Sample Error Could Conceal Real Good News
Sustained record lows for the National Association of Home Builders/Wells-Fargo Housing Market Index hardly bring the tidings one hopes for in the middle of Spring Selling Season 2009.
Analysts’ chime-ins about the data today reflect an important point of confusion in the HMI data that may hide a glimmer of good news for housing and the economy as a whole, although not for all home builders.
For instance, here’s how Wachovia’s Carl Reichardt, equity research analyst for home building and building materials and supplies, read the “take-away” from today’s report.
Our field data survey suggested an improvement in selling conditions in January and February while several public builder calendar Q4 conference calls suggested orders improved sequentially in December and January. However, these HMI data indicate to us that the improvement may be merely seasonal and that conditions remain depressed. We were surprised to see the traffic component of the HMI index decline sequentially given finalization of the federal housing tax credit in February; previously we felt that uncertainty over the stimulus was keeping buyers on the sidelines.
Reichardt’s counterpart at JP Morgan, Michael Rehaut notes:
On a YOY basis, Traffic worsened, down 53% YOY vs. Feb.’s -42%. Overall, we believe this to be modestly disappointing as the market is still in the midst of the Spring selling season. Accordingly, we continue to believe these overall weak levels, combined with continued job losses, still tight credit conditions, depressed consumer confidence, and still highly elevated home inventory levels, should continue to result in depressed demand well into 2009.
Here’s a thought. From a broader economics standpoint, the numbers don’t tell the story. As a matter of fact, we know that “Builder Confidence” as represented in the HMI data is not “Builder Confidence” at all. It’s the confidence level of a sampling of the NAHB membership, which doesn’t reflect what’s going on among the extremely finite group of large home building organizations. We’ll come back to this point, but first, a relevant diversion.
Have a look now at “What Will Recovery Look Like?” from Caculated Risk. In it, he visually quotes from another analyst, Professor Hamilton, who offers a blackboard-type picture of key economic trends. Here’s the main picture.
Click on image for access to Caculated Risk analysis.
Now, here’s some commentary from Calculated Risk that speaks to what’s going on in this picture.
For recovery, we know what to watch: Residential Investment (RI) and PCE. The increasingly severe slump in CRE / non-residential investment in structures will be interesting, but that is a lagging indicator for the economy.
Unfortunately there are reasons that RI (excess supply) and PCE (too much debt) won’t rebound quickly, but they are still the areas to watch.
And here is an excerpt from a research note by Jan Hatzius, Chief Economist at Goldman Sachs, sent out this afternoon:
“Although we still think real GDP will fall by about 7% annualized in Q1 and the labor market numbers remain awful, the good news is that the weakness is shifting from more leading to more lagging sectors.”
So, technically speaking, the leading indicators have to get as bad as they’re going to get, and then the lagging indicators have to do their inevitable me-too act, and then the leading indicators can start to track back toward improvement.
Now, let’s get back to home building. Thanks to Jonathan Smoke, who joined Hanley Wood Market Intelligence as senior VP for products and innovation, we can look at the HMI data with more insight.
Here’s today’s Big Builder take with a twist:
”Since the traffic subcomponent failed to show sustained improvement over February and instead revealed a decline, I am starting to believe that the HMI survey is weighted too heavily towards reflecting the sentiment of smaller builders,” said Jonathan Smoke, senior vp/products and innovation for Hanley Wood Market Intelligence, who is currently preparing an analysis of the methodology of the HMI in light of the increased market share of production home builders in recent years. “Anecdotally, we are hearing about improved traffic at big builders from promotions and marketing of the Home Buyer Tax Credit.”
Interestingly, John Burns Real Estate Consulting may have touched on a similar observation in its analysis of its own home builder survey paired up with the NAHB HMI data.
John Burns noted, however, that “the NAHB’s Housing Market Index has not been showing the same improvement as we have, which is likely due to the fact that our survey participants are more inclined to still be building, while the typical NAHB member has shut down operations.”
So, what will recovery look like? It won’t show up first in the HMI Index. Why?
Consolidation. Jonathan Smoke observed that a big shift in the “pessimism” level of the HMI first occurred in about 2000, just as the largest home builders began a major market share move nationally. Now, the HMI may measure the same sample as it ever has, but the sample distorts reality, since 100 home building organizations account for more than 40% of home sales and closings.
Anecdotally, we’re hearing from a growing number of in-the-trenches representatives, that in January and February, sales and traffic have picked up. Now that the dust has settled for the moment on the first time home buyer tax credit of $8,000, home builders are making hay with that any way they can, adding in mortgage rate incentives and free upgrades, anything that can get that inventory turned and cash harvested.
They’re not out of the woods. Jobs and confidence will be the true tide turners, and it’s just a question of which will come first.
Still, you want some real good news here, and we’re saying all you have to do is look at the terrible HMI data and know it’s way off the mark to find the good news.
As a matter of fact, we’ll bet that this very housing recession will consolidate new residential construction to such a degree as to make the following analysis from Calculated Risk suspect.
Here is a comparison of the National Association of Home Builders (NAHB) Housing Market Index and new home sales from the Census Bureau. Since new home sales are released with a lag, the NAHB index provides a possible leading indicator for sales.
Click on image for access to Calculated Risk post.
We believe that as sales and closings consolidate further among larger players, we’ll see an initial de-coupling of NAHB home builder sentiment from sales trends. Sample error will be the cause.
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