Housing—Still Troubled
Lord Abbett
By Milton Ezrati
March 28, 2011
After the carnage of 2008–09, housing, unsurprisingly, seems recently to have suffered from a kind of post-traumatic syndrome. There is no growth, of course, and neither will there likely be much for some time to come. Meanwhile, the monthly sales and pricing data gyrate, as if the market could not settle on a direction. This troubled market is also receiving support from mortgage lenders, who are resisting foreclosures in order to keep the inventory of unsold homes manageable. But behind all this seeming confusion, the market does seem to have found some stability, nationally, if not in every region. If sideways movement does little to help the recovery, it at least relieves the economy of what was a major drag.
The data certainly paint a strange picture month to month. Last spring and summer, for instance, the sales figures for both new and existing homes plummeted by some 33.5% between April and July 2010. The news prompted some forecasters and commentators at the time to panic and call for a second recessionary dip. But even as sales fell, real estate prices painted a stronger picture, rising at an annual rate of 24.2% during that same period. Later in the year, a strong uptick of 26.4% in sales between August 2010 and January 2011 relieved much of the double-dip anxieties and showed that the downdraft had been temporary. But by then, real estate price figures began to paint a negative picture, falling at almost a 28.3% annual rate during that same time.
The roots of this ambiguity no doubt lie with the government’s decision to end the homebuyer’s tax credit last April. Washington and some commentators erroneously claimed that the credits were a fundamental support and that their removal caused basic problems. That is hardly likely. No rational person would go into debt by $250,000, $500,000, or more to secure a tax credit of $8,000 for a first-time homebuyer or $6,500 for a person who has already owned a home—what the Washington bureaucrats no doubt refer to as a “serial homebuyer.” But the credits’ cancellation surely did affect the timing of home purchases. When it became clear that the credits would end in April, anyone who planned to buy a home anytime soon moved heaven and earth to bring the closing in to secure a tax break on what he or she had already planned otherwise. Accordingly, home sales boomed 15.5% in March and April. Since these sales stole from the future, activity naturally fell in May, June, and July, only to turn up later in the year as the artificial effect of changing government rules dissipated. The price declines later in the year no doubt reflect a lagged response to this earlier, artificial sales decline.
As this disruption washes out of the data, much now depends on how deftly mortgage lenders can manage the situation. Though comprehensive data do not exist, it is apparent anecdotally that mortgage lenders have managed the pace of foreclosures to help stabilize the market. They worry, understandably, that if they were to foreclose at every opportunity they have, they would glut the market with inventory, put intense downward pressure on real estate prices, and, of course, deflate their own assets in the process. So far, they seem to have done a good job of controlling the situation. The national inventory of unsold homes has dropped from 12.5 months’ supply last July to 7.6 months’ supply this past January (the most recent month for which data are available).
Given this record, there is every reason to expect these lenders to manage the situation as well going forward. Sales probably will grow at a slower pace now that they have caught up from the artificially depressed levels of last spring and summer. Real estate prices should stabilize as the lagged effect of last summer’s sales drop runs its course. But as these lenders, managing their foreclosure opportunities, gradually feed this “shadow inventory” of homes onto the market, the flow of properties will no doubt keep a lid on real estate pricing and on construction activity for some time to come, particularly in the most hard-hit regions of the country. Still, if circumstances keep housing from offering the economy a growth engine for a long time to come or the source of wealth creation in the household sector, the economy and financial markets will nonetheless welcome the change from the sharp declines and volatility of past years.
Milton Ezrati, Partner and Senior Economist and Market Strategist, has been widely published in a wide variety of magazines, scholarly journals, and newspapers, including The New York Times, Financial Times, The Wall Street Journal, The Christian Science Monitor, and Foreign Affairs, on a broad spectrum of investment management topics. Prior to joining Lord Abbett, Mr. Ezrati was Senior Vice President and head of investing in the Americas for Nomura Asset Management, where he helped direct investment strategies for both equity and fixed-income investment management.
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