Are We There Yet?

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Three years into what is supposed to be a continuing and strengthening housing recovery, some analysts are still wondering if it is sustainable. Recent economic reports have done nothing to dispel those concerns.

The January employment figures, which were supposed to anchor expectations for robust housing sales, did anything but. Employers added only 113,000 workers to their payrolls for the month after adding an even scanter 75,000 in December, once again falling well short of predictions that the labor market would shed the chains that have consistently produced “less than expected” results, and begin to demonstrate the muscular growth economists have been predicting for nearly a year.

Economists generally blamed miserable winter weather and an “inevitable” reduction in retail staffing levels that had been expanded during the holidays for the slim January employment gain.

Disappointing but not Disastrous

“It’s another disappointment, but it’s not anything disastrous,” Julia Coronado, chief North America economist for BNP Paribas, told Bloomberg News. “We’re still in muddle-along territory rather than take-off mode. There isn’t the kind of momentum in hiring” that economists and policy makers would like to see.

January housing market reports reflected a similar lack of momentum. Pending sales and existing home sales both fell in December to their lowest levels in more than a year and November sales were revised downward, the National Association of Realtors (NAR) reported. This marked the second consecutive month that existing sales have fallen below the year-ago level, interrupting 29 consecutive months of year-over-year gains.

New home sales also slumped in December and construction starts fell, as well. Building permits were only 5 percent below a November rate that had reached a nearly five-year high, and they were nearly 18 percent higher than the same month a year ago.

Industry analysts are emphasizing the double-digit annual increases in new and existing home sales, over the less stellar monthly comparisons for both, insisting that the weak November and December reports reflect the impact of severe winter weather, not the beginning of a downward trend.

No Need to Panic

“It’s obviously not a good report,” Michael Hanson, a senior U.S. economist at Bank of America Corp., said of the new home sales statistics. “But I wouldn’t panic,” he told Bloomberg. “I don’t feel like this is the beginning of the end of the housing recovery by any stretch.”

The still relatively optimistic consensus view holds that warmer weather and solid economic growth this year, which many analysts are predicting, will combine with pent-up demand, rising incomes and stabilizing home prices to produce another good year for housing. Appreciation rates, which reached double digits some months last year, will slow enough to assuage concerns about housing affordability, industry analysts say, but remain strong enough to persuade heretofore reluctant sellers to list their homes, boosting inventory levels that have constrained sales in many markets and preventing the out-sized price gains that have stirred fears of another bubble in some areas.

The closely-watched Case-Shiller index tracking home prices in 20 metropolitan areas, increased 13.6 percent year-over-year in October; Core-Logic ‘s index recorded a similar 11 percent annual gain for December. But both indexes have reflected a slowing appreciation trend month-over-month since mid-year.

"The healthy and broad-based gains in home prices in 2013 help set the stage for a continued recovery in the housing sector in 2014," Anand Nallathambi, president and CEO of CoreLogic, told Mortgage News Daily. "After six years of fits and starts, we can now see a clear path to a durable recovery in single-family residential housing across most of the United States."

What Housing Recovery?

Not all analysts see a clear path ahead. Uncertainty about the economic outlook and the prospect that sluggish employment growth and higher interest rates could curb housing demand clutter the outlook for some; a close reading of housing data makes others question whether the housing recovery we’ve seen to date actually qualifies as one.

The recovery’s underpinnings, they suggest, aren’t nearly as strong as they need to be. Their primary concerns: Investors continue to represent an outsized proportion (more than 40 percent) of buyers, while first-time buyers, who typically drive a healthy market, continue to be under-represented at 27 percent vs. the 40 percent average that prevailed before the market crashed. RealtyTrac reports that 40 percent of the homes sold last year were purchased by investors in all-cash deals and more than 15 percent were distressed sales, most of which were purchased by investors, as well.

The price gains heralded as evidence of a strong recovery were fueled by speculation, not sustainable buyer demand, Lance Roberts, CEO of STA Wealth Management, told Housing Wire. “The simple reality is that there has really been very little recovery in housing,” he insisted, adding, “The optimism over the housing recovery has gotten well ahead of the underlying fundamentals.”

While some of the housing fundamentals may look a bit shaky to Roberts and other like-minded analysts, fundamentals in the broader economy (excepting the labor market) have been relatively and in some cases surprisingly, strong.

Gross Domestic Product (GDP) in the fourth quarter, which was expected to be flat or worse, grew at a 3.2 percent annual rate following a stronger (4.1 percent) and equally unexpected increase in the third quarter.

The Conference Board’s Index of Leading Economic Indicators also managed a slight — and we do mean slight (0.1 percent) fourth quarter gain. Productivity, corporate profits and business investment also exceeded expectations and, perhaps most important, consumer confidence, which had been flagging throughout the fall, rebounded as well. The Conference Board’s confidence index reached 80.7 in January, up from a downwardly revised 77.5 in December.

“All in all, confidence appears to be back on track,” Lynn Franco, director of economic indicators at the Conference Board, said in a press statement.

Whether we will be saying the same thing about the housing market and the economy generally later this year remains to be seen.