Realtor Magazine recently interviewed NAR Chief Economist, Lawrence Yun. Lawrence gave a glimpse into the recent decline in Pending Homes Sales, impact of weather on the real estate market, new home sales, and the ending of Mortgage Backed Security purchases by the Fed. Here’s a recap of the interview.
On Pending Home Sales
January’s Pending Home Sales Index (PHSI) showed a 7.6% decline to 90.4 from December’s number (which was revised upward to 97.8 in December). Despite the decline, the PHSI did show an increase year-over-year increase of 12.3% over January 2009. Lawrence Yun, Chief Economist of NAR is seeing the recovery being slow and weak but says the numbers are lower in January over December because of a number of factors including; a prolonged winter, a big run-up to the original first-time buyer tax credit, and a large percentage of sales being distressed sales, some of which are short sales.
How weather affects the housing market
Although the PHSI numbers are from January, Yun commented on the possible effects of storms that impacted areas of the Midwest and New England in February. In regards to weather, Yun said, “Historically speaking, anytime there is a weather impact, it leads to a delayed real estate transaction.” “One sees a weakness in one month (February), but the subsequent month there’s a little larger ramp up.” So the recovery can be delayed by weather with sales being slower now, but those sales are going to eventually happen unlike unemployment which can end a transaction altogether.
On new home sales
Yun is monitoring new home construction very carefully pointing out the severe drop in 2009 to 552,000 new home starts versus 904,000 in 2008. He reinforced the idea that builders are optimistic. Yun said, “The builders, they want to build, but they cannot get credit.” He feels this low amount of starts is good for absorbing this excess inventory but also thinks there’s a potential for a housing shortage. “This low level of activity, assuming the economy recovers the second half of the year, could imply that we may face a housing shortage situation 1 or 2 years from now, said Yun. With Yun mentioning this, it seems the idea of a housing shortage isn’t fantasty. I think economists are starting see the interesting effects of construction halting.
Mortgage Backed Security Program (MBS)
When asked if the government is going to follow through with its plan to stop purchasing Mortgage Backed Securities, he answered by saying the private market is stepping in now and taking the Fed’s place, so the Fed likely will let it expire as planned. Yun said this was most evident when the Fed slowed down the rate in which they were buying them to test the market and the private market stepped in right away. Yun explained that if the market continues to step in as the Fed is stepping out then he sees no reason why rates would spike.
What this means to you
The biggest takeaways from the interview in my opinion were Yun hinting at less government intervention with MBS ending, pending home sales need to be looked at in a year-over-year fashion (as something simple like a snowstorm in New England can affect the entire index), and the mention of a potential housing shortage in 1-2 years means the market might be altogether different in less than 24 months. What he didn’t comment on was the rising delinquencies.
As an investor keeping your eye on what economic thought leaders are saying can give you a better understanding on how interest rates, government intervention, and trends can affect your business. By listening you’ll see that a consensus starts to form. When you start averaging out what the crowd is thinking you start to see reality. This often dispels most of what’s going on in the media. Right now it looks like we’re on the road to real estate recovery and will continue to enjoy low interest rates and see a compression in inventories. The number of foreclosures is rising though and so are mortgage delinquency rates (now above 10%). This means slow recovery and more homes hitting the market. Expect prices to remain flat or see a slight increase over the next 12 months.