February 29, 212 Economics Group Special Commentary Mark Vitner, Senior Economist mark.vitner@wellsfargo.com (74) 383-5635 Anika R. Khan, Economist anika.khan@wellsfargo.com (74) 715-575 Joe Seydl, Economic Analyst joseph.seydl@wellsfargo.com (74) 715-1488 Housing Data Wrap-Up: February 212 How Much of the Seasonally Adjusted Recovery Is Real? With much of the housing data reported for this past fall and winter coming in slightly better than expected, hopes have been raised that the long-awaited recovery in housing is finally underway. There is no doubt that conditions are improving; sales and new home construction have both increased modestly, and prices for non-distressed sales have stabilized in many markets. Credit conditions have also improved modestly, and progress has been made in clearing some of the excess inventory of homes owned by financial institutions or tied up in the foreclosure process. For all of the positive steps that have taken place, however, there are still plenty of challenges ahead. There are still millions of homes tied up in the foreclosure process, which has tended to fuel fears that an avalanche of new supply will come on the market. These fears are keeping appraisals unusually conservative and mortgage underwriting standards unusually tight, discouraging home buying and keeping many would-be sellers on the sidelines. While the recent improvement in home sales and new home construction is certainly welcomed, the extent of the improvement has likely been exaggerated by the recent unusually mild winter weather. November, December and January typically account for the smallest percentage of new home sales each year. If the weather is unseasonably mild, as this year has been, just a little more home buying than usual can translate into large seasonally adjusted increases. This appears to be what has happened over the past three months, with the seasonally adjusted data for new home sales up 3.2 percent since October, while the not seasonally adjusted data declined.1 percent. Normally, home sales would have declined much more than that on a not seasonally adjusted basis. The warmer- and drier-than-usual weather has also allowed more new home construction to take place, boosting starts and leading to more buyer traffic than what is typical during this time of year. The NAHB/Wells Fargo Housing Market Index has risen 12 points over the past four months, with the largest gains in the snow-starved West and in the unseasonably balmy Midwest. Sales and new home construction have both increased modestly and prices for nondistressed sales have stabilized in many markets. Warmer- and drierthan-usual weather has also allowed more new home construction to take place. Figure 1 Figure 2 2.1 Housing Starts Millions of Units 2.1 45 4 35 NAHB Housing Market Index Index, Seasonally Adjusted West: Jan @ 44 Midwest: Jan @ 3 United States: Jan @ 29 South: Jan @ 25 Northeast: Jan @ 21 45 4 35 1.5 Forecast 1.5 3 3 25 25.9.9 2 2.6.6 15 15.3.3 1 1. 8 82 84 86 88 9 92 94 96 98 2 4 6 8 1 12 14. 5 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 5 Source: U.S. Department of Commerce, NAHB and Wells Fargo Securities, LLC This report is available on wellsfargo.com/economics and on Bloomberg WFEC
Housing Data Wrap-Up: February 212 February 29, 212 Builders are clearly busier than they have been at any other time outside of the tax-credit fueled buying binge. Sales of large blocks of homes to investors will not eliminate shadow inventory. Even though the unseasonably mild weather has exaggerated the extent of the increase in housing activity, there has also been some real improvement. Builders are clearly busier than they have been at any other time outside of the tax-credit fueled buying binge immediately following the recession. The gains, however, are spotty. Most new home construction is confined to partially complete residential developments, where builders have been able to secure inexpensive lots and construct homes that can compete with nearby foreclosures. Builders have also had some success with infill locations and in the active adult sector. The real test for the housing recovery will come this spring. Seasonal adjustment factors cancel out over the course of the year. Since home sales and new home construction did not fall off as much as it typically does this winter, there will not likely be as much of a pickup in activity this spring. This will show up as weaker-than-expected seasonally adjusted numbers. Once you put aside the seasonal adjustment distortions, the housing recovery probably looks relatively tame. There are still a multitude of issues that need to be resolved before a sustained self-reinforcing recovery can unfold. One important first step is the recent settlement between the state attorneys general and five major mortgage services, which will likely lead to an increase in foreclosures and further depress home prices in the near term. While this sounds problematic, it is absolutely necessary and will not only allow the price discovery process to unfold, but will also help answer questions about just how much shadow inventory is currently hanging over the housing market, what types of houses are in that inventory and where and in what condition that inventory is. Only after these questions are answered can the unusually conservative appraisal and mortgage approval process begin to normalize The Treasury and Federal Reserve are also actively promoting the idea of selling large blocks of homes owned by Fannie Mae and Freddie Mac to investors that will convert them into rental properties and commit to keeping them as rentals for at least five years. There is also talk of encouraging large private lenders to do the same. Sales of large blocks of homes to investors will not eliminate shadow inventory. Most of these investors would likely plan to sell these homes in five years or so, thereby returning much of the supply to the single-family market. The block sales, however, would reduce some of the fears that an avalanche of distress sales will soon hit the market and will also provide market participants with more information about how many of these troubled properties exist and where they are, once again helping to normalize appraisals and mortgage approvals. We have slightly increased our expectations for home sales and new home construction. Sales of new single-family homes are expected to rise 12 percent in 212. Housing starts are expected to rise 9 percent this year, with single-family construction rising 8 percent and multifamily starts rising 12 percent. Overall, starts should rise an additional 16 percent in 213. Even with these gains, however, homebuilding will remain only a shadow of what would typically be seen in an even a modest economic recovery. In addition to clearing up the mystery surrounding shadow inventory, another key issue that needs to be resolved is what will become of the GSEs and, more specifically, what will the federal government s role be in housing finance. Unfortunately, that question will not be answered until after this fall s presidential election. Recent Housing Data Release Consensus Actual Prior Revised Next Release NAHB Sentiment Index February 26 29 25 n/a Mar-19 Housing Starts, Thousands of Units January 675K 699K 657K 689K Mar-2 Housing Permits January 68K 676K 679K 671K Mar-2 Existing Home Sales, Millions of Homes January 4.66M 7M 4.61M 4.38M Mar-21 Percent Change January 1.1% 4.3% 5.% -.5% Mar-21 New Home Sales, Thousands of Units January 315K 321K 37K 324K Mar-23 Percent Change January 2.6% -.9% % 1.9% Mar-23 S&P Case/Shiller Composite-2 December -3.65% -3.99% -3.67% -3.85% Mar-27 Source: S&P, NAHB, National Association of Realtors, U.S. Dept. of Commerce and Wells Fargo Securities, LLC 2
Housing Data Wrap-Up: February 212 February 29, 212 National Housing Outlook 28 29 21 211 Forecast 212 213 Real GDP, percent change -.4-3.6 3. 1.7 2. 2.1 Nonfarm Employment, percent change -.6-4.4 -.7 Unemployment Rate 5.8 9.3 9.6 9. 8.3 8.3 Home Construction Total Housing Starts, in thousands 9 553.9 586.9 69.2 665. 77. Single-Family Starts, in thousands 622. 445. 471.1 43.9 465. 53. Multi-Family Starts, in thousands 28 18.9 115.8 178.3 2. 24. Home Sales New Home Sales, Single-Family, in thousands 485. 374. 323. 34. 34. 4. Total Existing Home Sales, in thousands 4913. 434. 419. 426. 45. 465. Existing Single-Family Home Sales, in thousands 435. 387. 378. 3786. 4. 4125. Existing Condominium & Townhouse Sales, in thousands 563. 464. 474. 477. 5. 525. Home Prices Median New Home, $ Thousands 232.1 216.7 22 225.8 218. 22. Percent Change -6.4-6.6 -.9 Median Existing Home, $ Thousands 198.1 172.5 172.9 166.1 164. 165. Percent Change -9.5-12.9.2-3.9-1.3.6 FHFA (OFHEO) Home Price Index (Purch Only), Pct Chg -7.5-5.3-3. -4.3 -.8 1. Case-Shiller C-1 Home Price Index, Percent Change -16.7-12.9 2.1-3.4 -.1 Interest Rates - Annual Averages Prime Rate 4.88 3.25 3.25 3.25 3.25 3.25 Ten-Year Treasury Note 3.66 3.26 3.22 2.78 2.8 2.3 Conventional 3-Year Fixed Rate, Commitment Rate 6.4 5.4 4.69 4.46 4.2 4.25 One-Year ARM, Effective Rate, Commitment Rate 5.18 4.71 3.78 3. 3.1 3.2 Forecast as of: February 29, 212 Source: Federal Reserve Board, FHFA, MBA, NAR, S&P, U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC 3
Housing Data Wrap-Up: February 212 February 29, 212 Housing Starts Building Permits Seasonally Adjusted Annual Rate, In Millions Housing Starts Seasonally Adjusted Annual Rate, In Millions 2. 2. 2. 2. 1. 1..8.8.6.6 1. 1..4.4.8.6.4.8.6.4.2. Building Permits: Jan @ 676K. 1 2 3 4 5 6 7 8 9 1 11 12.2.2. 2,2 Housing Starts: Jan @ 699K. 1 2 3 4 5 6 7 8 9 1 11 12 Single & Multifamily Housing Starts SAAR, In Thousands, 3-Month Moving Average.2 66 2, 1,75 Single & Multifamily Building Permits SAAR, In Thousands, 3-Month Moving Average 8 7 2, 6 1,5 6 1,8 54 1,25 5 1,6 1,4 48 42 1, 4 1,2 36 75 1, 5 2 8 6 4 2 Single-family Housing Starts: Jan @ 493K (Left Axis) Multifamily Housing Starts: Jan @ 24K (Right Axis) 87 89 91 93 95 97 99 1 3 5 7 9 11 24 18 12 6 9 25 Single-family Building Permits: Jan @ 441K (Left Axis) Multifamily Building Permits: Jan @ 235K (Right Axis) 92 94 96 98 2 4 6 8 1 12 NAHB/Wells Fargo Housing Market Index Diffusion Index 1 9 Housing Completions Seasonally Adjusted Annual Rate, In Millions 8 7 8 7 6 6 2. 2. 5 5 4 4 3 3 2 2.8.8 1 NAHB Housing Market Index: Feb @ 29. 87 89 91 93 95 97 99 1 3 5 7 9 11 1 Housing Completions: Jan @ 53K.4 87 89 91 93 95 97 99 1 3 5 7 9 11.4 Source: NAHB, U.S. Department of Commerce and Wells Fargo Securities, LLC 4
Housing Data Wrap-Up: February 212 February 29, 212 New Home Sales 1,5 New Home Sales Seasonally Adjusted Annual Rate, In Thousands 1,5 6 45 Inventory of New Homes for Sale Non-Seasonally Adjusted, In Thousands Inventory: Jan @ 151, Completed New Homes: Jan @ 57, 6 45 1, 1, 1,1 1,1 9 9 15 15 7 7 5 New Home Sales: Jan @ 321, 3-Month Moving Average: Jan @ 321, 1 89 91 93 95 97 99 1 3 5 7 9 11 $35 Average and Median New Home Sale Price In Thousands 5 1 $35 14 12 89 91 93 95 97 99 1 3 5 7 9 11 Months' Supply of New Homes Seasonally Adjusted 14 12 $ $ 1 1 8 8 $25 $25 6 6 $2 $2 4 4 $15 $15 Average Sales Price: Jan @ $261,6 Median New Sales Price: Jan @ $217,1 $1 $1 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 2% 15% Median New Home Sales Price 2% 15% 2 22 2 18 16 14 Months' Supply: Jan @ 5.6 2 9 92 94 96 98 2 4 6 8 1 12 Inventory of New Homes for Sale New Homes for Sale at End of Month, 22=1 Northeast: Jan @ 7.4 Midwest: Jan @ 28.2 South: Jan @ 55.2 West: Jan @ 45.7 22 2 18 16 14 1% 1% 12 12 1 1 5% 5% 8 8 % % 6 6-5% -1% Median New Sales Price: Jan @ $217,1 Year-over-Year Percent Change: Jan @ -9.6% -15% 89 91 93 95 97 99 1 3 5 7 9 11-5% -1% -15% 4 2 2 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC 4 5
Housing Data Wrap-Up: February 212 February 29, 212 Existing Home Sales 4,5 Inventory of Existing Homes for Sale Existing Homes for Sale at End of Month - In Thousands 4,5 7.5 Existing Home Resales Seasonally Adjusted Annual Rate - In Millions 7.5 4, 4, 7. 7. 3,5 3,5 3, 3, 6. 6. 2,5 2,5 5. 5. 2, 2, 4. 4. Total Inventory: Jan @ 2.3 Million 1,5 1999 21 23 25 27 29 211 1,5 Existing Home Sales: Jan @ 7 Million 3. 1999 21 23 25 27 29 211 7. Existing Single-Family Home Resales Seasonally Adjusted Annual Rate - In Millions 3. 7. $ $25 Single-Family Home vs. Condo Prices In Thousands $ $25 6. 6. $2 $2 5. 5. $15 $15 4. 3. Existing Home Sales: Jan @ 4.1 Million 2.5 99 1 3 5 7 9 11 4. 3. 2.5 $1 $1 Average Single-Family Price: Jan @ $21,1 Average Condo Price: Jan @ $22, $5 $5 99 1 2 3 4 5 6 7 8 9 1 11 12 4% Pending Home Sales Index Year-over-Year Percent Change 4% 1, Existing Condominium Resales Seasonally Adjusted Annual Rate - In Thousands 1, 3% 2% 3% 2% 9 9 1% 1% 8 8 % % 7 7-1% -1% 6 6-2% -2% 5 4 5 4 Year-over-Year Change: Jan @ 8.% -3% -3% 22 23 24 25 26 27 28 29 21 211 212 Condo Sales: Jan @ 52, 99 1 2 3 4 5 6 7 8 9 1 11 12 Source: National Association of Realtors and Wells Fargo Securities, LLC 6
Wells Fargo Securities, LLC Economics Group Diane Schumaker-Krieg Global Head of Research & Economics (74) 715-8437 (212) 214-57 diane.schumaker@wellsfargo.com John E. Silvia, Ph.D. Chief Economist (74) 374-734 john.silvia@wellsfargo.com Mark Vitner Senior Economist (74) 383-5635 mark.vitner@wellsfargo.com Jay Bryson, Ph.D. Global Economist (74) 383-3518 jay.bryson@wellsfargo.com Scott Anderson, Ph.D. Senior Economist (612) 667-9281 scott.a.anderson@wellsfargo.com Eugenio Aleman, Ph.D. Senior Economist (74) 715-314 eugenio.j.aleman@wellsfargo.com Sam Bullard Senior Economist (74) 383-7372 sam.bullard@wellsfargo.com Anika Khan Economist (74) 715-575 anika.khan@wellsfargo.com Azhar Iqbal Econometrician (74) 383-685 azhar.iqbal@wellsfargo.com Ed Kashmarek Economist (612) 667-479 ed.kashmarek@wellsfargo.com Tim Quinlan Economist (74) 374-447 tim.quinlan@wellsfargo.com Michael A. Brown Economist (74) 715-569 michael.a.brown@wellsfargo.com Joe Seydl Economic Analyst (74) 715-1488 joseph.seydl@wellsfargo.com Sarah Watt Economic Analyst (74) 374-7142 sarah.watt@wellsfargo.com Kaylyn Swankoski Economic Analyst (74) 715-526 kaylyn.swankoski@wellsfargo.com Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company 212 Wells Fargo Securities, LLC. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE