Employment Cooling, Housing Slipping as Fed Continues to Combat Inflation

The nation’s red hot labor market cooled a bit in August, indicating that the Federal Reserve’s inflation-fighting efforts may be having the desired effect. But Fed officials aren’t declaring victory yet. Far from it.

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Get ready for more good housing news.  Sales volumes are higher than they have been since the downturn began, inventories are lower, the percentage of distressed sales has declined and prices have increased for 10 consecutive months.

You’d think those statistics would have just about every housing analyst grinning broadly, and many are, but most decidedly are not.

Where others see signs of continuing improvement, these less upbeat observers see causes – many of them – for continuing concern.  Their major worries:

  • Although foreclosures have declined, they remain elevated and significantly so.
  • Rising prices have lifted many homeowners above the negative equity line, but 11 million remain underwater.
  • The economic recovery still isn’t generating job growth at high enough levels to fuel a strong home-buying surge.
  • First-time buyers, an essential component of a housing recovery, remain pretty much missing in action, sidelined by weak job growth and the tight underwriting guidelines of mortgage lenders. Housing gains thus far have been driven almost entirely by institutional investors and cash buyers. One indicator of this problem:  sales of the priciest homes -- $1 million and more – jumped by more than 60 percent last year while sales of homes priced at $100,000 or below – first-time buyer territory – declined by 17 percent, according to the National Association of Realtors. (NAR).
  • Existing sales, new home sales and pending sales all declined in December, suggesting that the housing recovery may be slowing. 

A Good Market, But….

“It’s a good housing market in the sense that mortgage rates are very low and prices have come down to normal levels, so yes, it’s a good time to buy if nothing bad happens,”  economist Robert Shiller, co-founder of the closely-watched Case-Shiller home price index, said in a recent interview with Bloomberg Television.  “But it’s also a very bad housing market in that most of the mortgages are being supported by the government, and we have the Fed and this buying program. It’s a very abnormal market. There’s a lot of uncertainty going forward,” he said. 

With economic growth still restrained , job creation still less than robust, and multiple threats to the recovery ahead, Shiller added, “I think we’re pretty far from irrational exuberance – maybe 50 years away.”  

No one is talking seriously about “irrational exuberance” in a housing market that has been seriously depressed for the past four years.   But many analysts do see evidence of “rational exuberance,” justified, in their view, by a stream of positive housing indictors that continue to outweigh the negative ones. 

Pointing Up

  • Job gains, although not strictly speaking a housing indicator, are an important driver of home buying activity, and while recent gains haven’t been stellar, they have been steady.  Employers added 157,000 jobs in December – “not exactly awful,” in the words of one analyst, and possibly a bit better than that.  Even better news was the upward revision in the October and November reports that added 127,000 jobs to the total, suggesting to
  • Although existing and pending sales declined in December, the decline was minimal (1 percent below the November total).  The annual resale rate was the second highest since November, 2009, according to the NAR.  Equally important, the NAR contends, the December dip resulted from a lack of supply, not a lack of demand; inventories are at their lowest level since January of 2001. 
  • Listing prices are getting stickier.  Trulia reports that sellers cut their prices during the last six months on only 33.6 percent of the listings in the 100  large metropolitan markets  the company tracks compared with 36.7 percent in the same six-month period a year ago. 83 of those 100 markets reported fewer price cuts, according to the Trulia report.  New England, unfortunately, was an exception to that trend – 5 of the 10 markets with the largest percentage of price reductions were in this region.  
  • Although new home sales declined by a significant 7.3 percent in December compared with November, sales for the previous three months were all revised higher, and the December sales total was almost 10 percent higher, year-over-year.  Home starts in 2012 jumped by more than 28 percent over the 2011 total – the largest annual gain since 1983, according to the National Association of Home Builders (NAHB).  The association’s builder confidence index is at a six-year high and its “Improving Markets Index” posted its fifth consecutive increase in Januarys, as 47 new communities joined the list.   Of the 361 metropolitan areas on in the index, 242 now qualify as “on the mend.” 
  • The Case-Shiller index of property values increased by 5.5 percent in November, the largest annual gain since August of 2006.  A separate survey by CoreLogic pegged the annual increase at 7.4 percent. 

“Housing is clearly recovering,” David Blitzer, chairman of the S&P index committee, said in a press statement. “These figures confirm that housing is contributing to economic growth.”

And the recovery in home prices, once established, can be self-re-enforcing, Ian Sheperdson, chief economist at Pantheon Macroeconomics Advisors, agreed.  “With inventory of both new and existing homes still very low, prices will likely continue to rise,” Ian Shepherdson, chief economist at Pantheon Macroeconomics Advisors Inc. in White Plains, New York, said in a note to clients. “Each successive price increase adds more weight to the idea that the housing market is recovering, and nothing pulls people into the market faster than the thought that prices will rise further. “