Puget Sound Housing Update - The Conundrum Continues

Sales remain elevated...


So far in 2013, King County Home Sales are well ahead of last year and are outpacing every year since 2008. Last month 2,096 homes were closed.

In the meantime...


Inventory is at all-time lows.   3,221 homes are currently on the market.  Inventory has remained steady since November of last year.  The increase in sales must be coming from new listings.  This is encouraging since it implies that the traditional move up buyer is coming back to the market.  They appear to be putting their home on the market and buying another thereby being inventory neutral.  Closed sales to inventory is at an extremely tight 1.5 ratio.

With demand for homes being greater this year and supply unusually low, what are prices doing...





Surprisingly they have been basically flat since July 2012.  Typically in the case of increased demand and tight inventory, price would do its job and move up to balance supply & demand.   Of course, Case Shiller is a repeat sale index.  Perhaps another view of prices is in order.

The median price of closed sales is currently higher than prices going back to 2009.


With Case Shiller being flat and median prices increasing, it would insinuate that higher priced homes sales are greater than they were last year.  This might add some credence to the theory regarding the move up buyer.

Since I refuse to believe that the laws of economics have been repealed, what would need to happen to resolve this conundrum?  Supply would need to increase without a commensurate increase is sales.  That would suggest that one-sided sales such as foreclosures would need to increase.





Bank owned sales spiked late last year, but nowhere near the peaks of 2011.  I would expect further decreases in Bank owned sales.  Many Banks have discovered the benefits of short sales in lieu of foreclosure.  That trend should continue.  So it doesn't seem that foreclosures will start a flood of inventory to the market.  The other source of new inventory will come from new home builders.  Anecdotal information suggests that the builders have been as surprised as anyone with the increase in sales and have been caught short of land.  There is no landslide of new lots coming on due to builders.

What about demand...

One boost to demand has been low interest rates.  While off their lows, the ten year note rate has been in a channel since the mid-2012 lows.  A key pivot point is coming up in the next few weeks.  A break of the upper trendline would signal higher rates.  A reversal would argue for the opposite to happen.  Anything in between is just noise.  A decisive break up and out of the channel would certainly be detrimental to the market in terms of lower demand.




Another threat to demand is the number of unemployed people.  King & Snohomish Counties have seen their unemployment rate plummet since the peak in 2010.  While there are certainly many that are underemployed, or, would go back to work if they were handed a job, the trend is clearly towards lower unemployment levels.  Seattle is actually within a stones throw of the tight labor markets of 2007 & 2000.  The simple fact that the rate is dropping makes current employees more secure in their jobs, unlike 2009 which looked like there was never going to be any job creation.  Unemployment doesn't appear to be a threat to housing demand.

Barring a sharp increase in rates, the only thing left for the market to do to reach equilibrium is for prices to increase.  If this is indeed the situation then the lagging Case Shiller index should start showing increases soon.  On Tuesday the March (3 month average of January, February & March) index will be released.  I would suspect we'll start seeing the index moving up.

Most charts from Seattle Bubble.

NW Stocks Roundup

The Stocks of the larger companies headquartered in the Puget Sound region continue to perform quite nicely.  It would appear that investors have confidence in the areas companies to do well moving forward.  Unfortunately, the link between higher stock prices and a companies future economic performance has become shaky at best of late due to the flood of liquidity the Fed has been pouring into the marketplace.  However, if higher stock prices do turn into enhanced future performance, all systems are go for the Puget Sound area.

Boeing reported earnings yesterday and got rave reviews from Wall Street.  BA was rewarded with a 3% increase in the stock prices.  It's too extended to jump in now, but the indicators suggest further upward movement in the stock.  Boeing has enjoyed a 28% increase YTD in spite of the battery issues with the new Dreamliner.  It appears that issue is being resolved clearing the way for future delieveries.  I wouldn't anticipate many more layoffs than have already been announce.

Microsoft has caught fire this month.  Improved earnings and word of increased Hedge Fund interest in the stock has vaulted the stock over 10% this month.  MSFT is nearing a new 52 week high.  I would anticipate that the stock needs to take a breather near term as it is getting quite over bought.  A pullback near $30.25 would represent a nice entry price.  MSFT's releases last year are starting to show up in their earnings.  The recent release of Windows 8 for the mobile market has been slow out of the gate but represents further growth opportunities.  An update to XBOX is due later this Spring.  The stock price action suggest Microsoft will continue its hiring spree.

Amazon has spent most of the year consolidating.  One more pullback to a confluence of the 50 day ema and prior support near $264 would be a wonderful opportunity.  A stop at $258 would limit any damages.  On the other hand, the stock looks more like to break north over $272.  That should lead to a run at the previous high at $285.  Bezos will most likely continue to leverage his stock price and follow thru with his buildout in South Lake Union.  There appears to be no reason to slow Amazon from gobbling up new hires.

Costco broke to a new high yesterday.  The indicators suggest that it has room to move.  The minimum target is still $110.  $104 turned out to be a great entry point when the 50 day ema, trendline support, prior high support and oversold indicators all came together.

Starbuck also hit a new high yesterday.  The target remains at $63.  A stop below $58.60 is appropriate.  The indicators suggest the target is achievable.

Nordstroms is still below the 52 week high having been in a consolidation phase since last September.  The stock has a good opportunity to move higher after bouncing off the 50 day ema last week.  A better buy in point would be near $54 where trendline and 200 day ema support comes in to play.  A break to a new high would target the low $60's.
If stock prices still reflect investors expectations for future growth, the Puget Sound area should be in a reasonably strong economic growth pattern during 2013.

Macro Update

The global economy continues to look like it's slowing down.  

 Doctor Copper is down 30% since 2011.  It recently broke thru support at 43.  The last line of defense is at 40.  A support break points to much lower Copper prices.  As one of the critical industrial metals, a break would signify that a significant slowdown in process.  The indicators are quite oversold which may lend some support to Copper.  After this weeks plunge in Gold from a very similar looking triangle, it's probably best to wait to see how the market handles 40 before placing a trade.  Long term triangles like the one Copper is sporting tend to resolve themselves in a continuation of the prior trend (up in Copper's case) but when they don't...look out below.

 Lumber is taking a much needed pause.  After a 120 pt (40%) romp since October, Lumber looks tired.  Good support comes in at the 34 week ma, but the indicators suggest Lumber will hit major support at 320.  Mill shutdowns in the wake of the housing bust has caught producers undersupplied, while the Home Builders have been squawking for more and more product as new home starts have rebounded from extremely depressed levels.  Consequently, new Home Builders have seen framing lumber prices take off.  Likewise, the price of just about every home building material has increased.  The next shoe to drop will be when construction labor stops clamoring for higher wages.

The above chart of the Home Builders helps explain Lumber's price increase.  The Home Builders have zoomed from 280 to 400 in the last 18 months, a whopping 150% increase.  The Homies are on the verge of breaking a significant trendline.  Additionally, the index closed below the 13 week ma.  I believe the correction won't be too ferocious but will represent a pause in light of such an increase.  I would expect the Home Builders to rattle around while the indicators reset.  As long as scant standing inventory remains in the marketplace, Home Builders ought to be able to make money, even with historically low starts.

 

 Oil showed more cracks this week, breaking a 4 yr trendline.  Additional support shows up at 27.  Price has been fairly stable since the bottom in 2009, wavering between 30 and 40 with a flat MACD.  Probably not worth it, but a reasonable scalp would be going short at $32.25 with a stop at $34.25.  The target would be 28.

 

Fortunately, Unleaded Gas has been trading in a well defined range since 2011 bouncing between $3.40 and $2.50.  This move looks like more of the same with a bounce at $2.50.   This move down represents a reasonable shot at a triple top which would portend a move down to $1.70.  This doesn't seem likely, but I would certainly be in favor of significantly lower gas prices.  The more likely trade would be to go long at $2.50 with a tight stop at $2.40.

  

Just when it looked like rates couldn't go any lower, they appear poised for another plunge.  The TLT above shows the bond price, which has an inverse relationship to rates.  This powerful looking flag has the potential to push the bonds up to 155 over time.  While lower rates are a boon to borrowers, lower rates will probably be the result of a slowing global economy.  Mortgage brokers may soon see yet another refinancing boom.  Holding bonds here looks good with a stop at the confluence of the moving averages 119.  Confirmation of the uptrend will be when the indicators break the downtrend lines, and, when a new high is established at 130.

The big question for me is will a slowing global economy derail the rebound in housing.  Lower Copper & Oil prices have been attributed by many pundits to a slow down in the emerging markets like China & India.  This wouldn't appear to affect the local housing market.  Higher Lumber & Home Builder prices reflect increased demand for homes vs a shortage of available homes for sale.  Slower global growth that results in lower interest rates helps increase the demand for local homes.   Taken together, lower interest rates should trump other deflationary trends resulting in a decent housing market.

Market Update

The market closed the 3rd quarter with a thud, that followed thru to start the 4th quarter.

Since I posted the above chart on August 1st when I suggested "cash continues to be King" the markets have been taken out behind the woodshed.

The August trendline break has triggered a significant sell off.  After 8 weeks of range bound trading the S&P is breaking out of its triangle.  Unfortunately, it looks like a measured move is setup.  The target for the measured move is about 950 which would coincide with a 61.8% retracement of the rally that began in 2009.  There is some pretty decent support between 1020 and 1050.

On the monthly chart, a sell signal has been generated with the MACD going negative in September.  This supports the target of 950.

New Home Activity

After looking at Used Home Activity, it's time to see how the New Home market is faring.

 New home sales continue to be depressed due to the intense competition from the used market.  The new home market has seen a decent summer averaging over 20,000 and comparing favorable to last years market.  Unfortunately, at this pace, new home sales for 2011 will be the lowest on record.

 Looking at sales from a longer term perspective, the last couple of years have been record lows.  It's looking like another year of about 300,000 sales.  Certainly a far cry from the bubbles top at 1,400,000 sales.

Fortunately, builders have refrained from starting many homes resulting in a months supply of around 6.

The bright spot in the new home market is the lack of inventory.  Eyeballing the above chart, it looks like there are about 60,000 finished homes on the market and about another 60,000 under construction.  If sales can maintain a 20,000/month clip it won't take too much to whittle away at that inventory.  That would set the stage for builders to focus on presales which are a much more profitable product for them, rather than specs.

Used Homes update

The monthly housing statistics have been recently released.

 Inventory levels continue to drop as they have for most of the year.  The months supply of homes on the market also continues to drop from the spike high seen mid 2010, however, it still remains well above the 6 months mark considered a more "normal" market.

 Sales have seen a small uptick recently and remain near the longer term average of 5mm sales/yr.

August saw pretty decent demand with 500,000 sales as the selling season winds down.  That was the best showing in 3 years.

According to the Case Shiller index prices have been basically flat since 2009.  All those who have been calling for a further 20% decrease in prices have sorely disappointed.  Certainly the continuing drop in mortgage rates have buffeted the fall in prices.

All in all, the market appears to be better than most would have you believe.  The supply of homes on the market has continued to decrease, demand for homes (sales) have held up reasonably well, prices have been stable (at least not freefalling) and mortgage rates have been dropping.  Should the unemployment rate continue to stay at the 9+% it has been at for the last two years I believe we are about 5% in price away from a buyable bottom.

Charts from Calculated Risk.

S&P 500

After the markets imploded in late July, early August the S&P 500 has been locked in a wide range between 1120 and 1220.  With the S&P currently trading around 1170, it's pretty much in the middle with no edge here.  Buying near 1120 and selling near 1220 is the strategy until there's a breakout one way or the other.

Equity Indices

The certainly wasn't impressed by the Feds lack of action yesterday.

As seen above in the Mid-Cap index, the market is poised to break out of it's bear flag.  The 50 day ema provided significant resistance to the upside and now all that's holding the market together is the bottom side of the flag.  The indicators are rolling over and heading south suggesting the flag will break down and out.  There is possible support at the year's low, 77.  The flag itself measures down to 73.  Unfortunately, if this turns out to be a measured move, the possible low is much further below.

The longer term outlook as seen in the Naz shows the market getting rejected at the neckline.  A follow thru to the downside measures to about 2100.  That's about 15% lower from here.

Seattle SFR

Time for a look at how the Single Family Residential market is faring in Seattle.  On the demand side:

Closings have been pretty stable since March averaging over 1500/month.  That's a stark contrast to the slow down in closings last year after the expiration of the tax credit.  At this point stable is good since that would put closings at the highest level since the 2007 meltdown.
On the Supply side:

Inventory also remains stable averaging near 8,000 units, the lowest amount in years.  That puts the month's supply a little over 5, which is pretty good.  With the selling season almost over seasonality should kick in resulting in lower inventory.  The typical pattern is for homeowners who failed to sell earlier to take their homes off the market.  The remaining inventory would be from motivated sellers.  Just eyeballin' it, inventory usually drops 30% into yearend.  That would take inventory available for sale down to 5,600 units at yearend.  It seems to me that the inventory would consist primarily of bank influenced properties (REO's/short sales) with owners (banks) attempting to shore up their 12/31 financial statements.
The balancing mechanism between supply and demand is price:

So far, the bounce in prices appears to be due to seasonality.  Since 2008, the selling season bounces have been; 2008 - lasted 1 month and increased 3%, 2009 - lasted 9 months with no price appreciation, 2010 - lasted 4 months and increased 3%, 2011 (ytd) has been 4 months with 3% appreciation.  So the increase this year, at this point, looks seasonally driven.  After the selling season appreciation in 2008 prices fell for 10 months resulting in a 17% decrease.  In 2009, prices fell for 5 months for a 5% decrease.  In 2010 prices fell for 8 months for a 9% decrease.  It seems the key to the market will be how prices behave during the slow months.

Taking a closer look at recent prices it is evident that the lower priced homes are taking the brunt of the decrease.  Anecdotal information suggests that well priced nice homes are being snatched up quickly, often resulting in multiple bid situations.  Over priced POSs are being passed up resulting in lower listing prices driving prices down.  As disappointed would be sellers take their homes off the market during the slow season I would expect the remaining motivated sellers to aggressively price their homes to move.  The result will be that prices will drop, with some amazing values appearing in the lower end of the market.  Investors and Flippers would be well advised to scour the market for these upcoming gems.

Charts from Seattle Bubble.

Long Term Investing in Equities

It doesn't really matter what your investment adviser has been telling you.  Continuing to make monthly contributions to you retirement account doesn't necessarily result in higher returns.  However, it does make your adviser more money since they are basically paid based upon how much "Assets Under Management" they have.  They get paid by the mutual funds they have clients money invested in.  When is the last time you got a call from your adviser suggesting you should be in cash?  Why would they...it takes money out of their pocket.  Take a look at this long term chart spanning from 1996 to today:

The Green dotted line approximates today's close.  That line extends back to 1999.  If you invested your funds in a market index fund back in 1999 and added to the account each month (dollar cost averaging)  you would be break even.  12 years of investing, and, nothing to show for it.  On the other hand, if you sold your index funds near the prices identified by the MACD (shown below price, ie red circles), and, bought near the green circles, you would have made significant progress towards increasing your wealth.  The message is that blindly throwing money into the market isn't the best way to increase your wealth.

Currently, the monthly MACD hasn't gone negative and the 200 month ema hasn't been broken.  Should both of those turn negative 700 is the next target.  Let's hope that doesn't happen.