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Johnson: Housing Market Remains on Track

Although housing data remains choppy, it will continue to boost GDP growth and bring several knock-on effects in 2016, says Morningstar's director of economic analysis.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We got some data on housing this week that maybe is a little bit confusing. We're here with Bob Johnson, our director of economic analysis, to make sense of it all.

Bob, thanks for joining me.

Bob Johnson: It's great to be here today.

Glaser: We did get somewhat conflicting data on housing. On the positive side were existing home sales. Why did existing home sales look so strong in January?

Johnson: Existing home sales were only up 4% month to month, but everybody had expected them to be down. We had an absolutely great December, but it was a little bit artificial. November was a really low number for existing home sales, because all this new paperwork was required. So we had this big fall in sales, and then it all came back the following month once they cleared the paperwork jungle. The growth actually accelerated, not a lot. But at 5.44 million units, it was the second best of the entire recovery, so that was really good news for the housing market.

Glaser: Is that growth sustainable? Would you expect to see continued acceleration through 2016?

Johnson: To put that number in perspective, it was up 11% from a year ago, and that's really strong. I think we'll be lucky to get 3%-5% growth in existing homes for the full year because of affordability issues and inventory issues--there's a number of issues weighing on it. So I wouldn't expect more really great months like this. I'm thinking for the full year that the average will come out to be about 5.5 million units or so, up from 5.3 million units in 2015. I'm not expecting much growth for the full year, even as good as this particular number looked.

Glaser: So we're close to a recovery high, but where are we compared with the housing boom?

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Johnson: That's a good question. In the 2000s, we got as high as about 7.2 million units. But there was a lot more flipping going on--people not even occupying the home, but owning it for a couple of months in a hot market and then selling it again. I don't think we'll ever get back to those numbers. But today's 5.4 million level represents about halfway-back to that type of number. We got as low as 3.5 million units at one point, in our worst month, and I mentioned the high was 7.2 million, and we're almost exactly splitting that difference now at 5.4 million. So we're halfway back, which is considerably better than, say, where we are on housing starts, where we're not even quite 40% of the way back yet.

Glaser: When you think about the economic impact of existing home sales--which is just an asset transfer--do you think it's important to GDP, to economic growth, for this number to keep growing?

Johnson: There are two things that are absolutely key in existing home sales. I think all of us economists maybe at some point pooh-poohed some of the existing home data, but it is a big component of GDP because what does get included is the commissions on selling a home. That is 6%-8% of the price of a home. It's not quite as large as new home construction in the GDP calculation, but it's closer than one might believe. It's important. We obviously, because of the paperwork snafu, had a really bad November. That means it'll be a big help in the first quarter. We've got the January data already in at a pretty healthy number on a higher sales price. That's great news, and that will probably be an adder to the GDP calculation this time around.

Glaser: Let's look at new home sales now. That number for January was disappointing, falling below half a million. Why do you think new home sales are down?

Johnson: That number is highly volatile and subject to a lot of revisions, so I wouldn't be too upset about it. We had a very unusually strong number at 544,000 units in the last couple of months, and that was not a sustainable kind of number, in our opinion. So this was a fall-back to normal.

The full year new-home sales growth was something just barely over 500,000, or half a million units as you said. So at 494,000 for January, we were just a touch below that, but remember that follows a couple of months where we were way above that mark, so it's just backing and filling.

In general, I still expect new home sales growth will probably be better, in the 7%-9% growth range in the year ahead, versus what I mentioned was the somewhat slower 3%-5% growth in existing homes sales. That's because the home dealers are bringing their prices in and working on smaller, more affordable units now, and as people have a choice between a new home and fixing up an existing one, it's becoming a tighter battle than it used to be with those existing home prices accelerating as much as I said.

So I think this will be the stronger of the two markets. It certainly didn't seem to look that way, but... right now there are more homes under construction than any time in the last eight years. There just weren't a lot that were sold right now.

Glaser: Let's look at prices. We did get Case Shiller data, and it's on a little bit of a lag compared with some of this other data. But are there signs that home prices are becoming unaffordable again? Is this a big problem?

Johnson: The jury is still out on affordability. It's always lagged by the time they gather all the data. With mortgage rates staying so low and incomes starting to go up, it has offset some of the higher price increases, but I don't know how long that's going to last. Certainly home prices are getting a little bit problematic. The Case Shiller data in particular this month was up 0.8% on a month-to-month basis, and that's a three-month moving average. If you annualize that number, it looks like almost 9%-10% growth in prices, and that's clearly dangerous territory. I don't think we'll get there for the full year. I don't want to take one month out of context, but that's certainly a little bit problematic.

And growth has accelerated. It's the one thing that economists blew. They all thought home prices in 2015 were going to be at 4%, and we ended up with pretty darn close to 6% in all three of the major metrics--right around 6%. There wasn't any arguing, "Well, this [data set] included this, or this one included volatile cities, or this was only government mortgages." They all said the same thing: Prices were up a bunch. But it wasn't even: The coasts were particularly strong, and everything in the middle was not as good.

Glaser: Overall, there might be some confusing data out there, but housing is still on track?

Johnson: I think housing is very much on track, and I think that it will continue to help GDP growth in 2016. Remember, it's 3%-3.5% of GDP by itself. And I think that we'll do at least as well, and make as big of contribution, as we did in 2015. Probably not much more, but at least the same.

The other thing about housing is the knock-on effects. You buy a house, you need to buy more furniture. It helps moving companies. It helps mortgage brokers. It helps financial institutions. There's a number of pretty large knock-on effects that follow from a strong housing market. We saw that last year, with furniture being one of the strongest retail sales categories. I'm optimistic that the market will do well. Like I said, the data right now is mixed, but I think on balance it looks favorable, and I think that housing will be one of the big parts of the growth story in 2016.

Glaser: What could derail this? We've seen a lot of volatility in the stock market and particularly other markets in January and February. Is that something that worries you? Could that keep people from buying houses or keep prices down?

Johnson: The real estate market will be less affected by the stock market than many, many other things. If you look at the data, it's more closely aligned with what happens in the employment market. And as you know, we've seen some pretty good data there, and that suggests a better housing market.

I get a lot of calls, people asking me, "The stock market's down. Nobody's going to spend anymore." Yes, the stock market is down, but there's a much bigger percentage of assets that are in people's homes and a much larger percentage of people own their own homes than own stocks directly. I think there's a bigger impact from what's happened in the housing market that will offset a lot of what we're hearing about in the stock market today.

Glaser: Bob, as always, thanks for your analysis.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.