It is amazing how an uptick in a number from a very depressed level brings the bullish media headlines to the surface. For example from CNBC this morning: “Not since the spring of 2008 have the nation’s homebuilders felt this good about the potential for new business. An industry association survey measuring builder sentiment rose for the third straight month in December, with significant gains in the component measuring traffic of perspective buyers. The National Association of Home Builders/Wells Fargo Housing Market Index edged up two points from a downwardly revised number to 21.”
Actually, this isn’t true at all, as the index hit a recent peak of 22 in May of 2010 rising from a low 2 months earlier of 15. My point is twofold; 1) we have been here before and the market turned down again and; 2) we are still at some of the lowest levels of the index on record. So, while the headlines bleat that the “the good economic news keeps rolling in…” let’s try and keep our focus on the trend rather than the number itself.
However, today’s report will boost expectations for strength in tomorrow’s housing starts report as well as Friday’s report on new home sales. Data on existing home sales will be posted on Wednesday. While the numbers may well see a bounce going into the end of the year with individuals trying to lock things up by year end (even I am trying to close on my refinance by then) it is strength that is likely to be very temporary in nature.
As we have discussed just recently in our report on “Housing – The Margin Effect” when a market is extremely depressed, as it is now, even small levels of activity at the margin will have a larger influence on the indexes as a whole.
There are three issues that will weigh on the housing market in the coming year. The first is that there are large inventories of foreclosed properties which continue to plague the most distressed markets. This inventory combined with consumer worries about job security and the challenges of selling an existing home remain significant factors. The second is that foreclosure activity from banks will likely increase in the coming year which will suppress home prices even more making potential buyers back away from purchases. Finally, if a recession takes hold you can most assuredly expect home prices and sales to decline.
This, combined with the difficulty in obtaining credit, will be major hurdles to any type of continued recovery into the future. So while the media hops on the “bandwagon of hope” for finding the elusive bottom in housing – the reality is that the problems that have plagued homeowners, and potential home buyers, have not been rectified. Jobs, incomes, credit, savings and a deep lack of confidence in the housing market are all major hindrances in the housing market place today.
So, while today’s increase in the NAHB survey is certainly encouraging – it has a long way to go before this patient can declared stable enough to move out of the ICU.