Market Analysis

John Tuccillo
JTA, LLC

July 2010

Living on the Edge: The Economy and Housing at Midyear

This is a particularly critical period for the economy. The good news from the first quarter that we celebrated was revealed in the second quarter to be a case of special circumstances. The employment recovery is much weaker than it looked when the Census jobs were pulled out. Private sector employment is increasing but at a very slow rate. The housing rush was a creature of the tax credit, and it’s unclear how many houses will be sold this summer in the absence of a stronger jobs recovery.
In short, what recovery we had has stalled. The hope that the stimulus expenditure would jump start private companies appears to have been in vain. Corporate earnings are up, but these have not been translated into increased hiring. It’s as if corporate America is on strike against what it sees to be an unfavorable legislative and regulatory climate in Washington. To top everything off, consumer confidence, which had been growing took a steep tumble in May.
All the numbers we are seeing now suggest that the recovery is at an inflection point, a slowing down of growth. It happens in most recoveries and is usually followed by a resumption of strong growth. But in this recovery there is no obvious engine to get that growth started again. Government is tapped out. The huge deficit, the growth of fiscal conservatism in the Congress (on both sides) and the anti-government politics now permeating the country, all militate against any repeat of the stimulus package, the tax credit or any other program that help the recovery materialize. No, if we are to recover, the ball is in the court of the private sector and for the moment no one seems willing to hit it.
The housing sector appears to still be recovering. If we average out the April spike and the May plunge, sales seem to be on track for where they were predicted, a 10-15 percent increase over 2009, which was a bad year. Prices appear to be stabilizing in most of the country and are poised to rise again. This is all good news for home buyers and sellers and real estate professionals, but offers little help to the economy. Ideally, in a recovery, housing pushes the economy along. But we fell so deep and the overhang of distressed properties is so great that housing is not helping now.
How does all this play out in the NSBAR market area? The numbers all appear to be moving in the right direction, a reflection of the national trend, but still impressive. The market is in fact getting better. Sales are clearly higher for the second quarter. To a certain extent, the expanded tax credit helped and if you look at the numbers in April, you can see the sales spike. What’s missing is the May slump that affected the national numbers. In the area, May sales were still above sales in May of 2009, a good sign: while the credit helped, the market has its own momentum. For both Barrington and North Shore, absorbsion rates are up, days on the market down and the supply demand ratio is falling. In addition, for the most part, the ratio of sales price to list price is up from a year ago and new listings are down. This is a picture of a market where buyers have returned and sellers are pricing correctly. The caveat here is the impact of the tax credit on these numbers. However, when dealing with buyers and sellers, the rising absorbsion rate, falling inventories and recent trends in sales prices are all important pieces of information. The numbers in the monthly reports are tools that you should use to increase your business.
Finally, where are we going in the economy? In the best case scenario for this economy, corporate earnings translate into vigorous job growth and the recovery booms along. In the worst case, Congress cuts spending drastically, the Fed raises rates, corporations freeze hiring and we move back into recession. This is in fact what happened in 1937 when the economy was climbing out of the Depression and was then plunged into a recession that wiped out a substantial portion of the progress that had been made. As in all cases, the actual outcome lies between the poles. Where it falls will depend on policy and that’s why this is a particularly critical period.

John Tuccillo
JTA, LLC

April 2010

The spring is turning out to be a rebirth in more than one sense. The weather is better, the days are longer, vegetation is blooming, and the economy is coming back. The run of statistics we have seen recently indicates that the recession is indeed over and the economy is building momentum toward a good year—particularly in comparison to the last two. The persistent rise in the Dow signifies that investors are optimistic about the future; the March consumer spending reports show the beginnings of the return to the market by households; the employment numbers finally turned positive in March.
Real estate is coming back as well. While home sales have been in a short term slump starting the year, anecdotal reports suggest that consumers are finally beginning to use the extended and expanded buyer tax credit to fire up the market. NAR’s Pending Sales Index tends to confirm the anecdotes. This spring, potential buyers have the perfect mix of prices, interest rates and tax treatment—their bargaining position has never been better.
Of course, all of this may stall out. We really need two or three more months of statistics like the ones we’ve seen—particularly for employment—to really feel comfortable. The housing market may be solely a creature of the tax credit. But the history of recoveries tells us that once the corner is turned momentum begins to grow. It’s kind of like a big city marathon that draws tens of thousands of runners. The guys at the front take off at the starting gun, but the guys in the back may take twenty minutes just to cross the starting line. Eventually, though, the whole pack gets moving. We are just getting to the point where the bulk of the economy is approaching that starting line. Sometime in 2010, the whole pack will be moving.
In the NSBAR market area, that sluggish start is also evident. Using the first quarter (2010) statistics for new listings, days on the market and ratio of list price to sales price, the numbers look generally better than they did in the first quarter of 2009, but not universally so. For example, detached properties in the North Shore area sold more quickly and at a higher ratio of sales price to list price. In Barrington, the list to sales price ratio is up, but so are days on the market. Perhaps the best piece of good news here is that million dollar plus home sales have been increasing (year over year) since October. And through the NSBAR market area, sales are up for the first quarter over 2009 and new listings stable to down. This is the picture of a market in the early stages of recovery.
The two numbers in this mix that are likely to get the most attention are average and median home prices. Both are down this year over last. It’s unfortunate. I believe that for market assessment purposes—and I stress this because prices matter a lot to owners, buyers and sellers—prices have little use. To begin with, aggregated price numbers tell little about individual buildings, so we don’t know what they are saying. Secondly, market progress is all about unit sales, not prices. For example, a market where sales are up more than new listings (as is the case in NSBAR’s market) is improving. But is those sales are distressed properties whose prices have been discounted, the price measures may actually fall, indicating a declining market. When you deal with consumer perceptions about the market, you must emphasize the ways in which price can be a misleading number.
One last point. Even though you may be reading this after April 30 and the tax credit has expired, please be sure to remind consumers over and over that given the recovery of the economy and the housing market, the combination of low interest rates and reduced prices is unlikely to survive the fall. They have a six month window to take full advantage of the current favorable condition.

John Tuccillo
JTA, LLC

1/18/10

Stuck In The Mud - But That May Not Be A Bad Thing

There’s not a lot of good news out there, for either the economy or the real estate market. We’re fighting through a deep recession that will drive the unemployment rate over 8.5 percent and drop GDP by about 10 percent. We haven’t seen a slump of this magnitude in 27 years, since the recession of 1982. We’re also facing the need to reconstruct the financial system to correct the excesses that have crept into the markets over the last fifteen years. It will be a smaller, more tightly regulated financial system, but it needs to be done if we have any realistic expectation that the banks will take what the Fed has offered and pass it on to the borrowing public. And the housing sector still languishes. We continue to see price declines and stagnating sales. The irony here is that three years ago, the real estate market set in motion the events that have now brought us recession and financial catastrophe, yet now real estate is poised for a comeback and is being held back by that very same economy.

 

The statistics for the fourth quarter of 2009 for the North Shore and Barrington areas illustrate this very plainly. While the numbers don’t look very good—sales and prices are still below a year ago—market relationships are essentially unchanged from 2008. If you look at the three key indicators (new listings, days on the market, ratio of sales to listing price), you see the same pattern for the fourth quarter as you saw for the second and third quarters. New listings are dropping consistently, a good sign for market recovery. While days on the market are up and sales to listing prices are below where they were a year ago, the relationship between 2008 and 2009 has been roughly constant for the past nine months. That is not necessarily good news, but neither is it worse news. In other words, despite the troubles burdening the Chicagoland economy, the housing market has not deteriorated any further.

 

There is, of course, some good news. Interest rates, thanks to the Fed’s very aggressive monetary policy are extremely low—as low as they’ve been in nearly sixty years. Thirty year fixed rate mortgages, the only kind anyone should use, are (as of mid-January) below 5 percent. Combined with current prices, this produces real values for anyone who has deep pockets and/or has nothing to sell. In other words, it really is a good time to buy real estate. Additionally, we’re looking at a massive stimulus package coming out of Washington. We will see $1 trillion of spending on short term, intermediate term and long term projects intended to put money into taxpayers hands (a suspension of withholding payments), create jobs (grants to state and local governments to fund infrastructure projects, and invest in the future (alternative energy and education programs). Right now we don’t know if this will work, but the odds are good. We’ve never seen the economy not respond to massive government stimulus. If it does work, we may see the economy come back sooner rather than later, say around September. Then we will see the housing market fully blossom again.

 

Net Worth of Homes

Barrington 

Deerfield 

Evanston 

Glenview

Winnetka

 

Market Stats

Listing Totals for May and June 2010

All statistics are based on listing side only.

 

June 2010

May 2010