Consumer Confidence Declines As Employment Growth Declines | John Burns Real Estate Consulting

Consumer Confidence Declines As Employment Growth Declines


The weakening job market is a key factor in rapidly deteriorating consumer confidence, which is now at its lowest level since March 2003, surrounding the beginning of the war in Iraq. The current consumer confidence index rating of 64.5 is well below its long-term average of 98.4, with no immediate signs of getting better: consumers’ short-term expectations rating is 47.9, which is the lowest since 1974. Consumer confidence is closely tied to the job market, as shown in the graph below, and each report of diminishing job growth only dampens consumers’ perceptions of the economy. We expect to see consumer confidence continue to decline throughout 2008, as we do not expect any significant pickup in employment in the near-term.

Economic Growth………………………………………………………………….C-
The economic growth indicators are performing below average levels. The employment situation continues to worsen, as year-over-year payroll employment growth fell to 482,000, or just 0.4% growth. The unemployment rate rose to 5.1%, which is the highest since September 2005, and the volume of mass layoffs was 24% higher than one year prior. Final estimates show that fourth-quarter GDP growth remained at a very slow 0.6% annual rate, well below the 4.9% growth in the third quarter. Personal income growth continues to decline, falling to 4.6%, and retail sales growth has slowed to 2.6% year-over-year. Core CPI – a key gauge of inflation – decreased slightly in February to 2.3%.

Leading Indicators………………………………………………………………….D
The poor performance of the leading indicators suggests sustained economic difficulties in the near future. While slight improvements were witnessed this month in the Leading Economic Index, Purchasing Managers Index and Non-Manufacturing Index, each of these improvements follows significantly deteriorated conditions in the prior months. Oil prices continue to rise against the sinking dollar, with crude oil at $105.56 per barrel for the month, further limiting consumer discretionary spending. All of the major stock indices that we track have shown negative growth in the last year, and the S&P Super Homebuilding index – while improving slightly this month – remains down 36% year-over-year decline. Residential investment continues to decrease as a percentage of overall GDP, falling to 4.1%, which is its lowest share in more than 12 years.

Mortgage Rates…………………………………………………………………….B+
In March, the Fed Funds rate dropped to 2.25% after the Federal Reserve cut the rate by an additional 75 basis points. The 30-year fixed rate declined to 5.85% by month-end, while the one-year adjustable rate rose to 5.24%. The Mortgage Bankers Association reported a significant decline in the percentage of ARM applications to a low of 3.8% of all loans originated during the last week of March – the lowest share since March 1991. The performance of subprime loans issued in the first half of 2006 continues to weaken, as measured by the ABX 06-2 BBB- series index, which has declined 88% since January 2007.

Consumer Behavior………………………………………………………………D+
Consumer behavior was weaker this month, as consumer confidence continues to fall at a rapid pace, dropping well below its long-term average. The University of Michigan’s Consumer Sentiment Index declined for the second month in March. The Consumer Comfort Index improved slightly this month, after falling to its lowest monthly average in the history of the index. While the dollar value of equity per owned home remains quite high – even on an inflation-adjusted basis – equity as a percentage of home values is at its historical low.

Existing Home Market……………………………………………………………D
The existing home market continues to weaken, with few signs of improvement. While the slight uptick in annualized existing home sales was the first sequential gain in 7 months, sales activity remains 24% below its year-ago level. The pending home sales index’s decline to its worst level since the index began in 2001 suggests that sales are likely to fall further. The minor improvement in sales activity and a drop in inventory to approximately 4 million homes pushed the months of supply back to 9.6 months of inventory. Prices in the resale market have fallen nearly 9% year-over-year to a median of $193,900, according to the National Association of Realtors.

New Home Market…………………………………………………………………F
The new home market remained extremely weak this month, as sales activity continued to decline while inventory levels remained high. The NAHB’s Housing Market Index, which measures sales and traffic, stayed flat this month, measuring near its historical low at 20. New home sales activity fell to 590,000 annualized transactions, and remains 30% below the sales volume one year ago and 58% below its peak volume in July 2005. The level of unsold new homes stayed at nearly 10 months of supply, which is the highest since October 1981. This includes approximately 4 months of unsold completed new homes alone. The Census Bureau reported that the median new home sales price of $244,100 represented a 2.7% decline over last year.

Housing Supply…………………………………………………………………….F
The supply of housing continues to decline, as builders continue to cut back on construction. The annual volume of new home completions fell to 1.21 million, which is the lowest total since December 1995. Housing starts stayed relatively flat in February at roughly 1.07 million total annualized units, indicating that completions are likely to continue to decline in the near future. Single-family permit volume has fallen 42% in the last year alone, dropping to 639,000, which is the lowest volume since early 1991. The number of multifamily permits also fell, and the total seasonally adjusted permit activity has fallen below 1 million for the first time since November 1991.

U.S. HOUSING MARKET STATISTICS
Data Current Through March 31, 2008
Grade*
Overall Grade
D+
Statistic
Grade*
C-
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate)
0.6%
C-
Employment Growth (1-year Change)
– Non-ag Payroll, NSA
482,000
C-
Employment Growth Rate
– Non-ag Payroll, NSA
0.4%
C-
Unemployment Rate
5.1%
C+
Mass Layoff Events, SA (YOY % Change)
23.7%
C-
Productivity
1.9%
C
Retail Sales
2.6%
D
Inflation (core CPI)
2.3%
B
Personal Income Growth, nominal
4.6%
D
Federal Deficit (last 12 mos., $mil curr.)
-$214,264
C
Statistic
Grade*
D
These have all proven to be predictable early indicators of the direction of economic growth.
Leading Econ. Index (Ann. Growth Rate Last 6 Mos.)
-3.0%
D+
ECRI Leading Index
-11.0%
D-
Manpower Net Employment Outlook
14%
D+
Corporate Profit Growth (pre-tax)
2.5%
C-
Residential Investment as % of GDP (nominal)
4.1%
D
Interest Rate Spread
10-year Treasury
3.52%
2-year Treasury
1.75%
Interest Rate Spread
1.77%
B-
Stock Market (Return over last 12 months)
Dow Jones
-1%
C
S&P 500
-7%
D+
NASDAQ
-6%
D+
Wilshire 5000
-7%
D
S&P Super Homebuilding
-36%
F
Crude Oil Price (Current $)
$105.56
F
ISM Manufacturing Index
48.6
C-
ISM Non-Manufacturing Business Activity Index
52.2
D+
Statistic
Grade*
B+
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
5.85%
A
Mortgage Rates, adjustable
5.24%
B-
Fixed/Adjustable Spread
0.61%
F
Fixed/10-year Spread
2.33%
C+
Fed Funds Rate
2.25%
Percentage of Adjust. Loans
3.8%
A
Subprime Index (ABX.HE.BBB-.06-02)
10.3
F
Statistic
Grade*
D+
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
64.5
D-
Consumer Sentiment Index
69.5
D
Consumer Comfort Index
-31.8
D
Equity/Owned Home (Current $)
$128,332
A-
Equity % of Home Value
47.9%
F
Median Household Income
$48,201
– Growth Rate, nominal
4.0%
C-
Revolving Cons. Credit per Household
$8,056
– Growth Rate
7.0%
B-
Statistic
Grade*
D
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)
-8.9%
F
NAR Single-Family Median Home Price
$193,900
NAR Single-Family Annual Price Appreciation
-8.7%
F
Freddie Mac Annual Price Appreciation
0.3%
F
Annual Sales Volume, SA
5,030,000
B-
Months Supply of Unsold Homes, SA
9.6
D+
Purchase Mort. App. Index, SA
403.7
B
Pending Home Sales Index, SA
84.6
F
Homeownership Rate
67.8%
B+
Homeowner Vacancy Rate
2.8%
F
Statistic
Grade*
F
High appreciation and low inventory would mean an excellent short-term outlook for the new home industry.
Housing Market Index
20
F
Multifamily Condo Market Index
18.8
F
Median Price, NSA
$244,100
Annual Appreciation Rate
-2.7%
D
Constant Quality Price Index (YOY % Change)
-2.3%
F
Sales Volume, SA
590,000
D+
Months Supply of Unsold Homes, SA
9.8
D-
Months of Homes Completed, SA
3.8
F
Months of Homes Under Const., SA
4.2
D+
Months of Homes Not Started, SA
1.4
D
Statistic
Grade*
F
High construction levels are good for the economy. However, if new supply exceeds demand, prices could fall.
New Housing Units Completed, SA
1,208,000
D
Housing Starts, SA
1,065,000
D-
Single-Family Permits, SA
639,000
D
Multifamily Permits, SA
339,000
D
Total Permits, SA
978,000
D-
Manuf. Housing Placements, SA
77,000
F
Total Supply, SA
1,055,000
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.

 


Chris Porter If you have any questions, please contact Chris Porter at (949) 870-1218 or by email.

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