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Leading Indicators Sending Mixed Signals for Residential Property and an Update on Commercial
Written by article default Tuesday, 14 December 2010 04:18
Let's start with the Case-Shiller Home Indices – not pretty. There have been broad-based declines in home prices in the 3rd quarter of 2010, according to Case-Shiller. This is from data through September 2010."Another weak report; weaker than last month. The national index is down 1.5% from the third quarter of last year and 15 of 20 cities are down over the last 12 months. Other than Tampa, FL, there are no new lows this month but many analysts will argue that a double dip will be confirmed before spring. While some of the bad numbers may reflect the end of the government's tax incentive for first time homebuyers, there are other problems weighing on the housing market," says David M. Blitzer, Chairman of the Index Committee at Standard & Poor's. "The national economy is certainly the number one issue for housing. Additionally, there is a large supply of houses on the market and further, hidden supply due to delinquent mortgages, pending foreclosures or vacant homes. New construction is running at less than half the pace needed to meet normal demand, so a sustained recovery could be a ways off."
"Looking deeper into the data, in the monthly indices, 18 MSAs (Metropolitan Statistical Areas) and both Composites were down in September over August. This is worse than August when 15 were down month-to-month. The only two which weren't down in September were Las Vegas, which managed to stay a touch above the low set in July, and Washington D.C. Overall, there are few, if any, good numbers in this month's data."
This brings us to the real issue - job growth. Unemployment has remained nearly constant at 9.6% since June of 2009. Federal Reserve Chairman, Ben Bernanke, noted last Tuesday, "At the pace of growth that we're seeing now, we're not growing fast enough to materially reduce the unemployment rate." He says "the economy needs to grow at an annualized rate of 2 to 2.5% just to accommodate new workers coming into the labor force."
This is contrary to data coming out from the Conference Board Consumer Research Center which says that consumers are increasingly upbeat about the future job prospects, with those polled expecting more jobs, income increases, and fewer job declines. The index has improved for the second straight month. This index is based on a monthly representative sample of 5,000 U.S. households. Lynn Franco, Director of the Board, said, "Consumer confidence is now at its highest level in five months, a welcome sign as we enter the holiday season. Consumers' assessment of the current state of the economy and job market, while only slightly better than last month, suggest the economy is still expanding, albeit slowly."
Why this varying data? One reason could be the temporary job market. More people have work, but it's just not full-time. More and more firms are using temporary services to fill their needs without the expense of full-time employment.
There is positive news about the housing market. Pending sales rose in October, up 10.4% from September. Lawrence Yun, Chief Economist for the National Association of Realtor (NRA), reports, "It is welcoming to see a solid double-digit percentage gain, but activity needs to improve further to reach healthy, sustainable levels. The housing market clearly is in a recovery phase and will be uneven at times..."
The appeal of today's market is easy to understand if one looks at the NAR's Housing Affordability Index. From 2007 to today, the median house price in the U.S. has fallen from $217,000 to just $171,100. Interest rates have dropped from 6.52% to 4.62%, while median incomes have risen slightly. What does this mean for the consumer? The consumer can buy the same house today as three years ago and the payment will be substantially lower.
Quick note about commercial: Some think the commercial real estate market is stabilizing as well (I think some sectors have, but not all). Lawrence Yun reports that the slowly improving economy has led to a rise in commercial leasing demand. He says this "means overall vacancy rates have already peaked or will soon top out."
Yun anticipates a rise in household formation in 2011, which will increase demand for housing, both ownership and rental. "Multi-family housing is the one commercial sector that has held on relatively well in the past year, and can expect the best performance of the commercial sectors in 2011. Apartment rents could rise by 1 to 2% in 2011, after having fallen in 2009 and no growth in 2010." I agree with Mr. Yun on this one.
So what does this all mean? Well, slow and steady wins the race, but you can't win if you're not in the race.