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Is the Real Estate Picture Clear, Mixed or Cloudy (With a Chance of?)
Written by article default Tuesday, 22 June 2010 04:05
What are leading indicators and indexes telling us about the real estate market today? We usually start by looking at the Case-Shiller Index which gives us a good view of what home prices did in prior months. These indices (the 10 city and 20 city composite) measure home price changes for 30 of the major cities in the US. A review of the index shows that home values have fallen approximately 32% from the peak in 2005; this decline is truly unprecedented since the Great Depression.In March 2010, however, we saw the index go back to positive. This is the first time since the start of the decline.
The PMI Risk Index measures the likelihood of home prices being lower in the next two years for each of the 384 Metropolitan Statistical Areas (known as MSAs). This Index uses various economic data to determine these probabilities. The data sources that the PMI Risk Index uses are home appreciation rates, employment stats, affordability rates, the amount of excess housing supply (or also know as current inventory), interest rates and foreclosure activity.
Looking at all of the 384 MSAs, 51.3 percent (197) ranked in the high risk of decline categories, and 48.7 percent (187) ranked in the minimal-to-moderate risk category of lower prices in two years. The MSAs in the elevated and high risk categories typically have higher unemployment rates, higher new foreclosure rates, lower affordability, a large excess housing supply and more volatile house prices than do MSAs in the minimal-to-moderate risk categories.
The map below depicts the geographic distribution of the home price risk of all 384 MSAs. 42 out of the 50 largest markets in the latest survey showed a diminished risk.
Figure 1
Figure 2
The sand states are still showing a higher risk. Areas such as Chicago-Joliet-Naperville, IL showed the largest decreases in risk. So these signals are mixed.
Last week, the Pending Home Sales report from the National Association of Realtors showed that contracts jumped for the third straight month, up by six percent in April, and is now 22 percent higher than the year before.
A critical question is: are these numbers inflated because of the Tax Credit or is there a true recovery? The Federal Reserve's latest region-by-region analysis of the national economy, the so-called "Beige Book" released last week, has an important message for the real estateindustry. The analysis shows: "There is a recovery taking place," and it's a gradual recovery that should prove durable. Most Federal Reserve economists think that low interest rates and fairly low prices will continue to make the housing market attractive for prospective buyers. This means that even though tax credits most definitely had a large impact on the housing market, economists feel the market will now sustain itself.
Are consumers confident? The Conference Board's Index for Consumer Confidence rose five points in May, a good sign that consumers are willing to spend money. Lynn Franco, who directs the Conference Board's survey research center, noted that the "expectations" component of the index was particularly strong, the highest point in nearly three years.
Employment and job growth are showing evidence of positive movement. Here are some of the facts:
* Employment rose 290,000 jobs in April, the largest gain since early 2006 (see figure 1 below).
* Unemployment rose to 9.9 percent, this occurred because the labor force surged by 805,000, the biggest gain since 2003 (my son is one of those who just graduated from college and who is looking for a job).
* Employment in the household has skyrocketed in recent months. This means there are more people in individual households with jobs. The increase is 1.66 million jobs since the lowest point in December of 415,750.
* Private employment jumped 231,000 in April. The expectation was it would be the Census workers that would create the increase, but that wasn't the case.
Figure 3
These look like clear signals. I feel that the clouds are at bay right now, but the direction of the wind can change, so make sure your plan can weather any storm. I'm done with the weather analogies for now.