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Economics Group
Special Commentary
Mark Vitner, Senior Economist
mark.vitner@wellsfargo.com (704) 383-5635
We are seeing more and more signs suggesting that home sales and new home construction have effectively found a bottom.
Figure 2
Real Residential Fixed Investment
30% Bars = Seasonally Adjusted Annual Rate, Line = Yr/Yr % Change 30%
20%
20%
10%
10%
0%
1.2
0%
-10%
0.9 0.6 0.3 0.0
-10%
-20%
-20%
The key factor determining the pace of recovery will be how quickly the excess supply of existing homes clears.
-30%
-30%
-40% 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
-40%
Source:
1 Hedberg, William and Krainer, John (2011). When Will Residential Construction Rebound? Federal Reserve Bank of San Francisco.
Housing Chartbook: July 2011 July 29, 2011 There are risks related to U.S. debt ceiling debate that is currently taking place on Capitol Hill.
The homeownership rate continues to fall, declining 1 percentage point over the past year to 65.9 percent in the second quarter, and is now at its lowest level in 13 years. Tight underwriting standards and increased foreclosures account primarily for the decrease in homeownership. Even though affordability remains high, many would-be buyers are unable to qualify for new mortgages. Moreover, impending loan-limit drops for GSE and FHA mortgages could push financing costs higher, hurting affordability. There are also risks related to U.S. debt ceiling negotiations that are currently taking place on Capitol Hill. A potential U.S. credit downgrade could put upward pressure on mortgage rates in the coming months. The housing story is not all negative, however. A handful of metro areas and a number of submarkets are actually performing quite well. For example, the demand for real estate has picked up noticeably in recent quarters in both Washington, D.C. and Silicon Valley. Since the start of the year, prices in both of these regions have fared much better than national home prices and sales continue to be driven by job and income growth, especially among highly skilled workers. Rents have also increased sharply in both markets.
Home prices of non-distressed properties have likely bottomed in many areas around the country.
Home prices of non-distressed properties have likely bottomed in many areas around the country, but falling prices for foreclosures and bank sales continue to drag overall home indices lower. According to CoreLogic, prices of single-family homes are down 7.4 percent over the past year. Excluding distressed transactions, however, prices are essentially flat, down just 0.4 percent. Moreover, prices have firmed in recent months, reflecting a slight pickup in arms-length transactions and a small decline in distressed sales. With the backlog of homes waiting to enter the foreclosure process full, the major home price indices are likely to weaken further over the next year. We expect prices to begin falling again in September or October and continue falling right up until the spring 2012 home buying season. One factor that may help speed up the process is the return of international home buyers to many long depressed markets. Foreign buyers have been scooping up homes at rock bottom prices in recent months, particularly in coastal markets, such as Florida and California, where prices have likely overshot to the downside. Many of these buyers are from South America and Canada and are taking advantage of the weak U.S. dollar to purchase vacation homes, which can eventually be monetized through the rental process. Another bright spot has been the recent pickup in remodeling activity. The BuildFax Residential Remodeling Index jumped 22 percent in May on a year-ago basis, driven by higher demand for replacement projects. Rebuilding activity tied to the string of deadly tornadoes that struck the South and Midwest in April and May is also likely playing a role. The outlook for remodeling activity also remains favorable, with the Leading Indicator of Remodeling Activity published by the Joint Center for Housing Studies of Harvard University forecasting strong growth over the next few quarters. Figure 3
Homeownership Rate
70% Percent 70%
20% 15% Excluding Distressed Sales: May @ -0.4% Including Distressed Sales: May @ -7.4%
Figure 4
Impact of Distressed Sales on Home Prices
Year-over-Year Percent Change, CoreLogic 20% 15% 10% 5% 0% -5% -10% -15% -20% 05 06 07 08 09 10 11
68%
68%
10% 5% 0%
66%
66%
64%
64%
-5% -10%
62%
Homeownership Rate: Q2 @ 65.9%
62%
-15%
60% 65 70 75 80 85 90 95 00 05 10
60%
-20%
Source:
2008 -0.4 -0.6 5.8 900.0 616.3 283.7 482.2 4892.0 4336.7 555.3 232.1 -4.8 198.1 -9.2 -6.1 -16.7 4.88 3.66 6.04 5.18 216.7 -6.6 172.5 -12.9 -4.6 -12.9 3.25 3.26 5.04 4.71 373.9 5148.5 4559.2 589.3 321.7 4917.0 4310.8 606.2 222.6 2.7 172.7 0.1 -2.9 2.2 3.25 3.22 4.69 3.78 554.3 442.3 112.0 585.4 471.5 113.9 600.0 440.0 160.0 322.0 4945.0 4345.0 600.0 224.0 0.6 170.4 -1.3 -3.7 -3.5 3.25 3.29 4.79 3.20 -3.6 -4.4 9.3 3.0 -0.7 9.6 1.8 1.0 9.1
2009
2010
Forecast 2011
2012 2.1 1.4 8.9 720.0 520.0 200.0 410.0 5180.0 4520.0 660.0 225.5 0.7 173.7 1.9 1.3 -0.5 3.25 3.45 5.13 3.80
Real GDP, percent change Nonfarm Employment, percent change Unemployment Rate
Home Construction Total Housing Starts, in thousands Single-Family Starts, in thousands Multi-Family Starts, in thousands
Home Sales New Home Sales, Single-Family, in thousands Total Existing Home Sales, in thousands Existing Single-Family Home Sales, in thousands Existing Condominium & Townhouse Sales, in thousands
Home Prices Median New Home, $ Thousands Percent Change Median Existing Home, $ Thousands Percent Change FHFA (OFHEO) Home Price Index (Purch Only), Pct Chg Case-Shiller C-10 Home Price Index, Percent Change
Interest Rates - Annual Averages Prime Rate Ten-Year Treasury Note Conventional 30-Year Fixed Rate, Commitment Rate One-Year ARM, Effective Rate, Commitment Rate
Source: Federal Reserve Board, FHFA, MBA, NAR, S&P, U.S. Department of C ommerce, U.S. Department of
Mortgages
Mortgage rates have come down in recent months, primarily due to financial turmoil related to sovereign debt issues in Europe. Despite lower mortgage rates, mortgage purchase applications continue to move sideways, likely reflecting unusually tight underwriting practices. The high proportion of homeowners in a negative equity position has been holding back refinancing activity. Activity has turned up more recently, likely driven by borrowers looking to lock in fixed-rate financing on concerns over impending conforming loan limit changes. Worries related to U.S. debt ceiling negotiations and a potential U.S. credit rating downgrade could push mortgage rates higher in the coming months.
6.5%
6.5%
6.0%
6.0%
5.5%
5.5%
5.0%
5.0%
4.5% Conventional 30-Year Fixed Mortg. Rate: Jul @ 4.5% 4.0% 2004
4.5%
Mortgage Applications
60% 8-Week Moving Average, Seasonally Adjusted
ARMs Percent of Loan Applications (Value): Jul 22 @ 12.0% ARMs Percent of Loan Applications (Volume): Jul 22 @ 5.9%
60%
50%
40%
40%
400
400
30% 30%
300
300
20% 20%
200
200
10%
10%
100
Weekly Figure: Jul-22 @ 176.7 Down From 183.7 on Jul-15 Mort. Appl.: 8-Week Average: Jul 22 @ 184.2 8-Week Average Up 7.0% From Same Period Last Year 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
100
0% 2005
0
30%
12,000
15%
15%
10,000
10,000
0%
0%
8,000
8,000
-15%
-15%
6,000
6,000
-30% -30% New Home Sales: Jun @ -1.0% Mortgage Applications for Purchase: Jul @ -5.6% -45% Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 -45% Jul-11
4,000
4,000
2,000
2,000
0 94 96 98 00 02 04 06 08 10
Source: Mortgage Bankers Association, FHLMC, U.S. Department of Commerce and Wells Fargo Securities, LLC
Single-Family Construction
Single-family housing starts have remained near historical lows for nearly two and a half years as builders continue to face tough competition from foreclosures and short sales. The NAHB/Wells Fargo Housing Market Index increased slightly in July, but remains near record lows. With little buyer traffic, builders are extremely cautious and building only a handful of spec homes. Single-family housing permits fell for the first time in four months in June. The drop likely reflects ongoing concerns about overall economic growth, which is keeping spec construction to a bare minimum. A handful of markets are seeing stronger gains, however, mostly in regions with large technology sectors.
1.2
1.0
0.2
1.6
1.8
1.4
1.6
1.2
1.4
1.0
1.2
0.8
0.6 0.4
80 70 60 50 40 30 20 10
Source: National Association of Home Builders, U.S. Department of Commerce, NAR and Wells Fargo Securities, LLC
Multifamily Construction
The apartment market continues to benefit from the housing slump. Early second quarter data from REIS show net absorption has now been positive for the past eight quarters. The surge in demand has encouraged builders to begin working on new multifamily projects, with units authorized but not started up 31 percent from their low in September 2010. Strong demand helped drive the vacancy rate down to 6.0 percent in the second quarter. While apartment demand remains solid, the pace of recovery is moderating, reflecting slower economic growth. Multifamily permits are up 25.6 percent from a year ago (on a 3-month moving average basis). The gain comes off a low base, however, but should still boost construction over the next year.
Private Multifamily Construction Spending
Percent
400
400
300
300
200
200
100
100% 80% 60% 40% 20% 0% -20% -40% -60% -80% 94 96 98 00 02 04 06 08 10 3-Month Annual Rate: May @ -11.9% Year-over-Year Percent Change: May @ 0.0%
100% 80%
500
500
400
400
200
200
Housing Vacancies
7.0 Millions of Units 7.0
12%
75
8%
50
6.0
6.0
4% 25
5.0
5.0
0% 0
4.0
4.0
-4%
Apartment Net Completions: Q1 @ 6,012 Units (Right Axis) Apartment Net Absorption: Q1 @ 44,068 Units (Right Axis) Apartment Vacancy Rate: Q1 @ 6.2% (Left Axis)
-25
3.0
3.0
-8%
-50
2.0
2.0
-12% 05 06 07 08 09 10 11
-75
1.0
1.0
0.0 01 02 03 04 05 06 07 08 09 10 11
0.0
Source: U.S. Department of Commerce, REIS Inc. and Wells Fargo Securities, LLC
Buying Conditions
Buying conditions remain favorable, but slower economic growth and rising unemployment have pushed many potential buyers to the sidelines. International buyers have been taking advantage of the favorable buying conditions in recent months. Foreign buyers seem to be focused mostly on coastal markets, such as Florida and California, where prices have likely overshot the most. International buyers purchases tend to be all-cash transactions. Affordability is likely to remain high for the foreseeable future. Prices have stabilized recently, but will likely drift lower this fall and winter. Unfortunately, the pool of potential buyers has been thinned by tightening underwriting standards by lenders and the GSEs.
180
180
150
150
120
120
Housing Affordability Index: May @ 182.7 6-Month Moving Average: May @ 187.6 90 92 94 96 98 00 02 04 06 08 10 90
80%
80%
60%
60%
8.0%
8.0%
40%
40%
6.0%
6.0%
20%
20%
4.0%
4.0%
0%
0%
2.0%
2.0%
-20% 1990
0.0% 91 93 95 97 99 01 03 05 07 09 11
0.0%
5.5%
Treasury Yields
Percent 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 10-Year Yield: Jul @ 2.97% 5-Year Yield: Jul @ 1.50% 2005 2006 2007 2008 2009 2010 2011 1.5% 1.0%
60%
60%
3.5%
50%
50%
40%
40%
30%
30%
1.5%
20%
20%
1.0% 2004
10%
0%
Source: Federal Reserve Board, NAHB, NAR, The Conference Board and Wells Fargo Securities, LLC
New home sales perked up a bit during the second quarter, averaging a 315,000-unit pace. While this marks only a slight improvement from the prior six months, it represents the strongest pace of new home sales outside of the two tax-credit driven periods. Existing homes still sell at a huge discount to new homes, however, which is providing stiff competition to new homes. The overall inventory of new homes fell to 164,000 units in June, the lowest level on record. The drop brought the months supply down to 9.3 months. On a regional basis, new home sales in the South, which make up largest portion of sales in the country, have shown the greatest improvement.
12
12
1,300
1,300
10
10
1,100
1,100
8 8
900
900
6 6
700
700
4 4 Months' Supply: Jun @ 6.3 2 90 92 94 96 98 00 02 04 06 08 10 2
500
500
300
New Home Sales: Jun @ 312,000 3-Month Moving Average: Jun @ 314,667 89 91 93 95 97 99 01 03 05 07 09 11
300
100
100
170
$250
$250
90 70
$200
$200
50 30
$150
$150
10
$100 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
$100
Source: U.S. Department of Commerce, NAR and Wells Fargo Securities, LLC
Sales of single-family existing homes have lost some momentum recently, falling in three of past five months. The recent weakness is likely due to the spike in contract cancellations, possibly reflecting the ongoing struggle from conservative appraisals and tight underwriting standards. The National Association of Realtors noted that 16 percent of its members had a sale canceled in June, up from 4 percent in May. The inventory of existing single-family homes for sale totaled 3.77 million in June, representing a 9.5 month supply. Rising inventories, the large number of homes in the foreclosure process and the growing foreclosure pipeline will continue to put downward pressure on prices. The median price of an existing home is now just $184,300.
6.0
6.0
30%
30%
5.0 5.0
20%
20%
10%
10%
4.0
4.0
0%
0%
3.0 3.0 Existing Home Sales: Jun @ 4.2 Million
-10%
-10%
2.0 86 88 90 92 94 96 98 00 02 04 06 08 10 2.0
-20%
-30% 2003 2004 2005 2006 2007 2008 2009 2010 2011
1,000
900
900
800
800
700
700
1.5 1.0 0.5 0.0 1994 1996 1998 2000 2002 2004 2006 2008 2010
400 99 00 01 02 03 04 05 06 07 08 09 10 11 400
Home Prices
Foreclosures, short sales and other distressed transactions still account for a significant portion of existing home sales, comprising 31 percent of sales in June. While median prices have drifted higher in recent months, much of the gain is likely due to the changing mix of sales, with sales of larger homes picking up and fewer bank sales. The median price of a single-family home is now $184,600, up 0.8 percent from year-ago levels. Many buyers are likely rushing to get ahead of the FHA and conventional loan limit expiration, which would bring the limit down to $629,000 after October 1. Home prices are expected to continue to decline through the rest of the year, however, eventually bringing the peak-to-trough decline for home prices to around 40 percent.
12%
4%
6%
2%
$300
$300
0% 0%
$250
$250
-6%
-2%
-12%
-4%
$200
$200
-18%
National Home Price Index: Q1 @ -4.2% (Right Axis) National Home Price Index: Q1 @ -5.1% (Left Axis)
-6%
$150 Average Sales Price: Jun @ $269,000 Median New Sales Price: Jun @ $235,200 $100 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
$150
-24% 88 90 92 94 96 98 00 02 04 06 08 10
-8%
$100
14%
8% 6%
$250
$250
4% 2% 0%
$200
$200
-2% -4%
$150
$150
$100 Average Sale Price: Jun @ $237,300 Median Sale Price: Jun @ $184,600 $50 94 96 98 00 02 04 06 08 10
$100
$50
Source: FHFA, NAR, S&P Corp, U.S. Department of Commerce and Wells Fargo Securities, LLC
10
Residential Investment
30% 20% 10% 0% -10% -20% -30% -40% -50% 1996 Year-over-Year Percent Change 30% 20% 10% 0% -10% -20% -30% -40% -50% 1998 2000 2002 2004 2006 2008 2010
Remolding activity has posted strong gains recently, with the BuildFax Residential Remodeling Index jumping 22 percent in May from a year ago. Some of the recent pickup in remolding activity is likely tied to rebuilding efforts in the Midwest and South, following the string of deadly tornadoes that struck these regions in April and May. Remodeling activity continues to be concentrated on replacement projects, not discretionary projects. According to the Leading Indicator of Remodeling Activity (LIRA), which is published by the Joint Center for Housing Studies of Harvard University, remodeling activity is expected to remain strong through the remainder of the year. Growth is expected to moderate in early 2012, however.
Residential Investment
Q1-2011 Brokers' Commissions 16.2% Other 0.2%
Residential Investment
$900 $800 $700 $600 $500 $400 $300 $200 $100 $0 1992 Billions of Dollars Other: Q1 @ $0.8 Brokers' Commissions: Q1 @ $52.4 Improvements: Q1 @ $151.0 New Building: Q1 @ $119.0 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 1994 1996 1998 2000 2002 2004 2006 2008 2010
$125
Improvements 46.7%
Residential Improvements
40% Year-over-Year Percent Change 40%
$120
$120
30%
30%
$115
$115
20%
20%
$110 $110
10%
10%
$105 $105
0%
0%
-10%
-10%
$100
-20%
-30%
Source: Joint Center for Housing Studies, U.S. Department of Commerce and Wells Fargo Securities, LLC
11
Percent of Mortgages Outstanding, NSA New Hampshire Colorado Utah Rhode Island Illinois Ohio Virginia Maryland Idaho Georgia California Michigan Florida Arizona Nevada US 0% 10% 20% 22.7% 30% 40% 50% 60% 70% 18.7% 20.2% 21.2% 21.2% 21.7% 21.9% 23.1% 23.8% 24.2% 30.4% 30.9% 36.0% 46.1% 49.6% 62.6% As of Q1 2011
Housing conditions are becoming more disparate across the country. While it is generally true that the broader housing market remains weak, some areas are actually performing quite well. The demand for real estate has picked up in various tech centers, including Washington, D.C., Boston, Raleigh and Silicon Valley. Since the start of the year, prices in these regions have fared noticeably better than national home prices. Home prices continue to tumble in areas that were the most overbuilt during the boom years, including Florida, Georgia, Arizona and Nevada. However, in many submarkets, such as Orange County and Miami, prices have fallen so far that foreign buyers are now flocking to these markets looking for deals.
CoreLogic Home Price Index
Index, 2000=100, Not Seasonally Adjusted
260 Washington, D.C.: May @ 174.2 230 San Jose: May @ 148.3 United States: May @ 134.6
260
230
200
200
170
170
140
140
110
110
United States
80
80
50 90 92 94 96 98 00 02 04 06 08 10
50
Maryland
New York Nevada Indiana Florida Ohio Illinois Tennessee Arizona South Carolina Georgia Arkansas Idaho United States
-10%
-10%
-20%
-20%
-30%
-30%
-40%
-50% -55.9%
-47.5%
-50%
-60%
-60%
Source: FHFA, CoreLogic, Mortgage Bankers Association, U.S. Department of Commerce and Wells Fargo Securities, LLC
12
Diane Schumaker-Krieg Paul Jeanne John E. Silvia, Ph.D. Mark Vitner Jay Bryson, Ph.D. Scott Anderson, Ph.D. Eugenio Aleman, Ph.D. Sam Bullard Anika Khan Azhar Iqbal Ed Kashmarek Tim Quinlan Michael A. Brown Tyler B. Kruse Joe Seydl Sarah Watt
Global Head of Research (704) 715-8437 & Economics (212) 214-5070 Associate Director of Research & Economics Chief Economist Senior Economist Global Economist Senior Economist Senior Economist Senior Economist Economist Econometrician Economist Economist Economist Economic Analyst Economic Analyst Economic Analyst (443) 263-6534 (704) 374-7034 (704) 383-5635 (704) 383-3518 (612) 667-9281 (704) 715-0314 (704) 383-7372 (704) 715-0575 (704) 383-6805 (612) 667-0479 (704) 374-4407 (704) 715-0569 (704) 715-1030 (704) 715-1488 (704) 374-7142
diane.schumaker@wellsfargo.com paul.jeanne@wellsfargo.com john.silvia@wellsfargo.com mark.vitner@wellsfargo.com jay.bryson@wellsfargo.com scott.a.anderson@wellsfargo.com eugenio.j.aleman@wellsfargo.com sam.bullard@wellsfargo.com anika.khan@wellsfargo.com azhar.iqbal@wellsfargo.com ed.kashmarek@wellsfargo.com tim.quinlan@wellsfargo.com michael.a.brown@wellsfargo.com tyler.kruse@wellsfargo.com joseph.seydl@wellsfargo.com sarah.watt@wellsfargo.com
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