Housing Metrics Show Speed of Recovery Matters

Mixed U.S. housing metrics suggest the speed of the recovery is as crucial as the recovery itself. 

According to The Collingwood Group, Washington, a general expectation to see increases in housing sales is not that grounded. “Don’t hold your breath for a boom in housing demand,” these insiders note. “The U.S. needs to create three to five million housing units of demand just to clear the existing and shadow inventory.” And that is not happening  any time soon.

The March Housing Starts Report released in April by the Census Bureau and the Department of Housing and Urban Development shows in February home starts increased 35% compared to February 2011 while on a monthly basis single and multifamily unit starts fell from 706,000 in January to 698,000 in February.

The reason why this metric matters, these insiders say, is because it reflects the confidence of homebuilders, helps forecast future consumer consumption for home goods and immediately impacts financial markets, including mortgage lenders, analysts said. All of which have “a pervasive influence” on the overall economy.


Homebuilders’ instincts have traditionally influenced the attitude of other housing market participants. That rule however may change.


The Federal Reserve’s Beige Book for March showed expanded multifamily production and increases in building permits in many Federal Reserve districts. Rental demand is one of the drivers of new multifamily construction. But according to The Collingwood Group, real estate activity and the optimistic outlook for builders to some extent may have been stimulated by mild weather. The U.S. homebuilders’ confidence in the housing market “slipped in April for the first time in seven months” as recent increases in consumer interest did not turn into higher home sales, analysts said. 

The crisis is changing the psychology of both housing buyers and sellers. In today’s market, housing starts and construction “can be deceptive indicators,” Collingwood analysts wrote, because mild gains in construction will not reflect meaningful improvement in the economy unless housing demand improves and the disproportionately large housing supply is reduced.

Amherst Securities projects that over the next six years the housing inventory could grow by an additional 9.5 million properties.

New single and multifamily home construction would compete with “the shadow inventory” properties expected to enter the market as foreclosures or short sales. As a result “real gains in construction are unlikely” until the supply is reduced and other economic factors including household formation, employment and consumer confidence “see drastic improvement.” 

Fitch Ratings warned that even though U.S. housing metrics may start to improve as 2012 wears on, the change for the better fails to keep pace with investor expectations.

Fitch’s “U.S. Homebuilding/Construction: The Chalk Line—Spring 2012” report indicates the good news is that builders and investors are more enthusiastic about the future.

The improvement is based on positive housing forecasts that “still assume a modest rise off a very low bottom” in 2012.

Since the housing market is very close to hitting bottom, hopes it will bounce back during the next few years are not that unrealistic. Fitch projects single-family housing starts will improve about 10%, while new home sales and existing home sales will rise approximately 8% and 4%.

Other reports suggest there are believable signs of a slow recovery. But how stabilizing home prices that fuel increases in home sales will affect the real estate owned inventory is another matter. 

Keefe, Bruyette & Woods analysts find that even though non-distressed U.S. home prices have mostly stabilized due to certain constrains that may persist well into the future new home sales may only increase by up to 10%. 

Distressed sales will represent the bulk of all home sales. 

Analysts expect 92% of all sales in 2012 will be from existing homes including liquidations and foreclosures.

KWB estimates show distressed sales continue to account for approximately 30%-35% of existing home sales.

KBW analysts expect modest growth. It includes approximately $100 billion to $150 billion in Home Affordable Refinance Program loans, which represent about 10% of the $1.2 trillion overall mortgage volume in 2012.

Even if in line with expectations new home sales increase by 5% to 10%, analysts wrote, these sales will consist of less than 8% of homebuilders overall home sales.

Such improvement is bound to affect overall existing home sales and distressed sales. The KBW “Mortgage Matters: Housing Update and Monthly Mortgage Metrics” semi-annual market data suggest “a modest housing recovery” will be unevenly affected by tight mortgage credit, negative equity and shadow inventory pressures. 

Anticipated home price decreases shown by the Case-Shiller index over the past year “reflect the mix of distressed transactions” after the 2010 housing tax credit expiration. The Case Shiller Composite-20 index decreased 3.4% year-over-year and increased 0.2% month-over-month. Similarly, the February CoreLogic index, which excluded distressed transactions, decreased 0.8% for the year, even though average housing prices increased 0.7% month over month.