House prices: Approaching a bottom?

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In the paragraphs below, BCA Research provides its take on the latest U.S. housing data.

“According to the Case-Shiller data, U.S. house prices continue to decline, although on a short-term basis, the pace of declines has slowed.

“Case-Shiller house price indexes are about to breach the cyclical low, set in the spring of 2009. Unfortunately, the spring home buying season is getting off to a slow start according to survey data, implying that further house price declines are likely. With inventories – especially in the distressed property market – still very high, it will likely take more house price weakness before the market finally finds a floor.

“Nonetheless, there are some tentative signs that fundamentals are moving in the right direction. Foreclosure rates, while still high, appear to have peaked. Income and employment trends are gradually becoming more supportive, although lending conditions are still quite tight.

“Although we expect more weakness in U.S. existing home prices over the next several months, a turning point may be achieved by late 2011. Resolution of the ‘robo-signing’ foreclosure problems would be a strong positive for the housing market. We recommend keeping a close eye on foreclosure rates and total housing supply to indicate a sustainable stabilization in the residential real estate market.”

Source: BCA Research – Daily Insights Service, April 28, 2011.

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Case-Shiller Home Price Indices close to 2009 low

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The latest Case-Shiller Home Price Indices have just been released and don’t paint a particularly rosy picture. The seasonally-adjusted 20-City Composite Index fell by 0.2% in February, the eighth consecutive monthly decline, taking it close to the low seen in April 2009 and raising the prospect of a double-dip housing recession.

Source: Northern Trust – Daily Economic Commentary, April 26, 2011.

In the video clip below, David Blitzer, Chairman of Standard & Poor’s Index Committee, provides his take on the numbers.

He said: “We still are working through the mountain of foreclosures, but getting rid of more of them than we’re adding in, and we’ve been at this level in terms of home sales, home construction, new home sales for quite a while. I think looking forward one would conclude a lot of Americans don’t really want to own a house. They don’t see it as a good long-term investment.”

Source: CNBC, April 26, 2011.

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U.S. housing market developments suggest persistent unease

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This post is a guest contribution by Asha Bangalore, vice president and economist at The Northern Trust  Company.

The Mortgage Bankers Association’s Mortgage Purchase Index moved up 12.5% to 194.4 during the week ended March 4.  On a monthly basis, the Mortgage Purchase Index has declined 3.3% in February following a nearly 8.0% drop in January.  Of late, the link between mortgage applications for purchases of homes and actual sales appears to be weak (see Chart 1).  Combined sales of homes rose slightly in January [Sales of existing homes advanced in January (+2.7%), while sales of new homes plunged (-12.6%)].

Mortgage rates have increased after the Fed has commenced the second round of quantitative easing in November 2010.  The 30-year fixed rate mortgage was last quoted at 4.87%, up 70 bps from the recent low of 4.17% on November 5 (see Chart 2).

Housing affordability hit a record high mark of 191.0 in January 2011 (see Chart 3).  The attractive home price and mortgage rate situation has not resulted in the typical improvement of housing market conditions largely due to a worrisome employment situation.  The gains in hiring recorded in February raise expectations of a near term improvement in the housing market.  But, other reports from the housing market raise the level of concern.  According to CoreLogic, 11.1 million homes or 23.1% of residential mortgages outstanding had negative equity in the fourth quarter of 2010, up slightly from the third quarter.  This problematic situation combined with the existence of numerous foreclosed residential properties make a strong case for the Fed to maintain the current easy monetary policy stance in the months ahead.

Source: Asha Bangalore, Northern Trust, Daily Global Commentary, March 9, 2011.

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U.S. housing market: remains under siege but …

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The recent Senior Loan Officer Survey (SLOS) by the Federal Reserve Board indicates that U.S. banks are continuing to ease their lending standards on consumer loans (please note the reverse scale on the chart). Consumer confidence is also on the rise.

Sources: FRED; Federal Reserve Board; Plexus Asset Management.

Furthermore, the yield gap between 30-year home mortgage bonds and 30-year government bonds are again testing historical lows.

Sources: FRED; Plexus Asset Management.

By the looks of it the easier money and optimism will support the house market. But do they?

Well, surprise, surprise! Households continue to shun the house market as the SLOS indicates that banks are in fact experiencing a slowdown in demand for mortgage loans.

Sources: Federal Reserve Board; Plexus Asset Management.

At this stage banks are not yet relenting on their tight standards for mortgage loans, but who can blame them given the oversupply in the U.S. market? The question is whether QE2 is in fact producing the necessary results. Obviously not in so far as the housing market is concerned.

Sources: Federal Reserve Board; Plexus Asset Management.

U.S. consumers are probably also fretting about the surge in long-term interest rates and the recent jump in mortgage rates.

Sources: FRED; Plexus Asset Management.

There is some light at the end of the tunnel, though. It seems as if there is a reasonable correlation between house prices and consumer confidence. The latter turning for the better in the final quarter of last year and surging in January may turn out to be positive for the U.S. housing sector.

Sources: FRED; Standard & Poors; Plexus Asset Management.

The outlook for consumer confidence is upbeat if you believe long bond rates.

Sources: FRED; Plexus Asset Management.

Surely that means that the economy has strengthened further, you may ask? Yes, although volatile, the yield on the 10-year government note is in fact a reasonably good indicator of MZM (money zero maturity) and therefore the economy in general. The recent surge in long bond rates indicates that MZM velocity, and therefore the economy, is likely to surge in the current quarter.

Sources: FRED; Plexus Asset Management.

For those who think the U.S. housing market is set to implode further, do not hold your breath.

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U.S. home prices remain a challenge

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This post is a guest contribution by Asha Bangalore, vice president and economist at The Northern Trust  Company.

The Case-Shiller Home Price Index fell 0.5% in November marking the fifth consecutive monthly price decline following gains in the each of the three months of the second quarter.  On a year-over-year basis, the index has declined 1.6% in November after a 0.8% drop in October.  Moving back in time, the Case-Shiller Home Price Index posted year-to-year gains in each month during the February-September 2010 period, reflecting the positive influence of the first-time home buyer credit program.  Details show that 19 out of the 20 metro areas posted lower home prices in November 2010 vs. October 2010.  On a year-to-year basis, only four metro areas (San Diego, Los Angeles, San Francisco, and Washington DC) posted gains.  More importantly, prices of homes in seven metro areas (Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, Portland, Seattle, and Tampa) posted new lows for home prices since their peaks in 2006 and 2007.  The FHFA’s house price index also sends a message similar to that of the Case-Shiller Home Price Index (see Chart 3).

The Case-Shiller 20 and 10 metro area indexes have both dropped to levels last seen in 2003 (see Chart 4).  The staggering and persistent drop in home prices is troubling for the FOMC focused on raising growth.  If home prices continue to maintain a downward trend, additional homes will be under water and net worth of households will suffer a setback.  This will set forth a vicious cycle that is not all too favorable for the economy.  At the cost of being repetitive, robust improvements in hiring hold the key to stability in the housing market.

Source: Asha Bangalore, Northern Trust, Daily Global Commentary, January 25, 2010.

In the video below, David Blitzer, S&P 500 Index Committee Chairman, provides his comments.

Source: CNBC, January 25, 2011.

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Housing starts down, but permits provide hope

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The latest round of housing data shows residential construction has fallen again, with December housing starts dropping 4.3% below November to an annualized rate of 529,000 units. Although this decline is somewhat deeper than expected, permit extensions increased strongly by 16.7% month on month in December to an annualized rate of 635,000.

Asha Bangalore, economist of Northern Trust, commented as follows: “Is the sharp increase in housing permits extended in December the beginning of a new trend? It is premature to draw a firm conclusion. However, the December Architectural Billings Index for residential housing sends a bullish signal. The Index rose by 10.7% during December. There is a strong positive correlation between this Index (advanced five months) and housing starts, implying that housing starts could move up in the early months of 2011.”

Source: Northern Trust – Daily Global Commentary, January 19, 2011.

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