Tracking the Housing Market

Transcription

1 Tracking the Housing Market Yubo Wang March 27, 2013 The U.S. residential real estate market is now experiencing its second recovery since its 2006 top and the 2008 global financial crisis. At the moment, consumers, market participants and policy makers are pondering two vital questions: Has the housing market bottomed? How sustainable is the recent upswing? To answer these questions, we track the total market value of owner-occupied real estate from the Federal Reserve and privately-owned housing starts from the Census Bureau. From our perspective, several conclusions resonate: The present recovery is the second rebound in the housing market since the crisis. While the current recovery in housing is likely extending, an untimely rise in mortgage rates and a weak economy are key downside risks to the recovery. The total value of real estate reached a low of three standard deviations below its long run trend at the bottom of the housing market. Values still remain well below two standard deviations. Housing starts are half their normal historical average. So there is plenty of room for improvement. The recovery is uneven regionally. The west is in the lead and the northeast lags. A Second Recovery Attempt As measured by the total market value of owner-occupied real estate, the U.S. housing market topped in Q4 of It crashed 26.1% over the next two years before finding a temporary bottom in Q1 of Figure 1. A Second Recovery Attempt top 9 qtrs -26.1% 4 qtrs +2.6% 7 qtrs -5.6% 4 qtrs +8.7% Q3 2012Q1 2011Q3 2011Q1 2010Q3 2010Q1 2009Q3 2009Q1 2008Q3 2008Q1 2007Q3 2007Q1 2006Q3 2006Q1 owner-occupied real estate at market value ($trillion) 30Y fixed mortage rate (%) Source: Federal Reserve (Flow of funds account of the United States), Freddie Mac, and Center for Financial Stability Inc Avenue of the Americas, 4th Floor New York, NY T

2 The first recovery was short lived and relatively weak, lasting one year from 2009Q2 to 2010Q1 and measuring 2.6% in market value. The housing market rolled over with a decline of 5.6% to a fresh low by the end of Figure 1 shows that in the face of an already waning recovery, an unintended increase in mortgage rates (and treasury yields) in response to the Fed s QE2 program may have tipped the housing market into another prolonged slide. Economic growth had also slowed somewhat for much of It had taken many quarters of meaningful decline in mortgage rates before the housing market found its latest bottom in Q4 of The second recovery began in Q1 of This upswing, up 8.7% in total market value its fourth quarter (), is likely extending in The ongoing recovery is encouraging. It has now exceeded the unsuccessful recovery in duration by at least a calendar quarter and in market value by more than twofold. At the same time, there s much loss to recover and the trajectory of the recovery is still within the realm of a countertrend rebound. The recovery in 2012 represents just 22% and 15% of the total loss in market value to the 2011 low and the 2009 low, respectively. Our analysis suggests that an untimely rise in mortgage rates and a weak economy are key downside risks to the recovery. If downside risks should materialize, these two episodes of recovery would likely be interpreted as a sideways consolidation in technical terms or essentially a stabilization at present levels. Long Term Trends From a long term perspective, whether recent stabilization represents a nascent bull market or only a bearish consolidation remains to be seen (Figure 2) Figure 2. Long Term Profile bottoming? bearish consolidation? Q1 2009Q3 2007Q1 2004Q3 2002Q1 1999Q3 1997Q1 1994Q3 1992Q1 1989Q3 1987Q1 1984Q3 1982Q1 1979Q3 1977Q1 1974Q3 1972Q1 1969Q3 1967Q1 1964Q3 1962Q1 1959Q3 1957Q1 1954Q3 1952Q1 owner-occupied real estate at market value ($trillion) Source: Federal Reserve (Flow of funds account of the United States) and Center for Financial Stability Inc. -2-

3 On a log scale, recent low in total market value nearly reached a three standard deviation decline with respect to the long term trend (Figure 3). Figure 3. Long Term Trend 100,000 10,000 2σbands long term trend 1, σbands 2010Q3 2008Q2 2006Q1 2003Q4 2001Q3 1999Q2 1997Q1 1994Q4 1992Q3 1990Q2 1988Q1 1985Q4 1983Q3 1981Q2 1979Q1 1976Q4 1974Q3 1972Q2 1970Q1 1967Q4 1965Q3 1963Q2 1961Q1 1958Q4 1956Q3 1954Q2 1952Q1 owner-occupied real estate at market value (log scale, $billion) Source: Federal Reserve (Flow of funds account of the United States) and Center for Financial Stability Inc. Relatively attractive valuation, low mortgage rates and a growing economy are supportive. However, they do not necessarily preclude another dip. Valuations are attractive if one assumes the long term trend continues and the market will not overshoot further to the downside. Low mortgage rates and a slowly growing economy have been present for some time. But responses by the housing sector have been unimpressive so far. Housing Starts We track readings of privately-owned housing starts from the Census Bureau to shed light on housing activities. We calculate trailing 12-month total of non-seasonally adjusted starts to avoid potential distortions. By this measure, housing starts have just recovered to half of their long term historical average. Furthermore, recovery has been uneven geographically, especially for single family units. Half of what it used to be Housing starts remain well below the lower-end of their normal historical range (Figure 4). Total housing starts reached 806 thousand units for the 12-month period ending February The average for years between 1959 and 2006 has been million units. By this measure, current levels of starts are about half of their normal long term historical average. For the two episodes of recovery discussed above, housing starts have only increased 36% from 574 thousand units to 781 thousand units over the initial 12 months. -3-

4 Figure 4. Housing Starts 2,500 annual average ( ) 2,000 1,500 1, lowend of normal range Feb. '13 0 Dec 1959 Jun 1962 Dec 1964 Jun 1967 Dec 1969 Jun 1972 Dec 1974 Jun 1977 Dec 1979 Jun 1982 Dec 1984 privately-owned housing starts (trailing 12-month total, NSA, thousands) Source: Census Bureau and Center for Financial Stability Inc. Jun 1987 Dec 1989 Jun 1992 Dec 1994 Jun 1997 Dec 1999 Jun 2002 Dec 2004 Jun 2007 Dec 2009 Jun 2012 Uneven rebound The recovery in housing starts is also uneven geographically. Figure 5 presents the ratio of total housing starts during the 12-month period ending February 2013 and those during the 12-month period ending February It is obvious that the national rebound is mainly driven by the west. 45% 40% 35% 30% 25% 20% 15% 10% 5% Figure 5. Housing Starts Growth 1Y ending Feb 13 vs. 1Y ending Feb 12 0% US Northeast Midwest South West All single family Source: Census Bureau and Center for Financial Stability Inc. The disparity in single family starts is even greater. The northeast region has been notably lagging. This region represents 17.5% of the U.S. population and has top populous states such as New York, Pennsylvania, New Jersey and Massachusetts. During the 12-month period ending February 2013 and that ending February 2012, single family starts rose 12% in the northeast vs. 24% for all of U.S. -4-

5 The Center for Financial Stability (CFS) is a private, nonprofit institution focusing on global finance and markets. Its research is nonpartisan. This publication reflects the judgments and recommendations of the author(s). They do not necessarily represent the views of members of the Advisory Board or Trustees, whose involvement in no way should be interpreted as an endorsement of the report by either themselves or the organizations with which they are affiliated. -5-