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U.S. Building Market Intelligence, November 2010

Watch Out for Washington!!!
Watch Out for Washington!!!

   Lisa Marquis Jackson
Senior Vice President

November 19, 2010

Elected and appointed government officials have a tremendous track record of making a huge difference in housing, both positive and negative, as evidenced by the timeline below.

The series of policies that started with the 1992 GSE Act and culminated with the greatest housing market collapse in more than 75 years underscores the impact government can have.

We see 2011 as a very uncertain year for housing, primarily because the powers that be in Washington DC continue to influence the dynamics of the industry. Take note of the following:

  • Passage in the Financial Reform bill is creating tremendous uncertainty in the mortgage industry, primarily because nobody has defined the parameters of a “qualifying mortgage”.

  • Discussions on shrinking Fannie Mae and Freddie Mac are underway; they’re currently the mortgage industry lifeblood. (A white paper outlining findings from Treasury is due in January),

  • Today’s market positives of low mortgage rates and low down payments are all a result of Federal government intervention, and

  • The looming negatives of 2.5 million distressed sales in 2011 are also a result of government influence.

Here is what is on our radar screen going into next year:

  • Low Rates: We asked several of our bond fund managers what the market interest rate would be for a pool of mortgages without government backing right now. The results are not pretty!

  • Tedious and Costly Mortgage Environment: Tightening mortgage underwriting, including higher FICO scores, higher down payment requirements, and increasing mortgage insurance costs are all in the cards.

  • Distressed Sales will Pressure Pricing: 2 million+ distressed sales per year continuing to be sold in 2011 and 2012 unless the new FHFA Director backs our proposal to rent out the REO.

  • GSE Reform: The tax credit and robo-signing delays have stabilized home prices, yet the market is poised for another downturn as the REO gets sold. Because of the current slow-down, many of the elected officials believe that the housing market is stable and the GSEs can be significantly curtailed. That said, Washington does not move quickly. There will be hearings and headlines, but in reality, this could end up being a project for the next President.

  • Mortgage Interest Deduction: We have been saying that Congress won’t mess with the interest rate deduction, except maybe to drop the cap below $1,000,000. We are becoming more concerned that the cap might be lowered significantly. A drastic decline in the cap, or a phased in decline, would impact the move-up builders and a minority of expensive states dramatically.

  • A New Attitude: A policy shift from promoting homeownership to promoting rental housing seems to be playing out.

In conclusion, we need to “stay focused” and “stay tuned.” While big curveballs could be thrown at the housing business, the most likely scenario is that government intervention will make homes slightly harder to sell over the next few years.

There is plenty of short-term risk ahead. Focus on good locations where people want to live, and plan for having to sell homes to higher credit quality buyers. Stay more informed than ever because surprise announcements could impact consumer confidence and sales positively or negatively. In turn, that could dramatically affect home buying sales, volume and pricing.

Economic Growth............................................................................C-
Economic growth trends improved slightly this month, as several key metrics have ticked up recently. The real GDP growth rate improved from the second quarter, and retail sales continued to improve this month. The employment market continued to improve gradually as year-over-year employment growth increased again this month, while initial jobless claims decreased. In addition, personal income growth increased this month and inflation remains low.

Leading Indicators...........................................................................C-
The leading indicators for the economy are generally more positive than negative this month. The Leading Economic Index was down slightly but remains comfortably in positive territory. Also, the ECRI Leading Index became less negative once again. Stocks were up huge and corporate profits are still quite positive. The money supply increased slightly this month, which usually leads to more spending. Interest rates declined in October, indicating that lenders are less worried about defaults. The attitudes of those who would make hiring decisions captured in the Vistage CEO Confidence Index reflect improved confidence in continued economic growth. Temporary employment has increased by 23% year-over-year, yet the number of postings on decreased. Stocks have had a solid month in October, effectively erasing losses incurred over the first eight months of the year. All four major indices we track – the Dow, S&P 500, NASDAQ, and Wilshire 5000 – were up in October and have increased even more year-over-year. However, the S&P Homebuilding Index declined in October. This index has been hammered recently and has declined 28% from the most recent peak in April as weaker than expected home builder orders and CEO commentary worried investors.

Affordability has rarely been better for entry-level buyers, and rarely worse for moveup buyers, who need to extract equity from their existing home. Mortgage rates remain historically low and home prices have dropped from unrealistic boom levels to entirely sustainable levels, with some markets even heading into “overcorrection” territory. Our housing-cost-to-income ratio continues to decline, now at 24.3%, and our JBREC Affordability index stands at a remarkable 0.0 (on a scale of 0 to 10, 0 being most affordable). The median home price to income has declined to 3.2, which is near the long-term historical norm and a level conducive to market health. Affordability continues to be bolstered by historically low mortgage rates. The 30-year fixed mortgage rate dropped to 4.23% and adjustable mortgage rates fell to 3.30%. The Fed’s overnight lending target rate remained at a range of 0.00% to 0.25%, which is the lowest level on record. The share of ARM applications decreased to 5.3% this month and is still far below the peak level of 35% of total applications in early 2005.

Consumer Behavior..........................................................................D+
Consumer behavior worsened slightly this month, with most metrics declining. The Consumer Sentiment Index and the Consumer Comfort Index both declined this month, while the Consumer Confidence improved modestly. The Misery Index increased, and net worth was down slightly, both in terms of growth rate (5.9%) and net worth per household ($477,380). However, consumers are saving more with a minor improvement in the personal savings rate to 5.8%, and consumer debt was down a bit with consumer credit per household decreasing to $7,327.

Existing Home Market.......................................................................D
The existing home market improved somewhat this month after worsening markedly due to the federal tax credit “hangover” that started in May. Seasonally adjusted annual resale activity increased to 4.53 million homes this month. On a rolling 12-month basis, sales have decreased 2% compared to the previous month, but have increased 6% year-over-year. The number of unsold homes dipped to 10.7 months of supply from 12.0 months, but remains well above the historical average of 7.3 months. The most encouraging metric may be pending sales. This measure had been trending downward, but has now risen for the past two months. Though still near a record low, the change in trend is positive. The number of inventory homes inched downward. The S&P/Case-Shiller U.S. National Home Price Index improved once again, and has returned to positive territory this quarter for just the second time since late 2006, increasing 3.6% year-over-year.

New Home Market..............................................................................D+
The new home market improved slightly this month. Builder confidence improved this month as the Housing Market Index increased to 16 from 15 one month ago. New home sales increased to 307,000 units on annualized basis. Coming off months of post-federal tax credit declines, this increase is a modest positive sign. It should be noted, however, that the sample size used by the Census Bureau to calculate new home sales is extremely small and the confidence interval consequently large. The median single-family new home price also increased to $223,800 and is up 2% year-over-year. The months of unsold homes metric decreased to 8.0 months, albeit it is still at a level well above the historical average.

Repairs and Remodeling....................................................................D+
Conditions for residential repairs and remodeling were slightly down this month. The Remodeling Market Index increased compared to the previous quarter, rising to 43.4, below the historical average of 46.6. Private residential construction softened this month and has now returned to a negative growth rate at -6.3%. Residential investment as a % of GDP inched down to 2.2% this quarter. However, homeowner improvement activity has actually returned to positive territory for the first time since 2Q2007, climbing 1.8% year-over-year, and is much better than the severe declines experienced a couple of years ago.

Housing Supply...................................................................................F
Housing supply indicators worsened this month. New housing units were down, as were single-family starts to 436,000 units. Single-family permits increased this month to 406,000 units. All of these activity levels remain very low by historical standards. Vacancy rates in the U.S. have improved in recent quarters, but the majority of the U.S. remains oversupplied compared to history, with only six states undersupplied, all with small populations except Texas. The homeowner vacancy rate decreased this quarter to 2.5%, which is down from 2.6% last quarter.

Data Current Through November 17, 2010
  Grade* Period Statistic Direction**
Economic Growth C-      
Real GDP (annual rate) C 2010Q3 2.0% Rising
Employment Growth (1-year Change)        
     - Non-ag Payroll, NSA C- Oct, 2010 626,000 Improving
Employment Growth Rate        
     - Non-ag Payroll, NSA C- Oct, 2010 0.5% Improving
Unemployment Rate F Oct, 2010 9.6% Flat
     Average Length of Unemployment (Weeks)   Oct, 2010 33.9 Increasing
     Median Length of Unemployment (Weeks)   Oct, 2010 21.2 Increasing
     % of Labor Force Unemployed
             (27 weeks and over)
  Oct, 2010 4.0% Increasing
Total Payroll Monthly Emp. Growth (SA)   Oct, 2010 151,000 Increasing
Private Sector Payroll Monthly Emp. Growth (SA) Oct, 2010 159,000 Increasing
Gov. Sector Payroll Monthly Emp. Growth (SA)   Oct, 2010 -8,000 Increasing
U.S. Initial Jobless Claims D+ Oct, 2010 459,000 Increasing
Mass Layoff Events, SA (YOY % Change) A- Sep, 2010 -34% Declining
Productivity C 2010Q3 1.9% Rising
Retail Sales B Oct, 2010 7.3% Declining
Capacity Utilization D Oct, 2010 74% Decreasing
     Core CPI A+ Aug, 2010 0.6% Declining
     Full CPI C Oct, 2010 1.2% Rising
Personal Income Growth, nominal D Sep, 2010 3.1% Declining
Federal Deficit (last 12 mos., $mil curr.) F Oct, 2010 -$1,263,699 Decreasing
Federal Deficit per Household   Oct, 2010 -$11,253 Decreasing
U.S. Immigration as a % of Total Population C+ 2008 0.4% Increasing
Total Population Growth D- 2008 1.0% Increasing
Total Households   2010Q1 112,215,000 Increasing
     - Growth Rate D 2010Q1 0.7% Decreasing
Owned Households   2010Q1 75,097,000 Increasing
     - Growth Rate D 2010Q1 -0.1% Decreasing
Rented Households   2010Q1 37,118,000 Increasing
     - Growth Rate B- 2010Q1 2.3% Increasing
Leading Indicators C- Period Statistic Direction**
Leading Econ. Index
     (Ann. Growth Rate Last 6 Mos.)
C Sep, 2010 1.7% Declining
ECRI Leading Index D+ Oct, 2010 -6.8% Rising
Manpower Net Employment Outlook D 2010Q4 5% Declining Employment Index D Oct, 2010 136 Decreasing
U.S. Vistage CEO Confidence Index C 2010Q3 95% Increasing
CEO Economic Outlook Survey B- 2010Q3 86% Decreasing
Small Business  Optimism Index D+ Oct, 2010 91.7 Increasing
U.S. Average Hours Worked per Week F Oct, 2010 33.6 Increasing
Temporary Employed Workers A+ Oct, 2010 23.1% Declining
Corporate Profit Growth (pre-tax) B 2010Q2 37.0% Declining
Corporate Bond Spread
     (Corp Bond vs. 10-Yr Tres.)
D- Oct, 2010 2.07 Increasing
Capital Goods New Orders B Sep, 2010 13.9% Decreasing
Money Supply - M2 C Oct, 2010 2.2% Increasing
Interest Rate Spread        
10-year Treasury   Oct, 2010 2.54% Declining
2-year Treasury   Oct, 2010 0.36% Declining
     Interest Rate Spread B Oct, 2010 2.18% Widening
3-month LIBOR   Oct, 2010 0.29% Declining
3-month Treasury   Oct, 2010 0.14% Declining
     TED Spread B Oct, 2010 0.15% Narrowing
Stock Market (Return over last 12 months)        
     Dow Jones  C Oct, 2010 14% Rising
     S&P 500 C Oct, 2010 14% Rising
     NASDAQ C Oct, 2010 23% Rising
     Wilshire 5000 C+ Oct, 2010 17% Rising
     S&P Super Homebuilding C- Oct, 2010 -5% Declining
Tougher Standards on Business Loans
     - Large Firms
B 2010Q3 -9% Decreasing
Tougher Standards on Business Loans
     - Small Firms
B 2010Q3 -10% Decreasing
Crude Oil Price (Current $) D Oct, 2010 $82.18 Increasing
ISM Manufacturing Index C+ Oct, 2010 56.9 Increasing
ISM Non-Manufacturing Business Activity Index C+ Oct, 2010 58.4 Increasing
Affordability D+ Period Statistic Direction**
JBREC Affordability Index A+ Sep, 2010 0.0 Decreasing
US Median Home Payment / Income Ratio   Sep, 2010 24.3% Decreasing
US Median Home Price / Income Ratio C Sep, 2010 3.2 Increasing
After-Tax Housing Costs vs Asking Rents Gap   2010Q2 $83 Increasing
Mortgage Rates, Fixed A+ Oct, 2010 4.23% Declining
Mortgage Rates, Adjustable A+ Oct, 2010 3.30% Declining
Fixed/Adjustable Spread D Oct, 2010 0.93% Widening
Fixed/10-year Spread C Oct, 2010 1.69% Flat
Fed Funds Rate   Oct, 2010 0.15% Declining
Percentage of Adjust. Loans A- Oct, 2010 5.3% Declining
Equity/Owned Home (Current $) D 2010Q2 $92,786 Increasing
Debt % in Home (LTV) - Homes with Mortgages F 2010Q2 81.5% Decreasing
Median Household Income   2010Q1 $53,748 Increasing
     - Growth Rate, nominal F 2010Q2 -2.5% Increasing
Consumer Behavior D+ Period Statistic Direction**
Consumer Confidence Index D- Oct, 2010 50.2 Rising
Consumer Sentiment Index D Oct, 2010 67.7 Decreasing
Consumer Comfort Index F Oct, 2010 -46.25 Decreasing
Revolving Cons. Credit per Household F Sep, 2010 $7,253 Decreasing
     - Growth Rate A Sep, 2010 -11.2% Decreasing
Personal Savings Rate C Aug, 2010 5.8% Improving
U.S. Net Worth Growth Rate C 2010Q2 5.9% Decreasing
U.S. Net Worth per Household   2010Q2 $477,380 Decreasing
Financial Obligation Ratio C 2010Q2 17.0% Decreasing
Misery Index (Unemployment + Inflation) C Oct, 2010 10.77 Rising
Existing Home Market D Period Statistic Direction**
S&P/Case-Shiller® U.S. Price Index
     (YOY % Change)
C 2010Q2 3.6% Rising
NAR Single-Family Median Home Price   Sep, 2010 $172,600 Declining
NAR Single-Family Annual Price Appreciation D+ Sep, 2010 -1.9% Decelerating
Freddie Mac Annual Price Appreciation F 2010Q2 -4.6% Accelerating
Annual Sales Volume, SA C+ Sep, 2010 4,530,000 Increasing
Existing Home Inventory for Sale, SA F Sep, 2010 4,040,000 Decreasing
Months Supply of Unsold Homes, SA D Sep, 2010 10.7 Decreasing
Purchase Mort. App. Index, SA D+ Oct, 2010 199.8 Declining
Pending Home Sales Index, SA F Sep, 2010 80.9 Declining
Homeownership Rate B- 2010Q3 66.9% Declining
New Home Market D+ Period Statistic Direction**
Housing Market Index F Nov, 2010 16 Increasing
Multifamily Condo Market Index F 2010Q2 14.5 Decreasing
Median Price, NSA   Sep, 2010 $223,800 Increasing
Annual Appreciation Rate C Sep, 2010 3.3% Decelerating
Constant Quality Price Index (YOY % Change) D 2010Q3 -1.3% Decelerating
Sales Volume, SA F Sep, 2010 307,000 Increasing
New Home Inventory for Sale, NSA A Sep, 2010 205,000 Decreasing
Months Supply of Unsold Homes, SA B- Sep, 2010 8.0 Decreasing
   Months of Homes Completed, SA B- Sep, 2010 3.2 Decreasing
   Months of Homes Under Const., SA C Sep, 2010 3.6 Decreasing
   Months of Homes Not Started, SA C+ Sep, 2010 1.2 Decreasing
Repairs and Remodeling D+ Period Statistic Direction**
Homeowner Improvement Activity
     (YOY % Change)
C 2010-Q2 1.8% Increasing
Remodeling Market Index - Current C 2010-Q3 43.4 Increasing
Remodeling Market Index - Future Expectations D+ 2010-Q3 38.1 Decreasing
Private Residential Construction
     (YOY % Change)
C- Sep, 2010 -6.3% Decreasing
Residential Investment as % of GDP
F 2010Q3 2.2% Declining
Housing Supply F Period Statistic Direction**
New Housing Units Completed, SA F Oct, 2010 613,000 Decreasing
Single-Family Starts, SA F Oct, 2010 436,000 Decreasing
Multifamily Starts, SA F Oct, 2010 83,000 Decreasing
     Total Starts, SA F Oct, 2010 519,000 Decreasing
Single-Family Permits, SA F Oct, 2010 406,000 Increasing
Multifamily Permits, SA F Oct, 2010 144,000 Decreasing
     Total Permits, SA F Oct, 2010 550,000 Increasing
Manuf. Housing Placements, SA F Aug, 2010 50,000 Decreasing
     Total Supply, SA F   600,000 Increasing
Total Housing Stock    2010Q1 131,158,000 Increasing
     - Growth Rate D- 2010Q1 0.9% Decreasing
Homeowner Vacancy Rate F 2010Q2 2.5% Decreasing
Excess Vacancy F 2010Q2 1,721,097 Decreasing
Overall Grade D+ (Based on a straight average of the 7 Major Factors Above)
SA stands for Seasonally Adjusted Annual Rate.  NSA stands for Not Seasonally Adjusted.
* The best 15% ever are "A" scores, the average is a "C", and the worst 15% ever are "F" scores, with distributions throughout.
** Direction is in comparison to the most recent data for the prior month's statistic.  A positive number that says "Declining" means 
that the number was more "positive" last month, and vice versa. Due to revisions, prior month's data may change. As a result, 
this month's direction indicated may not coincide with the statistics reported in the prior month.
*** A high number is better affordability.  The calculation is 30% of the Median Household Income divided by the Mortgage Payment
     on the Median-Priced home.