Vital Signs: Has Housing Hit Bottom?

On deck: leading indicators index, FHFA home price index, new and existing home sales, and durable goods orders

The week ahead is light on economic reports, but the few that are forthcoming will be very important to the outlook. That’s because the data center on housing. It was the housing bust and its financial repercussions that dragged the economy into recession, and housing will provide some of the first signs that the downturn is bottoming out.

Most recently, housing has been flashing a few upbeat signals. That was especially true in February: Housing starts in the month jumped 22%, including a big 16% rise in permits to begin work on single-family homes. Starts in March retraced some of their February gain, but single-family construction showed further signs of stabilization. And in April, builders sounded a little more optimistic, according to the National Association of Home Builders. The NAHB index of builders’ sentiment about market conditions scored the largest monthly increase in nearly six years. The gauge remains exceptionally low, but the builders said current and prospective sales, along with buyer traffic through model homes, all improved notably.

Home demand still faces stiff headwinds. Sales of existing homes rose 5.1% in February, and purchases of new homes increased 4.7%. In the coming week, March data on both new and existing sales will be important for signs that the February strength was not just a fluke. The National Association of Realtors’ index of affordability stands at a record high, but that only helps potential buyers who can qualify for a conventional mortgage or pay a premium for a jumbo loan at a time when unemployment is surging. Plus, falling home prices continue to discourage many buyers looking for the best deal.

The hope is that record-low mortgage rates and falling house prices, combined with support from the government’s Home Affordable Modification Plan (HAMP), are laying the groundwork for a stabilization in housing demand, prices, and construction. Sales of new homes, while up in February, remain in a clear downtrend. Through February, demand for existing homes appears to stabilizing, with help mainly from foreclosure sales. Still, those transactions are helping to clear out inventories of unsold properties, and HAMP is helping to mitigate future foreclosures.

Reducing inventories is the key to stabilizing home prices, but there has been scant progress. The number of months required to sell all unsold existing homes has declined from 11 months in November to 9.7 months in February, but that’s still twice the normal level. In the new-home market, builders are well-positioned to make sizeable inroads into their stockpiles. The number of starts of homes built for speculative sale, as opposed to those custom-built for buyers who already own their land, have been running well below the level of sales for more than a year. As a result, new-home inventory is down sharply. However, sales have fallen faster than inventories, keeping the months supply at a high 12.2 months in February. As sales pick up, the months supply could drop rapidly.

The recession began with housing, moved to Wall Street, and then to Main Street. The recovery will follow much the same path.

Here’s the weekly economic calendar, from Action Economics:

Top Economic Reports
Top Reports Date Time For Median Estimate Last Period
Leading Indicators Monday, Apr. 20 10:00 a.m. March -0.2% -0.4%
Existing Home Sales (Mln) Thursday, Apr. 23 10:00 a.m. March 4.610 4.720
Durable Goods Orders Friday, Apr. 24 8:30 a.m. March -1.5% 3.5%
New Home Sales (Mln) Friday, Apr. 24 10:00 a.m. March 0.330 0.337
Other Reports and Events
Reports/ Events Date Time For
SPEECH: Chigaco Fed President Evans Monday, Apr. 20 9:00 a.m.
ICSC-UBS Store Sales Tuesday, Apr. 21 7:45 a.m. Apr. 12-18
Johnson Redbook Weekly Store Sales Tuesday, Apr. 21 8:55 a.m. Apr. 12-18
Mortgage Applications Wednesday, Apr. 22 7:00 a.m. Apr. 12-18
FHFA Home Price Index Wednesday, Apr. 22 10:00 a.m. February
Initial Unemployment Claims Thursday, Apr. 23 8:30 a.m. Apr. 12-18
    Before it's here, it's on the Bloomberg Terminal.