Last week, The National Association of Realtors said existing
home sales were up just 0.4% with inventories being reported as
the reason for a lower than expected reading. In fact,
inventories across the U.S. fell 4.9%, or 25% year-on-year, to
1.74 million, which was the lowest since Dec. 1999.
It seems that those lower inventories, low interest rates and
hungry buyers helped push prices higher as well. Earlier
this morning, the S&P/Case-Shiller 20-city composite index
posted a 0.2% increase in December, following a 0.1% decline in
November. After seasonal adjustment, home prices rose 0.9% in
December. December's prices were up 6.8% from the
same period in 2011, with increases in 19 of 20 cities. This
reading caps the best calendar year gain since the 15.5% surge in
New home sales figures just released from the Commerce
Department showed that units sold leapt 15.6% in January to an
annual rate of 437,000 to mark the highest month of activity
since July 2008 (seasonally adjusted). Sales in January topped
economists' estimates for 384,000 in annualized sales. December
sales were revised up to 378,000 from an initial read of
The West (The California & Arizona effect) saw the
greatest increase over the same period last year, up 45.3%, and
Northeastern states also saw a substantial increase of 27.6%.
Northeastern sales may have gotten an early jolt from
unseasonably warm winter weather that persisted from December
into early January. New home sales on average are
roughly 29% higher compared to one year ago.
The supply of new home inventory fell to 4.1 months at the
current sales rate from 4.8 months in December, the lowest level
Contrasting the S&P Case Shiller reading, the median price
of new homes fell more than 9% to $226,400 in January from
What strikes me as odd is the fact that housing starts
(reported last Wednesday) fell 8.5% to an annual rate of 890,000
in January with building permits up 1.8% to 925,000. The
important single-family starts rose just 0.8% to 613,000, which
is slightly above the 600,000 threshold that reflects a neutral
The week prior, the National Association of Home Builders
Housing Market Index (HMI) slipped to 46 from 47 in February,
continuing below the neutral reading of 50. Uncertainty about the
job market, home buyer access the mortgage credit, rising
costs for building materials, limited availability of labor and
desired lot locations were all reasons cited.
Here is where I get a bit confused…
If prices are so strong and inventory so low, why aren't we
seeing more homes being built? Why are quality home
builders like Toll Brothers warning investors about upcoming
I have been thinking about these questions quite a bit and
here is my thesis:
- Home prices have increased substantially, bu
t when compared to the major correction in prices in such a
short duration, it is more of stabilization than a strong
recovery. I believe that home prices will rise at 2-3% in
2013, then 2% in 2014. Maybe getting us back to 2005
levels if we are lucky, but still off 40%+ from the highs.
Homebuilders have picked all the low-lying fruit and now
have to deal with elevated prices of materials and sale
prices that are 50% less than what they could sell for at the
peak. There is also a desire for less expensive homes
making the task even more daunting. Land costs, code
requirements and local zoning laws make it extremely hard for
builders to slap up cheap housing that lacks minimum quality
- Rent rates are through the roof and a temporary way out for
home builders to make some cash while many Americans still
struggle with the ability to buy homes. We are seeing
several home builders get into the rental business and perhaps
convert those tenants into buyers eventually.
- Not all home builders are created equal, Toll had a high
multiple and high expectations with a focus on certain types of
homes. We need to stop lumping them all
- Sales rates are peaking now and will taper off as current
inventory is gobbled up and home builders are more selective
about building and/or move into the rent market.
Do you think the price and sales trends will stay
strong in housing for years to come?
Are these sales increases sustainable for the next year
given the inventory situation and home builder sentiment?
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