This morning we saw two huge housing data points.
However, the already tight housing supply is getting even tighter.
Bank of America economist Michelle Meyer tells us that while we are seeing an improvement in new home sales, today's data could be revised in coming months and that monthly data should be interpreted with caution since it can be very volatile.
She also says that housing supply is very tight and if we don't see a greater supply in the housing market, it will have an upward pressure on home prices.
BAML expects home prices to rise by 4.7 percent in 2013.
BI: New home sales spiked 15.6 percent in January. What's behind those numbers?
Michelle Meyer: The 15.6 percent increase was certainly above expectations, and it is an outsized gain even for this series which tends to be volatile. So we have to put that percentage gain into perspective and realize that with the data being quite volatile, particularly at this time of the year, we could see a revision or a partial payback in coming months. But that said, I do believe that the trend is still higher for new home sales and I think we should expect to see continued improvement, given the fact that inventory is low not just for new construction properties but also for existing properties, and that creates opportunities for building.
BI: Can the rise be attributed to just a weaker base?
Michelle Meyer: So December was down three percent but November was up eight percent. If you look at a monthly pattern it is very, very noisy — it's what's called mean reverting. I tend to like to look at three- or six-month moving average; I think it moves out some of the noise, and when you do look at it on a moving-average basis we're certainly still seeing improvement.
BI: In terms of the supply, the actual number of homes is flat on a monthly and annual basis. It's the spike in sales that is changing supply ...
Michelle Meyer: I think what it's showing is that the number of homes in the market for sale — that's remained as you've said pretty constant — which means builders are looking, seemingly as of now, at keeping stocks low. As home sales continue to rise we'll bring down that months' supply figure which means that the current stock of homes for sale will be cleared even more quickly and that's really what months' supply is capturing. It's saying how many months does it take to clear inventory at the current sales pace, so the lower it is, obviously the faster the inventory will move through the system, which means that there's greater ability for builders to add to the housing stock and increase construction.
BI: Is the market too tight at the moment? Is that a good thing or a bad thing?
Michelle Meyer: I think the market is tight, clearly by looking at these numbers, and again it's not just the new market which has arguably been tight for some time, it's also the existing market. So, if we don't see greater supply come into the market, it will continue to put upward pressure on home prices and limit the amount of turnover we see in the market. So, I think it would very much be appropriate in the environment to see inventory pick up, see building pick up.
BI: You have previously said you're not concerned about overbuilding (see article here). One of the reasons you gave, was large homebuilders had downsized during the crisis and it would take time for projects to pick up again. Does that then worry you considering supply is already tight and homebuilding might not pick up at a fast enough pace?
Michelle Meyer: I maintain the view that there's little reason to be concerned about overbuilding this year. We're starting from low inventory levels and I think there's some limit on capacity in the homebuilder space. The large public builders are gearing up for further increase in construction and we've seen it.
The numbers coming out from the public builders have outpaced the Census Bureau numbers for some time now. So it means that either they're outperforming the rest of the market, which is possible, or it means that we're going to see a revision to the official data which is also quite possible. And we get that revision in a month or two, so that's something that could be interesting actually.
... Presumably, the inventory numbers, the month supply figures we're seeing, suggest that homebuilding is already lagging a bit relative to demand. But I think that builders are going to be reactive, and you can see from homebuilder sentiment — homebuilder sentiment is quite strong, much stronger than what we're seeing from actual production.
So builders are feeling more confident, and I think they're looking for opportunities, and if demand continues to do well and if prices continue to improve, I think builders will respond appropriately to increases in sales.
BI: Is there anything else our readers should know?
Michelle Meyer: I think the other factor you always want to think about is regional differences. And not only in terms of new home sales, but also it ties into pricing. One of the things that was clear from this report is home construction has increased, certainly in January the biggest gain was in the West, but that was off of low levels in December. But even if you look at a longer trend, the West has seen more considerable gains in housing construction and that also is consistent with the fact that the market there just simply looks better, inventory is lower, and home prices are rising there. So the turn seems to be happening a bit more quickly in the West than in other regions.
BI: And what are you seeing in the East Coast, specifically in New York?
Michelle Meyer: That's probably the slowest market to turn. In terms of the Case-Shiller numbers [see here] the New York metro area was the only one of the 20 cities surveyed that is still contracting on a year-over-year basis. And in terms of construction there has been some improvement but it has been pretty modest, so I think the Northeast is lagging a bit relative to other parts of the nation.
BI: And do you expect it to continue to do so for a while?
Michelle Meyer: The challenge in the Northeast is the foreclosure process. It has a very slow judicial process which means that foreclosures and distressed inventory are leaking into the market only gradually. That means we'll continue to see this pressure on the housing market and there's certainly areas for opportunity. I think multi-family construction has picked up if you listen to what Toll Brothers just said, there's opportunities for apartment construction obviously in parts of New York, so when you look at Manhattan you get a very different picture than when you look elsewhere in the New York metro area. Overall it seems like its a little bit slower to turn.
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