February 12, 2010: John Burns' Take On Housing

I would hazard a guess that few investors have heard of John Burns. Burns is "Best of Breed" from my vantage point analyzing and predicting real estate trends. He publishes a subscription service which comprehensively slices and dices all things related to the housing industry entitled The U.S. Housing Forecast. In addition, he provides a free monthly newsletter which is precise, readable and thought-provoking under the banner U.S. Building Market Intelligence.

The February newsletter, about seven pages in length, summarizes the current state of housing affordability and grades out key factors. In addition, additional facets under the categories of economic growth, leading indicators, consumer behavior,affordability index, existing home market, new home market, repairs and remodeling and housing supply are quantified.

Burns computes complex and seasonally adjusted data and then summarizes,assigning a grade. The grade is based on a bell curve with an "A" historically best, a "C" historically average and an "F" for historically worst. Those easily glazed over by numbers appreciate this.

Burns grades out current home affordability as a "C-". Why? Although he assigns a grade of an "A-" for the affordability index and an "A+" for mortgage rates, he sees problems.

"Only 50% of new home buyers traditionally are coming out of an apartment. The other half need a down payment. Here is what weighs down the grade:

Equity: Average equity in a home is $82,471, which is a "D".
Loan To Value (LTV): Loan-to-value,at 62.5% is an "F" because of the historical norm of 34.5% (this statistic includes the almost 1/3 of all homeowners who do not have a mortgage).
Income Growth: Incomes have declined 3.9% in the past year, which is the worst on record.

While affordability has rarely been better for an entry-level buyer, affordability has rarely been worse for the many potential move up/move down buyers who bought or refinanced their home in the past ten years."

Here are Burns' other grades:

Economic Growth: D+
subsets: real GDP C+, employment growth 1-year D, employment growth rate D, unemployment rate F, mass initial layoffs B+, productivity B-, retail sales C,capacity utilization F, inflation core B+, full CPI C,personal income F, federal deficit F, household growth rate D, owned households D, rented households C+.

Leading Indicators: C+
subsets: leading economic index B, ECRI leading index A-, manpower employment outlook D, temporary employed workers F, corporate profit growth D, corporate bond spread (vs. 10-year treasuries) D,capital goods new orders D,money supply M2 C-, 2-year treasury A-, 3-month treasury B, Dow Jones return C, S&P 500 return C+, NASDAQ return B-, Willshire 500 B-,S&P Super Home building C, large firm standards on business loans B, small firm standards on business loans C+, crude oil price D, ISM manufacturing index C+, ISM non-manufacturing index C-.

Consumer Behavior: D
subsets: consumer confidence D, consumer sentiment D+, consumer comfort F,revolving credit per household growth rate A+, personal savings C-, net worth growth rate D, financial obligation ration D+,misery index (unemployment plus inflation) D+.

Existing Home Market: D+
subsets:Case-Shiller price index D,NAR single family annual price appreciation C-, Freddie Mac price appreciation F, annual sales volume B, existing home inventory D+,months supply of unsold homes C, purchase mortgage application index C-, pending home sales index D+, home ownership rate B.

New Home Market: D+
subsets: housing market index F,multi-family condo market index D, annual appreciation rate D, constant quality price index D+, sales volume F,new home inventory for sale B+, months supply of unsold homes B-, months of homes completed B-,months of homes under construction C,months of homes not started C+.

Repairs and Remodeling: D-
subsets: home ownership improvement activity D-, remodeling market index D-,remodeling market future D+, private residential construction D, residential investment as % of GDP, F.

Housing Supply: F
new housing completed F, single family starts F, multifamily starts F, single family permits F, multifamily permits F, manufactured housing placements F,total housing stock F, homeowner vacancy rate F.

Some of the categories may be fuzzy, although a careful reading of Burns' work makes it sensible and thorough.

In short, we are not our of the woods in the housing industry, though the demise of the American dream of home ownership is greatly exaggerated.

John Burns is a first-rate analyst who deserves your attention.