Job Losses Are a Precursor to Declining Consumer Confidence | John Burns Real Estate Consulting

Job Losses Are a Precursor to Declining Consumer Confidence


Consumers have remained amazingly confident during a housing market downturn that has lasted two years. However, we believe that is about to change. Consumer Confidence is heavily dependent on the sense of job security, and that sense is quickly eroding. The credit crunch is impacting almost every business in the country, particularly with their ability to obtain reasonable bank debt. There is almost no chance the economy can grow in this sort of environment, and employers in all sectors (especially the many industries that are directly and indirectly tied to housing) are now laying off more people than they are hiring, as evidenced by this month’s job report. This means the odds of a recession have increased – probably topping 50% – although we cannot find a credible economist who will admit so. We expect consumer confidence to fall for the remainder of this year and into next year.

Economic Growth…………………………………………………………………..C
The U.S. economy took a leg down in August, posting job losses for the first time in four years, which intensifies speculation of a Fed rate cut on September 18th. Second-quarter GDP growth was revised higher to 4.0%, though we now anticipate a drop in third-quarter GDP numbers, due mainly to worsening in the credit markets over the last several weeks. Mass layoff events within the U.S. remain below red-flag levels, but we expect an uptick in August and September data, especially with the rise in mortgage industry-related layoffs.

Leading Indicators…………………………………………………………………C-
The majority of leading indicators fell this month, with the stock market maintaining its pattern of volatility across all major indices. Market volatility has spurred a flight to quality, driving the price of Treasuries upward and yields downward. Residential investment as a percentage of GDP continues to drop, approaching levels not seen since the 2001 recession. As anticipated, homebuilders continue to struggle, with the S&P Super Homebuilding Index falling again in August, equating to a 45% year-to-date decline, or 33% year-over-year. Lastly, the yield curve widened to its largest spread in more than two years during August, as the re-pricing of risk continues to permeate credit markets.

Mortgage Rates…………………………………………………………………….B-
Adjustable mortgage rates increased in August while fixed rates declined, equating to the largest spread since 2001. At month-end, the 30-year fixed mortgage rate was 6.45%, while the one-year adjustable rate stood at 5.84%. The subprime credit market continues to worsen, as evidenced by the still-declining ABX 06-2 BBB- series, which has fallen roughly 59% year-to-date. In addition, jumbo rates have spiked precipitously, reaching roughly 7.1% at the end of August, as reported by Bankrate.com.

Consumer Behavior………………………………………………………………C+
All consumer confidence indicators dropped across the board in August, brought on by stock market volatility, credit tightening and a softening job market. Taking into account the recent drop in employment figures, we are anticipating a further decline in the Consumer Confidence survey next month, as this indicator is highly skewed toward feelings of job security.

Existing Home Market…………………………………………………………..D+
All existing home sales data point to a continued deterioration in the housing market. Price changes are in the red, as the median single-family home price is down 1.0% in the last year according to the NAR and down 3.2% according to S&P/Case-Shiller. July sales fell to 5.75 million annualized units, equating to a 9% year-over-year decline. The months of supply of unsold homes increased to 9.6 months, representing a new cycle high and the largest glut since September 1991. August may usher in even worse numbers, as the Pending Home Sales Index declined to 89.9 in July, dipping to a new historical low.

New Home Market………………………………………………………………….D
July’s new home sales data was stronger than expected, though we do not see a bottom in the new home market anytime soon. Annualized new home sales through July increased to an annual rate of 870,000, a 10% year-over-year decline, while the months of supply of unsold homes declined to 7.5 months. That said, July data does not completely reflect the recent tightening in lending standards that have permeated throughout the credit spectrum, including prime borrowers. We believe that the NAHB’s Housing Market Index paints a better picture of true market conditions. According to the NAHB, builder confidence now stands at a cycle low, with the Housing Market Index at 22, the lowest since January 1991.

Housing Supply…………………………………………………………………….D+
Builders continue to scale back at a precipitous rate. Specifically, housing starts decreased 6% sequentially to a seasonally adjusted 1.38 million annual rate, equating to a 21% year-over-year pullback. July data represents the lowest level of starts since January 1997. In addition, annual permit activity has fallen to its lowest level since October 1996, as residential building permits fell 3% sequentially, equating to a 23% year-over-year drop. Housing completions decreased again this month and have dropped 22% year-over-year.

U.S. HOUSING MARKET STATISTICS
Data Current Through August 31, 2007
Grade*
Overall Grade
C-
Statistic
Grade*
C
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate)
4.0%
C
Employment Growth (1-year Change)
– Non-ag Payroll, NSA
1,521,000
C
Employment Growth Rate
– Non-ag Payroll, NSA
1.1%
C
Unemployment Rate
4.6%
B-
Mass Layoff Events, SA (YOY % Change)
5.3%
C
Productivity
2.6%
C
Retail Sales
3.2%
D+
Inflation (core CPI)
2.2%
B
Personal Income Growth, nominal
6.6%
C
Federal Deficit (last 12 mos., $mil curr.)
-$170,280
C
Statistic
Grade*
C-
These have all proven to be predictable early indicators of the direction of economic growth.
Leading Indicators Annual Growth Rate over Last Six Months
Leading Econ. Index (Ann. Growth Rate Last 6 Mos.)
0.3%
C
ECRI Leading Index
0.9%
C
Manpower Net Employment Outlook
18%
C
Corporate Profit Growth (pre-tax)
4.5%
C
Residential Investment as % of GDP (nominal)
4.8%
C
Interest Rate Spread
10-year Treasury
4.55%
2-year Treasury
4.16%
Interest Rate Spread
0.39%
C
Stock Market (Return over last 12 months)
Dow Jones
17%
C
S&P 500
13%
C
NASDAQ
19%
C
Wilshire 5000
14%
C
S&P Super Homebuilding
-33%
F
Crude Oil Price (Current $)
$72.39
D
Inst. of Supply Managers Index
52.9
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
6.45%
B+
Mortgage Rates, adjustable
5.84%
C+
Fixed/Adjustable Spread
0.61%
F
Fixed/10-year Spread
1.90%
C
Fed Funds Rate
5.25%
Percentage of Adjust. Loans
15.0%
C+
Subprime Index (ABX.HE.BBB-.06-02)
39.3
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
105.0
C
Consumer Sentiment Index
83.4
C
Consumer Comfort Index
-14.75
C
Equity/Owned Home (Current $)
$145,850
A+
Median Household Income
$46,326
– Growth Rate, nominal
4.5%
C
Revolving Cons. Credit per Household
$7,758
– Growth Rate
5.4%
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)
-3.2%
F
NAR Single-Family Median Home Price
$228,600
NAR Single-Family Annual Price Appreciation
-1.0%
D-
Freddie Mac Annual Price Appreciation
3.3%
D
Annual Sales Volume, SA
5,750,000
B
Months Supply of Unsold Homes, SA
9.6
D+
Purchase Mort. App. Index, SA
424.0
B+
Pending Home Sales Index, SA
89.9
F
Homeownership Rate
68.2%
A-
Homeowner Vacancy Rate
2.6%
F
Statistic
Grade*
D
High appreciation and low inventory would mean an excellent short-term outlook for the new home industry.
Housing Market Index
22
F
Multifamily Condo Market Index
23.1
F
Median Price, NSA
$239,500
Annual Appreciation Rate
0.6%
D+
Sales Volume, SA
870,000
C+
Months Supply of Unsold Homes, SA
7.5
D+
Months of Homes Completed, SA
2.4
D+
Months of Homes Under Const., SA
3.8
C-
Months of Homes Not Started, SA
1.1
C-
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
1,512,000
C
Housing Starts, SA
1,381,000
C-
Single-family Permits, SA
1,003,000
C
Multifamily Permits, SA
370,000
D+
Total Permits, SA
1,373,000
C
Manuf. Housing Placements, SA
97,000
F
Total Supply, SA
1,470,000
D+

 


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