Looking Forward to 2009 | John Burns Real Estate Consulting

Looking Forward to 2009

While the economy is clearly in miserable shape, there is plenty of positive news for housing. Falling prices and falling mortgage rates have made housing much more affordable, and declining construction and mothballed new home communities have made housing much less competitive. Also, falling gas prices have helped the home builders, who are generally concentrated in the commuter markets. The Fed’s decision to drop the Fed Funds rate to almost 0% on December 16 should have wide-ranging positive implications for housing, including further reductions in mortgage rates and increased lending to businesses.

With the U.S. economy officially in a recession now for one year, the Fed clearly understands the magnitude of the problem. Economic fundamentals continue to erode, with GDP growth turning negative, employment losses mounting and the unemployment rate rising rapidly. Consumers are clearly spending less, as evidenced by the decline in retail sales, and saving more, as revealed by the increasing personal savings rate. In the housing sector, builder confidence remained at its all-time low in December as sales continue to dwindle, even amid falling prices.

We are looking for more action from elected officials in January, with a focus on stabilization in the economy and foreclosure assistance. We also expect sales volumes to improve since housing has become so affordable.

Our national forecast, along with analysis and history of more than 70 key national statistics, is available for sale this month for $145. Annual subscriptions will begin in January 2009. Click here to purchase.

Economic Growth……………………………………………………………………D
The economic growth indicators continued to weaken this month, as the worsening employment market weighs heavily on the overall economy. The non-farm payroll job sectors have lost more than 2 million jobs in the last year, and the year-over-year drop of -1.5% is the largest since early 2002. The unemployment rate reached 6.7%, which is the highest level since October 1993. Mass layoff events – job cuts of more than 50 jobs – have risen 59% 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 1.1% and the Core CPI (all items less food and energy) at 2.0%. 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 -7.4%.

Leading Indicators………………………………………………………………..D-
Continued declines in the leading indicators suggest that economic instability is likely to remain the norm for the near term. Wall Street was battered again in November as stocks continued to fall, with year-over-year losses of between 34-43% reported for all four major stock indices we track. Through early December, the stock market had improved from late-November lows, but remains volatile. Homebuilder stocks also weakened in November, falling 31% 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 $57.44 in November, returning to levels of 2004-2005. The unprecedented production cut announced by OPEC this week is sure to send oil prices higher. The Leading Economic Index fell this month, after improving slightly in the previous month. Manufacturing in the U.S. continues to decline, as evidenced by the fifth consecutive drop in the Purchasing Managers Index in November to its lowest level since the early 1980s, indicating continued contraction not only in the manufacturing sector, but also in the overall economy.

Affordability continues to improve as home prices and mortgage rates decline, but continued issues in the credit markets are keeping buyers on the sidelines. Mortgage rates fell in November after rising the previous month, with the 30-year conventional fixed rate dropping below 6% by November-end. 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. The Mortgage Bankers Association reported a rise in the share of ARM applications this month, bringing the rate to 3% in the last week of November – up from 2% in October, but down from 4% in the last week of September. 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-
Consumer confidence rose from October’s historical lows, but still remains a considerable drag on the economy. Both the University of Michigan’s Consumer Sentiment Index and the Consumer Comfort Index declined in November to or near record lows. As consumers cut back on spending, the personal savings rate continues to improve, gaining 2.4% year-over-year for a total of $261 billion in savings.

Existing Home Market……………………………………………………………….D
The existing home market remains anemic. The annualized existing home sales volume fell slightly below 5 million transactions in October from 5.2 million in September, according to the National Association of Realtors (NAR). The volume of pending home sales fell in October, and is down 1% year-over-year. The supply of unsold homes rose to 10.2 months of inventory despite a falling number of homes available for sale as resale activity slows. The median resale price fell sharply and has 11% year-over-year to $181,800, 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 showed continued signs of significant struggle in the last 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 fell for the sixth consecutive month and is down 7% year-over-year to $218,000. The annualized new home sales volume fell 5% sequentially to 433,000 transactions in October. Despite a shrinking inventory of new homes on the market, the months of supply continues to rise and has surpassed 11 months.

Housing Supply…………………………………………………………………….F
The overall supply of new housing diminished, pushing housing supply to extremely low levels, including the lowest levels of starts since this data has been recorded. 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 and 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 November 30, 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 -2,050,000 D+
Employment Growth Rate
– Non-ag Payroll, NSA -1.5% D+
Unemployment Rate 6.7% C-
Mass Layoff Events, SA (YOY % Change) 58.9% D
Productivity 1.3% C
Retail Sales -7.4% F
Core CPI 2.0% B+
Full CPI 1.1% C
Personal Income Growth, nominal 3.3% D-
Federal Deficit (last 12 mos., $mil curr.) -$690,388 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.) -4.5% D+
ECRI Leading Index -28.5% F
Manpower Net Employment Outlook 10% D-
Corporate Profit Growth (pre-tax) -9.0% D
Residential Investment as % of GDP (nominal) 3.3% F
Interest Rate Spread
10-year Treasury 3.10%
2-year Treasury 1.14%
Interest Rate Spread 1.96% B
3-month LIBOR 2.32%
3-month Treasury 0.19%
TED Spread 2.13% D
Stock Market (Return over last 12 months)
Dow Jones -34% D
S&P 500 -39% F
Wilshire 5000 -40% F
S&P Super Homebuilding -31% D-
Crude Oil Price (Current $) $57.44 C-
ISM Manufacturing Index 36.2 F
ISM Non-Manufacturing Business Activity Index 33.0 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 5.97% A
Mortgage Rates, Adjustable 5.18% B
Fixed/Adjustable Spread 0.79% D-
Fixed/10-year Spread 2.87% B-
Fed Funds Rate 0.25%
Percentage of Adjust. Loans 3.0% A
Subprime Index (ABX.HE.BBB-.06-02) 3.1 F
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 $8,203
– Growth Rate 3.9% 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 44.9 F
Consumer Sentiment Index 55.3 F
Consumer Comfort Index -50.5 F
Personal Savings Rate 2.4% D
Misery Index (Unemployment + Inflation) 7.80 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 $181,800
NAR Single-Family Annual Price Appreciation -11.2% F
Freddie Mac Annual Price Appreciation -5.6% F
Annual Sales Volume, SA 4,980,000 B-
Months Supply of Unsold Homes, SA 10.2 D
Purchase Mort. App. Index, SA 261.6 C
Pending Home Sales Index, SA 88.9 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 $218,000
Annual Appreciation Rate -7.0% D-
Constant Quality Price Index (YOY % Change) -2.0% D
Sales Volume, SA 433,000 F
Months Supply of Unsold Homes, SA 11.1 F
Months of Homes Completed, SA 4.9 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 80,000 F
Total Supply, SA 696,000 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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