Single-Family Construction Temporarily Bottoming Out | John Burns Real Estate Consulting

Single-Family Construction Temporarily Bottoming Out

While the continued decline in total housing construction is getting all the headlines, seasonally adjusted single-family construction activity was up slightly month-over-month. This is consistent with the findings of our monthly survey of builders, who report a slight increase in construction.

While single-family construction may be improving month-over-month, activity is still down significantly from one year ago. A rolling 12-month count of construction activity is a good check on the seasonally adjusted data, and is less subject to wild swings. Single-family construction continues to decline on this rolling 12-month basis.

The current Seasonally Adjusted annual single-family permit number is 373,000, and we believe that permits will bottom out around 340,000 later this year (this is a rollup of our MSA by MSA forecasts which are available by MSA here or for all MSAs for our retainer clients). If mortgage conditions remain favorable, the tax credits are renewed, and banks begin dumping quality land REO, construction could pick up more quickly than we anticipate.

Economic Growth………………………………………………………………….D-
The economic growth indicators continued to erode this month. First-quarter real GDP growth was revised upward slightly, but at an annual decline of -5.7%, it remains one of the most significant drops since the early 1980s. The Full CPI increased slightly to 1.9%, but the Core CPI (all items less food and energy) declined to -0.7%, which is only the second time the value has fallen below zero since 1955. The employment sector continued to weaken, with 5.2 million payroll jobs (3.8%) lost in the last year, which is the worst decline in more than 50 years. The headline unemployment rate has recently increased to 8.9%, reaching its highest level since late 1983, and the real unemployment rate (including part-time workers looking for full-time work) rose to 15.8%. Mass layoff events – job cuts of more than 50 jobs – have doubled in the last year.

Leading Indicators…………………………………………………………………D
Many leading indicators improved this month, suggesting that the economy may be preparing for a turnaround. Stocks rallied again in May, adding to their strong gains from the previous two months. The four major indices that we track have risen 20-29% from February’s lows. The Leading Economic Index improved sharply to -1.2% in April from -5.1% in March. Although the annual growth rate of the Leading Economic Index has been negative since late 2007, April’s decline was the smallest in one-and-a-half years. The price of crude oil spiked nearly $10 per barrel in May to $59.16, reaching its highest levels since November.

Affordability remains excellent due to falling home prices and mortgage rates. The housing-cost-to-income ratio is currently at 25%, compared to 44% at the peak of this housing cycle. Very low mortgage rates have greatly helped affordability. The 30-year fixed mortgage rate had risen slightly to 4.91% by May month-end, which was up from April’s lowest level in more than 40 years, but rose to 5.29% in the first week of June. The median-home-price-to-income ratio has also fallen below the historical average, currently reaching 3.2. The Fed’s overnight lending target rate remains at a range of 0.00% to 0.25%, which is the lowest level on record. The Mortgage Bankers Association reported an increase in the share of ARM applications, which reached 3% in the last week of May, but remains extremely low when compared to peak levels above 35% of total loans in early 2005.

Consumer Behavior………………………………………………………………..D-
Consumer behavior has improved recently, but remains below historical norms. The Consumer Confidence Index spiked in May, reaching 54.9, which was up from 40.8 recorded in April. This represented the second straight monthly increase and the highest level in 8 months after reaching a 42-year record-low set in February. The Consumer Sentiment Index and the Consumer Comfort Index both experienced gains as well in May. The average American is saving more of their paycheck, as the personal savings rate continued to rise to 5.7%, which is the best rate in 14 years. Due to falling home sales prices and deterioration of the stock market, the U.S. has lost more than $11 trillion of wealth in the past year, reaching a total net worth of $51.5 trillion.

Existing Home Market……………………………………………………………..D
The existing home market remains very weak, yet reported a few improvements compared to last month. The seasonally adjusted annual existing home sales volume increased to 4.68 million transactions, yet is down nearly 4% year-over-year, according to the National Association of Realtors (NAR). The median price in the resale market has fallen 15% year-over-year to $169,800, according to NAR, while the Case-Shiller index posted an annual decline in paired sales of more than 19% in the first quarter, which was a record low. The supply of unsold homes increased and remains high at 10.2 months of inventory. The pending home sales volume jumped in April, and is up 3.2% compared to one year ago.

New Home Market………………………………………………………………….F
Conditions in the new home market have shown signs of improvement, but the overall health of the sector remains extremely weak. Builder confidence once again increased as the Housing Market Index rose to 16, showing that some builders believe the worst is behind us. The median new home price rose slightly to $209,700, yet remains down almost 15% year-over-year, according to the Census Bureau. The annualized new home sales volume, at 352,000 transactions, was essentially flat in April from March, but is down 34% year-over-year. The overall inventory of new homes continued to decline in April, pushing months of supply down to approximately 10 months.

Housing Supply…………………………………………………………………..F
Housing supply continued to diminish, falling to the lowest levels of both starts and permits in the nearly 50 years that the Census Bureau has been tracking these statistics. Seasonally adjusted single-family starts increased slightly in April, yet a large drop in multifamily starts pushed total starts to just 458,000 units. Like housing starts, single-family permits increased slightly, while multifamily permits fell, resulting in an overall decline in total permits. The annual volume of new home completions rose slightly in April to 874,000 units, yet remains down 15% year-over-year. The homeowner vacancy rate declined in the first quarter to 2.7%.

Data Current Through May 31, 2009
Overall Grade
Economic Growth
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate) -5.7% D-
Employment Growth (1-year Change)
– Non-ag Payroll, NSA -5,248,000 D-
Employment Growth Rate
– Non-ag Payroll, NSA -3.8% D-
Unemployment Rate 8.9% D-
Mass Layoff Events, SA (YOY % Change) 101.8% F
Productivity 0.8% C
Retail Sales -10.1% F
Core CPI 1.9% B+
Full CPI -0.7% C+
Personal Income Growth, nominal 0.7% F
Federal Deficit (last 12 mos., $mil curr.) -$1,270,033 F
Total Households 111,368,000
Owned Households 74,942,000
Rented Households 36,426,000
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.) -1.2% C-
ECRI Leading Index -9.3% D+
Manpower Net Employment Outlook -1% F
Corporate Profit Growth (pre-tax) -18.0% F
Residential Investment as % of GDP (nominal) 2.7% F
Interest Rate Spread
10-year Treasury 3.59%
2-year Treasury 0.95%
Interest Rate Spread 2.64% A-
3-month LIBOR 0.84%
3-month Treasury 0.18%
TED Spread 0.66% C
Stock Market (Return over last 12 months)
Dow Jones -33% D
S&P 500 -34% F
Wilshire 5000 -35% F
S&P Super Homebuilding -27% D
Tougher Standards on Business Loans – Large Firms 64% F
Tougher Standards on Business Loans – Small Firms 69% F
Crude Oil Price (Current $) $59.16 D+
ISM Manufacturing Index 42.8 D
ISM Non-Manufacturing Business Activity Index 42.4 D-
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)
Housing Cycle Barometer 0.0 A+
US Median Home Payment / Income Ratio 25.4%
US Median Home Price / Income Ratio 3.2 A+
Mortgage Rates, Fixed 4.91% A+
Mortgage Rates, Adjustable 4.69% B
Fixed/Adjustable Spread 0.22% F
Fixed/10-year Spread 1.32% D+
Fed Funds Rate 0.13%
Percentage of Adjust. Loans 3.0% A
Equity/Owned Home (Current $) $104,375 C
Debt % in Home (LTV) 57.0% F
Median Household Income $50,233
– Growth Rate, nominal 4.2% C-
Revolving Cons. Credit per Household $7,967
– Growth Rate -2.2% A+
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 54.9 D
Consumer Sentiment Index 67.9 D
Consumer Comfort Index -44.3 F
Personal Savings Rate 5.7% C
U.S. Net Worth Growth Rate -17.9% F
Financial Obligation Ratio 19.0% F
Misery Index (Unemployment + Inflation) 8.20 C+
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) -19.1% F
NAR Single-Family Median Home Price $169,800
NAR Single-Family Annual Price Appreciation -14.9% F
Freddie Mac Annual Price Appreciation -4.0% F
Annual Sales Volume, SA 4,680,000 B-
Existing Home Inventory for Sale, SA 3,968,000 F
Months Supply of Unsold Homes, SA 10.2 D
Purchase Mort. App. Index, SA 267.7 C
Pending Home Sales Index, SA 90.3 D-
Homeownership Rate 67.3% B
New Home Market
High appreciation and low inventory would mean an excellent short-term outlook for the new home industry.
Housing Market Index 16 F
Multifamily Condo Market Index 15 F
Median Price, NSA $209,700
Annual Appreciation Rate -14.9% F
Constant Quality Price Index (YOY % Change) -7.6% F
Sales Volume, SA 352,000 F
New Home Inventory for Sale, NSA 296,000 C+
Months Supply of Unsold Homes, SA 10.1 D-
Months of Homes Completed, SA 4.8 D-
Months of Homes Under Const., SA 3.9 C-
Months of Homes Not Started, SA 1.4 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 874,000 F
Single-Family Starts, SA 368,000 F
Multifamily Starts, SA 90,000 F
Total Starts, SA 458,000 F
Single-Family Permits, SA 373,000 F
Multifamily Permits, SA 121,000 F
Total Permits, SA 494,000 F
Manuf. Housing Placements, SA 55,000 F
Total Supply, SA 549,000 F
Total Housing Stock 130,429,000
Homeowner Vacancy Rate 2.7% 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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