Have we reached light at the end of the tunnel?

The latest statistics indicate growing signs of a housing recovery, but mark any recovery as tentative.

Increasing  strength could be undercut in a number of ways.  Among the uncertainties are unemployment, mortgage rates, the condition of both the U.S. and global economies, and consumer confidence.  Also to be considered is the so-called “shadow inventory.”

Still, new information suggests that perhaps we are not only seeing the proverbial light at the end of the tunnel, but possibly our journey through the tunnel has ended.

Trulia finds inventory plunging and percentage of price cuts trending down.

The news in the last day or two is, of course, conflicting.  There is evidence that the supply of housing has dropped dramatically (in the chart above); builder confidence is inching up; home construction of new homes jumped in January; the Conference Board said today that its index of leading indicators ticked up by 0.3 percent; today’s inflation measure shows an unexpected rise; it could take up to 33 more months to dispose of the supply of homes facing foreclosures; and some economists foresee another dip in the housing market.

I have expressed reservations about virtually all the trend data reported by both the federal government and independent sources such as S&P Case-Shiller, which most of the traditional news media seem to regard as the most telling.

My issue centers on gaps in the data e.g. the omission of apartment sales and more than 20 metro areas (Case-Shiller) and the exclusion of sales higher than $729,750 (Office of Federal Housing Finance).

To the best of my recollection, I have never cited Trulia or Zillow here or in the comprehensive e-newsletter that I write on alternate Fridays (tomorrow is next), but the volume of news this week suggests they are worth quoting.

According to Trulia, 21 percent of homes currently on the market in the United States as of February 1, 2010 have experienced at least one price cut. It is the lowest level since Trulia started tracking price reductions in April 2009 and a significant decrease since November 2009, when 26 percent of homes had at least one price reduction.

The total dollar amount of the reductions was “only” $22.6 billion in contrast to $28.1 billion in November, a 19 percent decrease. The average discount for price-reduced homes continued to hold at 11 percent off of the original listing price.  Commented CEO Pete Flint:

“Seeing lower levels of price reductions nationally is an early indicator that we may be getting closer to a healthier real estate market. So far this year, we’ve seen more engagement by home buyers than we’ve ever seen before on Trulia and it shows no sign of slowing down.

“However, the tax credit extension is scheduled to expire soon and last year’s experience indicates that sellers may begin to panic by reducing prices ahead of the deadline. “

Luxury homes (those listed at $2 million and above) continue to be hit the hardest by price reductions with an average discount of 14 percent, Trulia further reported.  Although such homes represent under 2 percent of its listings, they account for 25 percent of the $22.6 billion in home price reductions; the average discount has held at 10 percent.

Yesterday, we also learned that builder confidence for newly-built, single-family homes rose in February to its highest level since November 2009, according to the National Association of Home Builders/Wells Fargo Housing Market Index.

The index gained two points to 17 – on a scale of 100, in which 50 is the pivot between optimism and pessimism. So, the change is nice, though hardly exciting.

Also yesterday, the Commerce Department said that housing starts in January were at a seasonally adjusted annual rate of 591,000, 2.8 percent December and 21.1 percent higher than one year earlier.

Single-family home construction rose by 1.5 percent above December.

Graph from CalculatedRisk.com. Click to expand.

As Calculated Risk.com analyzes the data, the government’s quarterly reports are revealing.  They show that there were 71,000 single family starts, built for sale, in the fourth quarter of 2009 on an unadjusted basis.  That total is fewer than the 82,000 new homes sold for the same period and is the ninth consecutive quarter with homebuilders selling more homes than they start.

“With starts so low in every category, the number of units added to the housing stock in 2010 will be at a record low – and that will help reduce the significant excess inventory of housing units,” the blog avers.

According to Standard & Poor’s, shadow inventory could have a negative impact on home prices in the coming months as more homes face imminent delinquencies and subsequent foreclosure.

Shadow Inventory Will Need To Clear: "Generally, distressed loans ultimately close through liquidation," says Standard & Poor. "The average monthly rate of liquidations, based on original loan balance, of seriously delinquent and REO (Real Estate Owned, or 'bank owned') loans over the last 12 months is about $14.5 billion. The original balance of currently seriously delinquent and REO loans is $426.3 billion. If no additional loans default and only the current inventory of nonperforming and REO loans eventually must be liquidated, it will take 29 months to complete. This estimate of 29 months does not consider loans that have yet to default or, more significantly, those that have recently cured."

In total, the shadow inventory could take 29 to 33 months to clear, and the amount of potential distressed inventory stands to grow.  Says the S&P report

“We believe that the recent reversal in housing prices is the result of a temporary constriction in the supply of foreclosed homes on the market. It is our opinion that recent positive housing reports should not be construed as a sign that the distress in the residential housing market is abating.”

Among other economists worried about the future count Stan Humphries, chief economist at Zillow.  He told Fox Business last week that data from the very end of the year was worrisome.

Some metropolitan areas, such as Oklahoma City and Harrisburg, Penn., already are experiencing a double-dip, Humphries said, while cities such as Los Angeles and New York did not see declines in December but saw the rate of increase in home values slow.

According to Humphries, the Real Deal notes, 20 percent of Zillow.com’s top 143 markets had the first precondition for “double-dip switches” – that is, five consecutive months of depreciation in 2009.

As for me, I’m a glass half full kind of guy, so I’m hopeful that the pessimists are wrong and that perhaps an increase in retail sales and manufacturing, along with other indicators, presage better times ahead.

Apartment just listed (not by me) on 93rd. St. on the Upper West Side.

What I know for sure is that buyers are back, though cautiously, as I have noted in recent posts.  All of the several open houses that I visited last weekend were busy.  One of them, a 1,300-sf co-op with two bedrooms and baths on 93rd Street on Manhattan Upper West Side was thronged.

With an asking price of $995,000, the apartment shows beautifully and represents excellent value.

I’d like to think, but remain shy of predicting, that Sunday’s turnout represents something else: the fragile return to health of the Big Apple’s housing market.

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Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

M: 347-886-0248
F: 347-438-3201

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