For the past two weeks, and four months after the FED initiated operation Twist: http://money.cnn.com/2011/09/21/news/economy/federal_reserve_operation_twist/index.htm, we have been hearing some say the US housing market has bottomed. Since we track several of the key economic indicators that track housing we thought it was time for an update. Our last report: https://caldaro.wordpress.com/2011/03/30/case-shiller-housing-update/, was a follow up to our initial report in depth report: https://caldaro.wordpress.com/2011/01/24/us-housing-into-the-2020s/. These two reports concentrated on housing prices and the Case-Shiller index. Since demand often precedes a rise in price, we have also been tracking Building permits and the NAHB builders sentiment index. These are also reported once per month, and are more timely than the two month lag in the Case-Shiller index.
In our initial report, and follow up, we concluded: “We anticipate that the housing market [prices] will remain under pressure from 2006 – 2015 or so. Typically these types of declines take about one decade to complete. On the downside we are not expecting much more of a decline [in price]. Possibly into the 130′s area over the next few years, with an outside chance of hitting the 1989 high around 125.” In March 2011 the Case-Shiller price index hit a low of $137.64. It has since risen to $142.89, and then declined to $140.30 in their lastest report.
When we examine the Case-Shiller chart we can clearly see an ABC down from the April 2006 high, with the C wave quite small. Currently, there are no signs of a bear market bottom in price. But demand has often preceded price so let’s review Building permits and the NAHB index.
The bull market peak in building permits occurred at 2263K units in September 2005. More than six months prior to the peak in housing prices. By time housing prices peaked, building permits were already in a bear market. Price exceeded demand. In March 2009 permits made a low of 513K units. It then had a B wave rally to 688K units by March 2010. After that it made a higher low of 534K units in February 2011, while housing prices continued to decline. Since that secondary low, permits hit a recent high of 681K units in November. While the recent activity in building permits has been encouraging, OEW has not confirmed a new bull market yet.
Our last indicator is the NAHB builders sentiment index. The data in this chart does not go back as far as Case-Shiller (1890), nor Building permits (1960). But it does offer an interesting comparison between builder sentiment and permits during the last bull market. Notice how builder sentiment tracked the entire 14 year bull market in building permits from 1991-2005. Also notice how sentiment weakened during the fifth wave. Builder’s were simply less confident at the top of the housing market in 2005, even though they were building more houses than the 1999 peak and prices were rising. Then after the collapse in new housing they reached their most bearish point right around the March 2009 low in building permits. Since then they turned bullish, (in OEW terms), in 2010, and are recently getting more bullish. They believe the bear market in housing is over!
Conclusion. Builders are long term bullish. This, however, has not been confirmed by a new OEW long term uptrend in building permits. But, the index has been rising and is getting close. Housing prices, as measured by Case-Shiller, are not likely to start rising again until about six months after a new bull market in building permits is confirmed. Therefore, when permits confirm a new bull market housing will be back in a bull market.