There is a lot riding on the U.S. housing recovery: Just as the housing sector led the broader economy into deep trouble several years ago, it is supposed to be leading the economy back to health now.
Trouble is, housing data have disappointed in recent months, raising concerns over whether slow jobs growth and rising borrowing costs are starting to bite.
Construction of single-family homes in January – known as housing starts – fell 6 per cent from last year; existing home sales also fell from last year; and new home sales in December (January numbers will be released on Wednesday) were little changed from last year.
If the numbers continue to move sideways or decline in the coming months, one of the most anticipated recoveries will be clearly faltering. Should we be worried?
Bill McBride, who writes the Calculated Risk blog, remains upbeat – good news, given his outstanding track record for nailing both the highs and lows for the market in recent years.
He figures there are several reasons driving the weak data, and the severe winter conditions are only partly to blame. None of them is enough to worry about more than a temporary setback.
1. Prices are rising. Gone are the days when home prices did nothing but slide amid a heap of foreclosures. The S&P/Case-Shiller home price index for November rose 13.7 per cent, year-over-year.
2. Mortgage rates: The rates on 30-year fixed mortgages, in particular, zoomed higher starting last summer, raising borrowing costs for home owners.
3. Fewer distressed sales. The housing crash put up a lot of home for sale, making easy pickings for anyone in the market to buy an existing home. Those sales are now declining.
4. Buying among investors, as opposed to people who actually want to live in homes, is declining.
5. Inventories are down. That is, the number of unsold homes on the market is drying up.
6. Home builders are being constrained by a limited supply of land, along with a tight supply of materials and, in some places, skilled labour.
Mr. McBride can see a number of upsides here. The declining number of inventories is actually good for new home sales. Stabilizing or rising home prices give home sellers the luxury of waiting for a convenient time to sell, which helps explain part of the declining inventories. Declining existing home sales is not bad news, and lower distressed sales is good news.
Mr. McBride argues that you also have to put weak housing starts and disappointing new home sales into perspective: Both measures are still very low relative to history, suggesting that neither is at risk of topping out.
For example, 2013 was the sixth weakest year for new home sales, for data going back to 1963. And housing starts rose 28 per cent in 2012 and nearly 19 per cent in 2013, but nonetheless last year was the sixth weakest for data going back to 1959.
"These low levels of housing starts and new home sales, combined with a growing population and new household formation, suggests new home sales and housing starts should increase over the next few years," Mr. McBride said.
He believes that higher home prices – we'll get a look at the December year-over-year gains for S&P/Case-Shiller index on Tuesday; economists expect a gain of 13.4 per cent – will lead to more inventory. And more inventory should bring slower price increases.
"The bottom line is the housing weakness should be temporary," he said. "There should be more inventory this year, price increases should slow, and sales volumes increase."
The share prices of U.S. homebuilders is now reflecting this optimistic view, following a difficult summer in 2013. (Full disclosure: I own Lennar Corp.) The S&P 500 homebuilding index fell 34 per cent from May to the start of September; it has since rebounded 34 per cent, but remains more than 50 per cent off its real-estate-bubble high in 2005.