence Index™, which had improved considerably in April, posted another large gain in May. The Index now stands at 54.9 (1985=100), up from 40.8 in April. After two months of significant improvements, the Consumer Confidence Index is now at its highest level in eight months (in Sept. 2008, it was at 61.4).

This is a big enough bump in consumer attitudes that we can be pretty sure it's not just a temporary blip. Although consumer confidence isn't the only thing to worry about, it was the collapse of consumer spending that pushed us over the edge (the housing crash itself did not send us into recession). Now we're likely to see an improvement-- albeit not a return to the exuberant spending of 2005 -- but a measured increase in spending.

Housing report carries a mixed message

Today's housing reports indicates that building permits in April 2009 decreased 3.3% from March and declined 50.2% from April 2008, to 494,000. Housing starts in March 2009 decreased 12.8% from the prior month and declined 54.2% from the prior year, to 458,000.

On the surface this appears to be more bad news. But there is a silver lining. Behind the headlines (interestingly, the same was the case with retail sales), the numbers didn’t look as terrible.

First, with record inventory why are people rooting for additional supply? Second, the large, and unexpected, decline in housing starts is driven solely by a huge drop in multi-family housing starts, which dropped 46.1% to only 90,000 at an annual rate. This looks like a payback for a large increase in February when multi-family starts rose 65.6%. In addition, single family starts rose 2.8% while permits rose 3.6%. This trend, if sustained in coming months, would suggest that single family housing starts are in the process of bottoming and we may be starting the long, slow recovery. As I have said before, regional variations do exist so be wary of painting with too broad a brush stroke.

Warning signs that a business is in trouble

From the latest GrowerTalks: Long before the bank says NO and the final profit and loss statement bleeds red ink, there are warning signs that a business may be in trouble. Whether you’re optimistic about your future or feeling a wee-bit stressed these days, it’s crucial to monitor for early indicators of coming problems. Think of it as preventative maintenance—something you’d give your vehicle in order to fix the little problems before the engine blows....continued.

Several folks, including myself, were interviewed for the article. Click here for the full scoop.

What consumers are still doing

Despite the recession, there are still some activities consumers are willing to spend their money on. Sageworks, Inc., a firm that tracks private-company financial performance, has compiled a list of seven. Number 2 signals opportunity for the landscape service sector.

• 1) Repairing their cars instead of buying new autos. Auto repair shops grew their sales by an average of 2.4% over the last 12 months. In contrast, car dealerships saw their sales decline by 9.7% in the same period.
• 2) Remodeling and repairing their homes instead of moving. Building equipment contractors (such as electricians, plumbing and heating contractors) saw their sales increase by 4.6% in the last 12 months.
  
• 3) Shopping at grocery stores more than eating out. Grocery stores experienced average sales growth of 6.7% over the last 12 months. Sit-down restaurants saw growth of 3.9% in the same period.
• 4) Attending technical and trade school. Trade and technical schools saw their top-line sales grow by 7.8% in the last 23 months, compared to growth of 5.9% in 2007.
• 5) Going to the dentist. The average dentists’ office experienced sales growth of 6.9% in the last 12 months, up from 4.9% in 2007.
• 6) Getting personal care services such as haircuts and manicures. Hair salons, barber shops, nail salons, and skin care providers experienced an average of 4.5% sales growth in the last 12 months.
• 7) Visiting an accountant. Accounting firms saw average top-line revenues grow by 10.2% over the last 12 months, putting the accounting industry in the top 20 industries in the country by sales growth.

Fed Forecast -- 3rd Qtr Turnaround

The Philadelphia Federal Reserve released its Second Quarter 2009 Survey of Professional Forecasters today, and the consensus forecasts for quarterly real GDP through 2010:Q2 are displayed below. The consensus forecast is for negative output growth to continue in the second quarter (-1.5%) of 2009 before turning positive in Q3 (.40%) and Q4 (1.7%), continuing into 2010 with growth of 2.2% and 2.9% in the first two quarters.
HT to Mark Perry for the graph.

The truth behind the latest labor stats

WASHINGTON (AP) -- The Labor Department reported Thursday that the number newly laid off workers applying for benefits dropped to 601,000 last week. That was far better than the rise to 635,000 claims that economists expected. But the total number of people receiving jobless benefits climbed to 6.35 million, a 14th straight record.

There's one small problem with the bold statement above. The population of the U.S. has roughly doubled since the 1950s, so comparisons of today's unemployed (unadjusted) to past periods is meaningless without adjusting for the population. The current number of unemployed (6.2 million average for April) is about 2% of the current U.S. population (estimated 306.56 million for April), which is still below the 2.12% level in 1975. So the claim of a 14th straight record for Americans receiving jobless benefits is not accurate, after adjusting for the size of the U.S. population.

Retail Rebound?

May 7 (Bloomberg) -- Wal-Mart Stores, the world’s largest retailer, reported comparable-store sales for April that rose more than analysts expected. Revenue from U.S. stores open at least a year increased 5%, excluding gasoline sales, in the four weeks through May 1, the Bentonville, Arkansas-based company said today in a statement. That exceeded the 3% average estimate compiled by Retail Metrics Inc.

U.S. store visits rose the most in seven months, spurred by demand in the grocery, health, home and entertainment categories, Wal-Mart said. Some consumers spent more freely on sporting goods and other discretionary merchandise after gasoline prices and payroll taxes dropped. The shift of Easter to April 12 from March 28 in 2008 also lifted sales.

Target Corp. announced Thursday that net retail sales for the four weeks ended May 2 were $4.45 billion, up 4.5% from the comparable period last year.Minneapolis-based Target (NYSE: TGT) said first-quarter highlights included better-than-expected same-store sales and gross margins, favorable retail expense performance and credit card results that were in line with prior guidance. Target’s April results far exceeded those for the first two month’s of the company’s fiscal first quarter. Same-store sales were down 6.3% in March and 4.1% in February.

Flu Diagnosis: Mexican Floriculture Industry Healthy, For Now

The latest regarding the flu's impact on the Mexican floriculture industry. Click here to view the article in SAF's latest news brief.

Value never needs a stimulus

My latest pontification in Greenhouse Grower -- click here.

Top 100 Growers say the key to their success this year is the economy -- click here.

The impact of increased savings

Two forces that until recently turbo-charged US consumer spending—growing household debt and a falling savings rate—have gone into reverse. In late 2008, as households started reducing their indebtedness and saving more, consumption tumbled.

New research from the McKinsey Global Institute shows that the economic impact of further US consumer deleveraging will depend on income growth. Without it, each percentage point increase in the savings rate would reduce spending by more than $100 billion—a serious drag on any recovery. Relatively healthy income growth, on the other hand, would help households reduce their debt burden without trimming consumption as much.

Consumer spending rebounds

The economy contracted at a 6.1% annual rate in the first quarter, which was a little more than the 4.6% decrease in real GDP expected by economists. The best news in the B.E.A. report report was the rebound in Personal Consumption Expenditures during the first quarter. Consumer spending grew at 2.2% during the first quarter (see graph above) following two quarters of negative growth (-4.3% in 2008:Q4 and -3.9% in 2008:Q3), and was just slightly below the 2.27% average growth since 2001.

REUTERS -- There were some bright spots in the report. Consumer spending, which accounts for over two-thirds of U.S. economic activity, rose 2.2%, after collapsing in the second half of last year. Consumer spending was boosted by a 9.4% jump in purchases of durable goods, the first advance after four quarters of decline.

WSJ -- GDP acts as a scoreboard for the economy by measuring all goods and services produced. Its biggest component is consumer spending, which accounts for about 70% of GDP. First-quarter spending increased 2.2%, after dropping 4.3% in the fourth quarter.

Hopefully, a good portion of this increase in consumer spending was in the lawn and garden category. As you probably saw in the Making Cents sales poll, 46% indicated that March sales were higher than same-month sales in 2008, 4% indicated they were the same level, and 50% indicated fewer March sales than last year. This is consistent with my conversations across the country as well.

Be sure to complete the April poll on the right side of the page.