Signs That Housing is Cooling
First the good news, data through November 2013, released January 28th by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed that the 10-City and 20-City Composites increased 13.8% and 13.7% year-over-year. Dallas posted its highest annual return of 9.9% since its inception in 2000. Chicago also stood out with an annual rate of 11.0%; its highest since December 1988. The three cities tracked by the indices in California also enjoyed strong year-over-year returns as of November, with San Francisco up 23.2%, Los Angeles up 21.6% and San Diego up 18.7%.
Now the bad news, in November, the non-seasonally adjusted version of the 20-City Composite, which as the report’s authors acknowledge is the accurate one, posted its first monthly decline, dropping modestly from 165.9 to 165.8, or down 0.06%, since November of 2012. In December, the 20-City Composite showed its second consecutive monthly decline of 0.1%. The concern here is how much of the recovery in housing has been driven by investors, foreign, domestic and institutional, buying in all-cash sales on a speculative basis. According to RealtyTrac, sales of foreclosed and distressed homes made up 16.2% of all home sales last year, up from 14.5% in 2012. All-cash deals accounted for 29.1% of all home purchases, again up from 19.4% the year before. Institutional investors, including hedge funds and private equity groups, were buying up homes of all types last year including foreclosures. During the year, 7.3% of all home sales were to investors, up from 5.1% the year before. Major markets where investors claimed the largest percentage of sales in December included Jacksonville, Fla., (38.7%), Knoxville, Tenn., (31.9%), Atlanta (25.2%), Cape Coral, Fla. (24.9%), Cincinnati (19.3%), and Las Vegas (18.2%).
In January existing home sales fell by 5.1% from December to the slowest pace in over a year. While this is concerning, much of that could be attributed to the horrendous weather. Only the coming months will tell if this is a new directional trend, or a function of an exceptionally difficult winter.
On January 30th, we received more cautious news. Pending home sales fell 8.7% month-over-month, the worst since May 2010, missing estimates by the most in over 3 years. This is a 6.1% drop year-over-year. According to Larry Yun, the Chief Economist for the National Association of Realtors explained:
“Unusually disruptive weather across large stretches of the country in December forced people indoors and prevented some buyers from looking at homes or making offers,” he said. “Home prices rising faster than income is also giving pause to some potential buyers, while at the same time a lack of inventory means insufficient choice. Although it could take several months for us to get a clearer read on market momentum, job growth and pent-up demand are positive factors.”
On Feb 26th, there was a glimmer of silver lining for the housing market, in that new home sales jumped a bigger-than-expected 9.6% to a seasonally adjusted total of 486,000 despite poor weather which hurt foot traffic. Economists were expecting sales to dip 3.4%. The report shows the housing market remains resilient despite bad weather and higher borrowing costs. We don’t want to get too excited about the Feb 26th report, because new home sales figures can be volatile. January’s numbers could be revised down in coming months, as October’s and November’s previously-reported figures were this month. It’s also important to note that new home sales are a small portion of the overall housing market and they remain weak for a late stage economic recovery.
On February 28th that hope dimmed as we learned that contracts to purchase previously owned U.S. homes rose less than forecast in July, climbing only 0.1% versus expectations of 1.8% (according to Bloomberg) and following a 5.8% drop the prior month.
Flipping homes, (when a home is purchased and subsequently sold again within six months) has become quite the money making adventure for some. In 2013, 156,862 single-family homes were flipped, up 16% from 2012 and up 114% from 2011. Homes flipped in 2013 accounted for 4.6% of all U.S. single family home sales during the year, up from 4.2% in 2012 and up from 2.6% in 2011. The chart below at right shows how the magnitude of flipping has grown over the years.
However, the flipping trend appears to be slowing. Flips accounted for 3.8% of all sales in 4Q, down slightly from 3.9% of all sales in 3Q and down from 7.1% of all sales in 4Q 2012, the highest percentage of sales represented by flips in a single quarter since RealtyTrac began tracking flipping data in the first quarter of 2011.
Bottom Line: The factors driving home prices up may not be sustainable. For housing to enjoy a sustainable recovery over the long run, employment and household income levels need further improvement.
