How’s this for a term you haven’t heard recently in connection with the housing market: “Improvement?” It has cropped up recently in the comments of analysts, describing what is still a decidedly mixed bag of statistics that are neither as bad as they have been nor as good as industry executives and government policy-makers would like them to be.
The “improvement” refers to home price trends. No, prices haven’t miraculously begun to rise again, but the closely-watched Standard & Poor’s/Case Shiller Home Price Index for May reflected “striking improvement in the rate of decline,” according to Robert Shiller, a Princeton economist and co-founder of the index, who, until now, has seen only negative trends in these monthly reports. But the rate of decline slowed in May to 18.1 percent compared with 18.7 percent — a better performance than most analysts, including Shiller, had expected. Even more encouraging, prices actually rose month-over-month in 8 of the 20 cities the index tracks.
“At this point, people are thinking the fall is over,” Shiller told Bloomberg Radio. “The market is predicting the decline is over,” he added. Although Shiller expects to see prices level off toward the end of this year, he isn’t anticipating a “sharp rebound” any time soon, absent dramatic improvement that no one seems to be predicting at the moment in the employment picture and the foreclosure rate.
Cause for Concern
On the contrary, foreclosure and delinquency trends are generating increasing cause for concern as strains that had been largely confined to subprime mortgage borrowers have spread noticeably and painfully to prime borrowers as well. Foreclosure-related filings exceeded the 300,000 mark for the third consecutive month in May as one in 398 households received default or repossession notices – 18 percent more than the same month a year ago – this despite the aggressive loan modification program the Obama Administration has initiated in an effort to keep struggling borrowers in their homes. A record 1.37 percent of all loans outstanding entered the foreclosure process in the first quarter, according to RealtyTrac, Inc., 29 percent of them held by prime rate borrowers.
“The foreclosure bucket is filling faster than it’s emptying,” Jay Brinkmann, chief economist for the Mortgage Bankers Association, told American Banker, a trend that he expects will continue “through the next quarter, at least.”
Analysts agree that foreclosures are a major drag on the housing market, boosting inventory levels, competing with non-distressed sales, and skewing home prices broadly downward. The good news about lower prices, to the extent that there is any, is that they bring home ownership within reach for a larger number of prospective buyers, and the sales data are beginning to reflect that impact, albeit modestly. Existing home sales increased by 2.4 percent to an annual rate of 4.77 million units inn May – below analysts’ expectations, but the second consecutive positive performance for a sector that has been recording unrelentingly negative numbers since the economic downturn began.
Other positive indicators noted by the National Association of Realtors (NAR): Distress sales as a percentage of the total declined to 33 percent from 40 percent a year ago and pending sales — a measure of future transactions — increased for the fourth consecutive month. Inventory levels also declined in May by nearly 11 percent year-over-year. But that statistic could be misleading, analysts point out, because it does not reflect the number of foreclosed homes that banks are selling, or will be selling, outside of the Realtors’ Multiple Listing Service.
New home sales, which continue to suffer from the competition with distress sales, declined by 0.6 percent in May compared with the April pace, but home builders are showing renewed signs of life, nonetheless. Permits for new construction increased 4 percent in May over April’s level and home starts jumped by more than 17 percent. The growing confidence implied by those statistics isn’t reflected in the National Association of Home Builders’ monthly confidence survey, however, which declined again in May.
“The market is no longer falling off a cliff,” Mike Larson, a real estate analyst for Weiss Research, told CNNMoney. “But we’re still not seeing any rip-roaring rebound.”
Half Empty-Half Full
Larson’s description of the housing market applies equally to the economy as a whole, where the big news in the past month was the Federal Reserve’s decision not to make any big news. The Federal Open Market Committee, the Fed’s policy-making arm, left the benchmark overnight interest rate unchanged at virtually zero, where, the committee indicated, it will likely remain “for an extended period.” Although noting encouraging signs that “the pace of the economic contraction is slowing,” the FOMC’s post-meeting statement also discouraged any hope for a near-term rebound, noting that “economic activity is likely to remain weak for some time.”
The FOMC statement and much of the current economic data call to mind Harry Truman’s oft-quoted desire for a one-armed economist, unable to say “on the other hand.” Positive indicators continue to pile up while negative data continue to discourage a conclusion that the downturn has hit bottom and a recovery has begun, providing equal support for viewing the economic glass as half empty or half full.
Opting for the half-empty interpretation, the World Bank, which had noted encouraging economic signs a couple of months ago, has revised its forecast downward and is now predicting that growth will decline by 2.9 percent rather than 1.7 percent.
The International Monetary Fund (IMF), on the other hand, sees reasons to be encouraged about the outlook, and is planning to revises its forecast (for a 1.3 percent decline this year turning positive, to a 2.4 percent growth rate next year) “modestly upward.”
These divergent forecasts aren’t surprising; some barometers measuring the same data are pointing in different directions. The Conference Board’s Consumer Confidence Index fell to 49.3 in June from a downwardly revised May reading of 54.8. But the Reuters/University of Michigan’s preliminary Index of Consumer Sentiment rose to 69 from 68.7 in May, reaching its highest level in nine months. The index has gained 15.5 points this year, recovering about one-third of the ground it has lost since its January, 2007 peak.
“Such a sizable gain has usually indicated that an end to the economic downturn is on the horizon,” a statement accompanying the new Reuters/University of Michigan survey results, noted. Still, Survey Director Richard Curtin cautioned that a “distressingly” slow housing recovery will prevent that sector from fueling a rebound in consumer spending, as it has in past downturns.
The Index of Leading Economic Indicators provided some good news to optimists seeking a statistical anchor. The index, predicting economic activity over the next six months, increased by 1.2 percent in May, its largest one-month gain in five years, as 7 of 10 components increased. The key employment measure was not among them, however, remaining firmly in the negative range, and confirming the predictions of many analysts that the recovery, when it comes, will likely be a jobless one.
More Job Losses
The most recent labor market reports provide little evidence to counter that view. The unemployment rate hit a 26-year high in June at 9.5 percent, as the economy lost another 467,000 jobs — a worse performance than economists had expected. Initial and continuing unemployment claims declined slightly, providing a dribble of good news in an otherwise discouraging report.
Analysts seeking evidence that the labor markets are stabilizing are hard-pressed to find it elsewhere. More than half the employers responding to a recent survey by Watson-Wyatt Worldwide said they expect to employ fewer workers over the next five years than they did before this downturn began; 45 percent of the firms that have cut compensation aren’t going to restore those cuts in the coming year and 20 percent said their cuts will be permanent.
A separate survey by USA Today found that workers who have jobs, while undeniably better off than those who don’t are struggling, nonetheless, with mandatory furloughs, pay cuts and reductions in their working hours. The survey found part-time work at a record high, overtime at a record low, and hours worked (averaging 33.1 in May) lower than at any time since the Depression.
Rising unemployment, stagnant (or falling) wages, a battered stock market and sagging home values have taken a toll on household wealth, which declined by another $1.3 million in the first quarter, falling to the lowest level since 2004 – another indication that the recovery is likely to be slow to start and tepid, at best. “It’s going to be very difficult to have any recovery in consumer spending without jobs and incomes recovering first,” Christopher Low, chief economist at FTN Financial in New York, told Bloomberg News. “The probability of a debt-financed consumer spending binge like we saw in the last expansion,” he added, “is essentially nil.”