Contrary to recent headlines, home prices are displaying seasonal strength.
By: Eric Landry, Associate Director with Morningstar
That's right, house prices are currently going up, though you wouldn't know it from the grim parade of negative headlines of late. Almost exactly two months ago, we wrote that, after a very rough several months, the leading indicators we monitor were suggesting better days ahead for home prices throughout most of the country. We still think a spring bounce is in the cards for the popular Case-Shiller indexes relatively soon. Rising prices have been highly evident in the median listing prices reported throughout the country for several weeks now. We think this will trickle down to the popular indexes sooner rather than later.
Of course, seasonality is driving much of what's currently happening. At this time of year, in a normal real estate environment, prices usually show resilience. We can't rule out the fact that this year's bounce is nothing more than that. Nor can we rule out the notion that seasonal weakness in the fall and winter months won't significantly overwhelm any spring or summertime gains, resulting in yet another annual decline for 2011.
Nevertheless, we counsel investors not to brush aside near-term home price increases as an aberration, or nonevent. Neither 2007 nor 2008 enjoyed any positive bounce during the spring months, a phenomenon that led to steep annual declines during each of those years. More recently, 2009's relatively strong spring months managed to offset weakness in the winter such that prices declined only in the mid-single digit range that year. With any luck, the same -- or an even more favorable -- scenario will arise this year, giving potential buyers (and maybe more importantly, lenders) some confidence that the rout in prices has mostly run its course.
To get a jump on all the popular home price indexes, such as the Case-Shiller or the Federal Housing and Finance Agency (FHFA) indexes, we look at median listing prices throughout the country to discern the direction and magnitude of the trends likely to show up in these popular home-price indexes in coming months. Of course, median listings are subject to distortion due to mix issues, so the data doesn't align perfectly with the above-mentioned paired-sale indexes. Nonetheless, the real-time signals rendered by median listing prices are a valuable tool in discerning both the direction and magnitude of price trends.
On the chart below, we've sliced and weighted our listing price data to mimic the Case-Shiller 20-city index for the past several years. Median listing prices generally lead Case-Shiller prices by a month or two. While some tracking error is evident, the real-time data has a track record of correctly anticipating Case-Shiller price movements.
Through the first two weeks of May, the 2011 bounce is already bigger than all of last year's seasonal increase, as well as those of 2006, 2007, and 2008. Only 2009, a year whose results benefited generously from government stimulus, has shown similar strength to what we're seeing now. Granted, this year's activity is springboarding from a lower base, as December 2010 activity was among the weakest in our data set. But those days are now decidedly in the rearview mirror.
We also spend considerable time analyzing the Case-Shiller National Home Price Index, which is published quarterly. Here too, investors can expect firming prices. As the below chart suggests, real-time data has an impressive forecasting track record on a national basis, and the news here is similarly good.
Because the first quarter is generally the seasonally weakest, the March Case-Shiller data that will be released later this month may signal further weakness on a national basis. However, we expect an impressive reversal during the June quarter. Our data generally leads by a few months, and is now firmly in a sequential uptrend. In fact, because the data is showing such solid gains only about halfway into the second quarter, 2011 is likely already ahead of 2009's seasonal bounce.
Long story short, the news flow regarding residential prices is set to take a turn for the better in the coming months. It's worth noting that we're not making a long-term forecast here, but we're confident that near-term prices are headed higher, and impressively so in several regions.
The strength we're seeing is relatively broad-based, especially in Florida. Of the five cities we cover in that state, four are showing pricing resilience. Specifically, the Jacksonville market has awoken after several years with absolutely no springtime bounce. It's shown strong sequential gains in April and May after modest ones during the previous two months. Miami has also broken out of its funk, with material sequential gains in median listing prices for the past three months. Cape Coral/Fort Myers enjoyed relatively strong March and April pricing, with flat results so far in May. Finally, Orlando is enjoying a good spring bounce. All four are now enjoying median listing prices materially higher than in December of 2010. Only the Tampa market is struggling, with only slight gains thus far in 2011.
Phoenix has been a disaster for over four years now, but recently has shown some strength. As of May, median listing prices are comfortably above prior year-end levels for the first time in years. We are also seeing modest bounces in Albuquerque, Baltimore, Boise, Boston, Chicago, Kansas City, Portland, San Antonio, Cincinnati, Virginia Beach, the Washington DC area, and St. Louis.
Stagnant or lower prices still persist in several regions, although declines are now much more modest than in years past. Besides Tampa, these more sluggish performers include Las Vegas, New Orleans, Reno, and Tucson.
A few stocks that may stand to benefit from firmer prices, and that are relatively cheap in our opinion, include Masco (MAS), a company that's been on the losing end of the massive decline in residential fixed investment. Few manufacturers stand to gain more from an increase in housing production, as three of its five of its segments are operating at well less than half of peak levels. Management has taken significant fixed costs out of the expense structure, so we believe the company can earn significant sums in a more normal environment.
St. Joe (JOE) is trading at a discount to what we believe its net assets are worth, while its prospects are looking up. We think the placement of a new airport in the middle of its vast land holdings will catalyze economic development in and around Panama City, Florida. In addition, recent data indicate that unit volumes in several of Joe's properties are picking up smartly.
Lennar (LEN) and KB Home (KBH) both have room to the upside. The former is one of the best-run builders in the country, and enjoys ancillary earnings streams from its distressed investment arm. Its inventory is now valued such that the company has enjoyed modest net income of late. The latter hasn't yet reached sustained profitability, but is trading at a material discount to adjusted book value.
In several cities we're seeing pricing strength displayed in median listing prices not seen since the tax credit-induced bounce of 2009. In some cases, prices are increasing for the first time in years. We expect a material portion of what we're seeing in this real-time data to show up in the paired-sale indexes published by Case-Shiller and FHFA in the next couple of months. Though the gains may not be as great as what we're seeing, we expect the news flow regarding home prices to take a material turn for the better. Whether or not these expected near-term increases translate into strength further down the road is still an open question, but the mere fact that the initial signs of a reversal are upon us is unmistakably good news.
Reprinted with permission.