Economy Weakening; Are More Rate Cuts Far Behind? | John Burns Real Estate Consulting

Economy Weakening; Are More Rate Cuts Far Behind?


We are most likely in a very mild recession right now. Unemployment spiked this month, and consumer confidence has fallen to 88.6, which is well below the long-term average of 98.6. The Fed now knows that it should have dropped rates further last year. We’ll see just how far the Fed moves at their next meeting on January 30.

Economic Growth…………………………………………………………………..C
The U.S. economy continues to grow an average pace. GDP growth, which was a higher-than-expected 4.9% annual growth rate in the third quarter, is likely to slow considerably in the fourth quarter, according to current forecasts. The year-over year change in payroll job growth fell below 1% for the first time since March 2004, and unemployment rose to 5%, which is its highest in two years. While personal income growth stayed relatively flat following marginal declines in October, retail sales activity improved in November as the holiday season swung into full gear. Core CPI – a key inflationary gauge – increased in November to 2.3%, and the inflation-adjusted federal deficit slipped further into the negative.

Leading Indicators…………………………………………………………………D+
The majority of the Leading Economic Indicators contributed negatively to the leading index this month – evidence of the widening effect of the housing slump and high oil prices – performing below their overall historical average. The leading economic index decreased significantly for the second consecutive month and has been down in four of the last six months. Among the indicators succumbing to the housing slowdown is the Purchasing Managers Index – a key measure of U.S. manufacturing – which contracted sharply in December to the lowest reading since April 2003, suggesting sustained weakness in manufacturing in the future and increased likelihood of recession. The early warning signal for manufacturing prompted investors to take fewer risks and caused a decline in the stock market. All four of the major stock indices we track lost ground in the month of December, though home builder stocks increased for the month.

Mortgage Rates……………………………………………………………………..B
Fixed rates fell while adjustable rates increased, resulting in a narrowing of the spread. The 30-year fixed mortgage rate ended the month of November at 6.17%, while the one-year adjustable rate stood at 5.53%. The Federal Reserve benchmark interest rate cut in December to 4.25% is believed to be followed by a further cut in January. As reported by the Mortgage Bankers Association, the percentage of mortgage loan applications with an adjustable interest rate fell to 10.4% in December, which brings this figure to a 6-year low. The ABX 06-2 BBB- series, which measures the performance of subprime loans issued in the first half of 2006, improved slightly toward year-end, but fell 80% for the year.

Consumer Behavior……………………………………………………………….C
Consumer Confidence made only a small improvement this month and nearly all other indicators declined. Consumer Confidence rose slightly to 88.6 in December, below its long-term average of 98.6. Consumer Sentiment and Consumer Comfort are performing well below their respective historical averages. Equity per owned household is declining as home prices are falling, but still remains quite high in comparison to history.

Existing Home Market……………………………………………………………D
Though there were some small positive signs in the Existing Home market this month, the sector continues to perform poorly. Annualized home sales increased slightly to 5 million transactions, and the median price rose slightly for the month, according to the National Association of Realtors. However, these two figures are down 20% and 4%, respectively, in the last year. The level of existing home inventory fell slightly to 10.3 months of supply, but has remained near this level for the last 3 months. Pending home sales, which are a leading indicator of existing sales, fell 2.6% for the most recent month, which is further than expected following an increase in the previous month.

New Home Market…………………………………………………………………D-
The new home market remains weak, with no improvement in the record-low builder confidence, as measured by the NAHB’s current Housing Market Index value of 19. New home sales dropped to their lowest annual volume since April 1995, with just 647,000 transactions in the last year. The level of unsold new home supply jumped to 9.3 months as a result, with 3.6 months of completed new homes alone. The median new home price increased slightly for the month, but is down -0.4% year-over-year.

Housing Supply…………………………………………………………………….D-
Housing supply continues to decline. The 1.152 million total permits issued in the last year represent a 25% decline over the last 12 months. Single-family permits alone have declined 34% in that time to their lowest volume since June 1991. Starts declined sequentially to 1.19 million in the last 12 months, while completions increased to 1.34 million. Both starts and completions remain down over the last year, -24% and -29%, respectively.

U.S. HOUSING MARKET STATISTICS
Data Current Through December 31, 2007
Grade*
Overall Grade
D+
Statistic
Grade*
C
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate)
4.9%
C
Employment Growth (1-year Change)
– Non-ag Payroll, NSA
1,270,000
C
Employment Growth Rate
– Non-ag Payroll, NSA
0.9%
C
Unemployment Rate
5.0%
C+
Mass Layoff Events, SA (YOY Change)
6.6%
C
Productivity
6.3%
B-
Retail Sales
6.2%
C
Inflation (core CPI)
2.3%
B
Personal Income Growth, nominal
6.1%
C-
Federal Deficit (last 12 mos., $mil curr.)
-$195,731
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.)
-2.3%
C-
ECRI Leading Index
-6.6%
D
Manpower Net Employment Outlook
17%
C
Corporate Profit Growth (pre-tax)
1.8%
C-
Res. Investment as % of GDP (nominal)
4.5%
C-
Interest Rate Spread
10-year Treasury
4.21%
2-year Treasury
3.23%
Interest Rate Spread
0.98%
C
Stock Market (Return over last 12 months)
Dow Jones
6%
C
S&P 500
4%
C
NASDAQ
10%
C
Wilshire 5000
4%
C-
S&P Super Homebuilding
-56%
F
Crude Oil Price (Current $)
$91.37
F
Inst. of Supply Managers Index
47.7
C-
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
6.17%
A-
Mortgage Rates, adjustable
5.53%
B-
Fixed/Adjustable Spread
0.64%
F
Fixed/10-year Spread
1.96%
C
Fed Funds Rate
4.25%
Percentage of Adjust. Loans
10.4%
B
Subprime Index (ABX.HE.BBB-.06-02)
19.3
F
Statistic
Grade*
C
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
88.6
C-
Consumer Sentiment Index
75.5
D+
Consumer Comfort Index
-21.4
D+
Equity/Owned Home (Current $)
$140,723
A
Median Household Income
$48,201
– Growth Rate, nominal
4.0%
C-
Revolving Cons. Credit per Household
$7,957
– Growth Rate
5.8%
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 Price Index (YOY Change)
-4.5%
F
NAR Single-Family Median Home Price
$208,700
NAR Single-Family Annual Price Appreciation
-3.7%
F
Freddie Mac Annual Price Appreciation
1.9%
F
Annual Sales Volume, SA
5,000,000
B-
Months Supply of Unsold Homes, SA
10.3
D
Purchase Mort. App. Index, SA
394.5
B
Pending Home Sales Index, SA
87.6
F
Homeownership Rate
68.2%
A-
Homeowner Vacancy Rate
2.7%
F
Statistic
Grade*
D-
High appreciation and low inventory would mean an excellent short-term outlook for the new home industry.
Housing Market Index
19
F
Multifamily Condo Market Index
18
F
Median Price, NSA
$239,100
Annual Appreciation Rate
-0.4%
D+
Constant Quality Price Index (YOY Change)
-0.8%
F
Sales Volume, SA
647,000
C
Months Supply of Unsold Homes, SA
9.3
D
Months of Homes Completed, SA
3.6
F
Months of Homes Under Const., SA
4.5
D
Months of Homes Not Started, SA
1.4
D
Statistic
Grade*
D-
High construction levels are good for the economy. However, if new supply exceeds demand, prices could fall.
New Housing Units Completed, SA
1,344,000
D+
Housing Starts, SA
1,187,000
D
Single-Family Permits, SA
764,000
D+
Multifamily Permits, SA
388,000
D+
Total Permits, SA
1,152,000
D+
Manuf. Housing Placements, SA
95,000
F
Total Supply, SA
1,247,000
D-

 


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