Bailout Recommendations and U.S. Housing Market Update | John Burns Real Estate Consulting

Bailout Recommendations and U.S. Housing Market Update

Unlocking the Housing Market Recovery is our independent report that offers suggestions for housing stabilization. To download the white paper, PowerPoint or a 30-minute webinar, visit:

The latest national statistics signal that we are headed for a depression. Stabilizing home prices is central to a national economic turnaround. The following is the order of priority needed to stabilize prices:

  1. Stabilize the Banking System
  2. Stimulate Job Growth
  3. Stimulate Responsible Home Buying
  4. Stimulate Responsible Loan Modifications

Today, details of the House version of a new Stimulus Bill proposal are being scrutinized. Some of our report’s recommendations are included, and others have already been accomplished. But there is more we’d like Congress, in conjunction with the Federal Reserve and U.S. Treasury Department, to be considering.

Many of you are well-connected to influential people. Please feel free to forward this work to anyone who can make a difference.

Economic Growth…………………………………………………………………..D
With the national economy well into a significant recession, production and labor markets have severely contracted, while earlier inflation concerns have all but dissipated. The non-farm payroll job sectors have lost more than 2.8 million jobs in the last year, and the year-over-year drop of -2% is the largest since 1982. The unemployment rate reached 7.2%, which is the highest level since January 1993. Mass layoff events – job cuts of more than 50 jobs – have risen 75% year-over-year. Real GDP growth witnessed its largest decline in 7 years, falling to a revised annual rate of -0.5% from 2.8% in the second quarter. Inflation fell again, with the Full CPI now at just 0.1% and the Core CPI (all items less food and energy) at 1.8%. Consumer spending continues to decline despite the ramp-up of the holiday season, as the year-over-year change in retail sales continued to decline, falling to -9.2%.

Leading Indicators………………………………………………………………..D-
Mixed results for many of the leading economic indicators reveal that, while the economy may be improving slightly in some aspects, a return to stability and positive growth will most likely not occur in the near future. Compared to the lows achieved in November, the stock market’s performance in December was an overall improvement. However, the market remains extremely volatile and the four major indices we track are still down 34-41% year-over-year. Homebuilder stocks improved in December from the previous month, but have fallen 32% year-over-year. The price of crude oil fell below the $100-per-barrel mark in mid-September amid heightened turmoil in the financial sector and has since fallen to a monthly average of $41.02 in December, returning on an inflation-adjusted basis to a level consistent with early 2004. The TED spread narrowed slightly this month and is well off its historical high in October, but still remains well above its historical average. Manufacturing in the U.S. continues to decline, as evidenced by the sixth consecutive drop in the Purchasing Managers Index in December to its lowest level since the early 1980s, indicating continued contraction not only in the manufacturing sector, but also in the overall economy.

Affordability has steadily improved as home prices continue to decline and mortgage rates drop to historic lows, but the current recession combined with ever tightening mortgage lending standards have dampened any potential positive effects in the housing market. Mortgage rates declined to their lowest level in nearly 40 years in early January, falling to just above 5%. The Fed dropped the overnight lending target rate to a range of 0.00 to 0.25%, which is the lowest level on record, in order to battle deflation and jump-start the economy. According to the Mortgage Bankers Association, adjustable-rate mortgage applications declined to their lowest levels on record and currently make up less than 1% of all mortgage applications. By comparison, ARM applications made up more than 35% of total applications at their peak level in 2005. Meanwhile, the dollar volume of equity per owned home remains above $100,000, but the debt percentage of home value (LTV) is at its worst level in history.

Consumer Behavior…………………………………………………………………D-
The lack of consumer confidence continues to play a crucial role in the national recession and faltering economy. The Conference Board’s consumer confidence index worsened in December to its lowest level in the 41-year history of the index. The University of Michigan’s Consumer Sentiment Index increased slightly in December and again in January, but remains at depressed levels. The Consumer Comfort Index declining for the third straight month. As consumers cut back on spending, the personal savings rate continues to improve, gaining 2.8% year-over-year for a total of $298 billion in savings.

Existing Home Market……………………………………………………………..D-
Existing home market conditions deteriorated over the past month, with prices and sales volume declining and months of inventory increasing. The annualized existing home sales volume fell slightly below 4.5 million transactions in November from slightly below 5 million in October, according to the National Association of Realtors (NAR). The supply of unsold homes rose to 11.2 months of inventory despite a falling number of homes available for sale as resale activity slows. The volume of pending home sales fell in November for all four regions in the Country, and is down 5.3% year-over-year. The year-over-year change in the median resale price remains negative at -13.2%, with the current median value at $181,300, according to the NAR. The Case-Shiller Price Index also declined, showing an annual decrease in paired sales of more than 16%.

New Home Market…………………………………………………………………..F
The new home market continues to face significant challenges, with most market indicators declining over the past month. Builder confidence remained at its historical low, due largely to continued declines in current sales and expectations for sales over the next 6 months. The median new home price improved slightly over the past month to $220,400, but values have declined 11.5% over the past year. Annualized new home sales volume declined in November to 407,000 transactions, which is the lowest level since 1991. Due to a lack of sales activity, months of supply of inventory remains above 11 months, even as new home inventory continues to decrease.

Housing Supply……………………………………………………………………F
With sales activity at extremely low levels and an excessive supply of housing inventory, the supply of new housing has declined precipitously over the past year, including the lowest levels of starts on record. Both multifamily and single-family starts experienced declines, and total starts have fallen to 625,000 units. Single-family and multifamily permits also declined, resulting in a 48% year-over-year drop in total permits. The annual volume of new home completions rose slightly in November to nearly 1.1 million, but is down 23% year-over-year. Meanwhile, total housing stock is up nearly 2% year-over-year. The homeowner vacancy rate was unchanged and remained near a record-high level at 2.8% in the third quarter.

Data Current Through December 31, 2008
Overall Grade
Economic Growth
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate) -0.5% D+
Employment Growth (1-year Change)
– Non-ag Payroll, NSA -2,815,000 D
Employment Growth Rate
– Non-ag Payroll, NSA -2.0% D
Unemployment Rate 7.2% D+
Mass Layoff Events, SA (YOY % Change) 75.2% D
Productivity 1.3% C
Retail Sales -9.2% F
Core CPI 1.8% B+
Full CPI 0.1% C+
Personal Income Growth, nominal 2.5% F
Federal Deficit (last 12 mos., $mil curr.) -$822,822 F
Total Households 111,730,000
Owned Households 75,896,000
Rented Households 35,834,000
Leading Indicators
These have all proven to be predictable early indicators of the direction of economic growth.
Leading Econ. Index (Ann. Growth Rate Last 6 Mos.) -5.6% D+
ECRI Leading Index -28.7% F
Manpower Net Employment Outlook 10% D-
Corporate Profit Growth (pre-tax) -9.2% D
Residential Investment as % of GDP (nominal) 3.3% F
Interest Rate Spread
10-year Treasury 2.18%
2-year Treasury 0.89%
Interest Rate Spread 1.29% C+
3-month LIBOR 1.85%
3-month Treasury 0.03%
TED Spread 1.82% D
Stock Market (Return over last 12 months)
Dow Jones -34% D
S&P 500 -38% F
Wilshire 5000 -39% F
S&P Super Homebuilding -32% D-
Crude Oil Price (Current $) $41.02 C
ISM Manufacturing Index 32.4 F
ISM Non-Manufacturing Business Activity Index 39.6 F
These statistics are probably the most important indicators of short-term housing market performance.
Conforming Mortgage Rates (contract rate; an additional 0.6 – 1.0 points are also paid up front by the borrower)
Mortgage Rates, Fixed 5.01% A+
Mortgage Rates, Adjustable 4.95% B
Fixed/Adjustable Spread 0.06% F
Fixed/10-year Spread 2.83% B-
Fed Funds Rate 0.25%
Percentage of Adjust. Loans 0.8% A+
Equity/Owned Home (Current $) $112,390 C
Debt % in Home (LTV) 55.3% F
Median Household Income $50,233
– Growth Rate, nominal 4.2% C-
Revolving Cons. Credit per Household $8,173
– Growth Rate 2.9% B+
Consumer Behavior
Consumer attitudes correlate well with short-term housing sales performance. Consumer income growth, debt levels and job prospects affect the long-term outlook for housing sales.
Consumer Confidence Index 38.0 F
Consumer Sentiment Index 60.1 F
Consumer Comfort Index -50.8 F
Personal Savings Rate 2.8% D
Misery Index (Unemployment + Inflation) 7.30 B-
Existing Home Market
Sales volumes correlate well with the Housing Cycle calculations, and boost the trade up New Home sales market.
S&P/Case-Shiller® U.S. Price Index (YOY % Change) -16.6% F
NAR Single-Family Median Home Price $181,300
NAR Single-Family Annual Price Appreciation -13.2% F
Freddie Mac Annual Price Appreciation -5.6% F
Annual Sales Volume, SA 4,490,000 C+
Months Supply of Unsold Homes, SA 11.2 D-
Purchase Mort. App. Index, SA 320.9 C+
Pending Home Sales Index, SA 82.3 F
Homeownership Rate 67.9% B+
New Home Market
High appreciation and low inventory would mean an excellent short-term outlook for the new home industry.
Housing Market Index 9 F
Multifamily Condo Market Index 8 F
Median Price, NSA $220,400
Annual Appreciation Rate -11.5% F
Constant Quality Price Index (YOY % Change) -2.0% D
Sales Volume, SA 407,000 F
Months Supply of Unsold Homes, SA 11.5 F
Months of Homes Completed, SA 5.3 F
Months of Homes Under Const., SA 4.7 D
Months of Homes Not Started, SA 1.5 D
Housing Supply
High construction levels are good for the economy. However, if new supply exceeds demand, prices could fall.
New Housing Units Completed, SA 1,084,000 F
Single-Family Starts, SA 441,000 F
Multifamily Starts, SA 184,000 F
Total Starts, SA 625,000 F
Single-Family Permits, SA 412,000 F
Multifamily Permits, SA 204,000 F
Total Permits, SA 616,000 F
Manuf. Housing Placements, SA 72,000 F
Total Supply, SA 688,000 F
Total Housing Stock 130,357,000
Homeowner Vacancy Rate 2.8% F
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.


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