US Housing Softening
by Craig on 26/01/10 at 9:39 am
Crucial to the economic recovery and the balance sheets of the US financials is the ongoing recovery in the US housing market. While not deteriorating given the last few data points, the recovery does appear to be running out of steam. US Housing prices based on the S&P/CaseShiller Home price index have been flat for the past 3-months. The latest reading, which is for November as this index does have a time lag, was down 0.2%. More concerning is only 6 of the 20 cities posted a month over month improvement including Portland, Phoenix, Dallas, San Diego, San Francisco and Los Angeles. Notice that all of these cities are in the West or Southwest regions of the U.S. The trend towards higher prices on a city-by-city basis has been trending down since July of last year.
Looking beyond the prices we also see some softness in other housing metrics. Existing home sales dropped in December from 6.54 to 5.45 million units. This may be a December issue but a drop of this magnitude is worth taking note. Tomorrow we get a look at new home sales for December which was down in November. Expectations are for some improvement from 355k to 366k. Other factors include delinquencies, which continue to rise.
Based on government data there is currently 7.2 months of supply on the market. Existing home sales is crucial for taking care of supply but given high foreclosure rates, the real supply of homes is likely much larger than 7.2 months. Many are expecting much more foreclosure driven supply hitting the market in the second half of 2010 which may limit any price appreciation.
Given these factors we would be wary of being long the home builders. And we would also question the recent strength in lumber prices. At a time when most commodities are under pressure, lumber continues to hold its recent highs. And if the U.S. housing industry continues to show soft or limited growth, it will be very hard for lumber to hold onto these levels. This would have a negative impact on the North American forestry stocks including Weyerhaeuser (NY:WY), Sino-Forest Cp (TSX:TRE), West Fraser (TSX:WFT) and Canfor (TSX:CFP).
