There’s a real dilemma as an investor relations person when it comes to Wall Street and your company’s earnings performance. If you have a bad quarter and fail to meet expectations, the market will react negatively and essentially punish your stock price – sometimes literally pummel it. Other times, when you exceed expectations, the market may not reward you for that performance, but may say, “What about next quarter?” Sometimes you can even meet expectations and get a trip to the woodshed if the internal distribution of revenues and expenses are not as anticipated.
The same can be true about the housing market. Yesterday I wrote a summary on the National Association of Realtors® latest monthly existing home sales report. But just like reported company earnings on Wall Street, they are now history, and people want to know what’s coming in the future. Even though March housing sales were up 10.3 percent over the same a month a year ago, and median prices were up 11.8 percent, a sequential decline in sales from February 2013 of a miniscule 6/10ths of 1 percent is now evidentially responsible for the declining equity markets, as stated in a press release “The positive atmosphere in European markets has fizzled as the day has gone on, with markets turning sour thanks to a bout of poor US housing figures. With existing home sales dropping instead of rising, evidence seems to be building that we are in for yet another difficult period for equity markets.”
How does a 6/10ths of a 1 percent preliminary number top a double-digit year-over-year gain? You can answer that by simply asking the question “What are you going to do for me tomorrow?” It is the anticipation factor that stock prices and housing consumers focus on, not historical performance.
So let’s take a look at “tomorrow.” We are fortunate that, when it comes to housing sales, several major entities provide updated monthly forecasts to future sales levels and lending volumes. Fannie Mae and the Mortgage Bankers Association (MBA) both supply separate forecasts for new and existing home sales and lending volumes monthly, while Freddie Mac forecasts total housing sales—both new and existing, as a combined single number. The following table commences from 2009 with historical data and picks up forecasts for 2013 and 2014. They see existing home sales increasing an average 6.8 percent in 2013 and another 5 percent in 2014. These forecasts can and often do change as time progresses, but are based on best estimates as of today. Both parties see the greatest number of existing home sales in 2014 since prior to 2009.
What has always amazed me about new home sales is the attention the press gives to them, when they are but a fraction of the total housing sales count. Generally speaking, in typical times in the U.S. in a normal market, there is usually one new home sale for each five or six existing home sales. Focusing on new home sales as the leading indicator is akin to looking at the wagging tail rather the rest of the dog. No doubt, more economic activity is generated by new construction (think materials and labor here), but the dynamics of the market are likely better reflected in existing home sales numbers and prices. Add to that the dearth of developed residential lots today – the country has literally done no new significant subdivision development since 2006 – and realize that new home construction is constricted for the next 12 to 24 months waiting for lots to become available. If you can’t build them you can’t sell them. That is reflected in the forecasts for new home sales from both Fannie Mae and MBA for 2013 and 2014. While the MBA and Fannie Mae are very close in projections for existing home sales in 2013 and 2014, they diverge by more than 100,000 new home sales in 2014. I would speculate that is not a function of market demand, but rather differing assumptions of developed residential lot delivery and availability.
Total housing sales forecasts for new and existing homes are included in the following table.
Are the 2014 estimates the new normal? I do not think so. Given the megatrend towards many younger Americans being perhaps at a decade long renter, and those former homeowners that were involved in foreclosures or short sales that, for a few years, are iced out of homeownership, I fully expect existing home sales to return to the 5.5 million level seen in the last normal market in 2002, prior to massive subprime lending, where if you had a pulse and breathed you qualified for a mortgage loan.
And new construction? I defer to a blog I posted in 2010 that deduced we needed to eventually build 1 million new dwelling units per year. Assuming a 65 percent homeownership rate, then we are looking at 650,000 new home sales per year. That would make the new normal level of housing sales 5.5 million existing homes per year plus 650,000 new homes per year, for a total of 6.15 million new and existing home sales per year. That is still a 6.8 percent upside for the average forecast seen in 2014. So we are likely 24 to 30 months off from getting back to normal, so-to-speak.
Ok, so now I am going to gloat a little. In the aforementioned 2010 blog, I stated that “In the short run (read that as the next 18 to 36 months) we will see restricted new housing construction—and double down on that bet if job growth continues to be close to zero. In the long run, however, we need to add 1 million dwelling units per year to inventory.”
Wow—that still sounds correct. And we are just now seeing the expanding construction.
Contrary to Fannie Mae’s and the MBA’s forecasts for 2013, it would not at all surprise me to see the 5 million existing home sales mark reached this year.