Slowdown in Construction Expected to Continue | John Burns Real Estate Consulting

Slowdown in Construction Expected to Continue


The fourth quarter is going to be a very interesting test to see how well the economy holds up during the housing downturn. Based on our conversations with builders and trades from all over the country, construction is likely to slow much more than usual in the fourth quarter because of excess inventory (most communities have enough standing or under construction inventory to satisfy the current sales pace) and cash flow (generating cash flow and reducing debt are what most builders need to focus on the most).

Residential investment has fallen back to normal levels and we are highly confident it will fall below the norm this quarter. Let’s continue to hope that government, health care and technology businesses continue to thrive so economic growth continues.

Economic Growth…………………………………………………………………..C
The economy weakened a bit this month, with the still-solid GDP estimate revised downward and continued slowing in the labor markets. Employment data was revised upward for the month of August, which had previously reported a year-over-year loss, though that segment of the economy continues to weaken. Income growth is slowing, and the federal deficit continues to increase. On a positive note, both productivity and retail sales improved this month.

Leading Indicators…………………………………………………………………C-
Most leading indicators performed worse this month, though the stock market continued to show strong performance. Residential investment as a percentage of GDP is declining, and a declining Purchasing Manager Index indicates that expansion in the manufacturing sector is slowing. The price of crude oil reached its highest level since 1981, after adjusting for inflation. Home builder stocks continue to suffer, as the S&P Super Homebuilding Index fell again in August to its lowest value since March 2003, equating to a 52% decline year-to-date. The yield curve widened to its largest spread in two-and-a-half years, reaching 62 basis points at September month-end.

Mortgage Rates……………………………………………………………………..B
Both adjustable and fixed mortgage rates declined in September, and the spread between the two narrowed. The 30-year fixed mortgage rate ended the month at 6.42%, while the one-year adjustable rate stood at 5.60%. As reported by the Mortgage Bankers Association, the percentage of mortgage loan applications with an adjustable interest rate plunged to just 12% in September. The subprime credit market continues to worsen, as evidenced by the still-declining ABX 06-2 BBB- series, which has fallen roughly 66% YTD.

Consumer Behavior………………………………………………………………C+
Consumer confidence fell below 100 for the first time in nearly 2 years, due to consumer concerns about the business climate and a less-favorable job market. Consumer sentiment was flat, while consumer comfort improved only slightly. We expect to see continued declining consumer confidence as the employment sector continues to weaken, as this indicator is highly skewed toward feelings of job security.

Existing Home Market…………………………………………………………..D+
Conditions in the existing home market remain weak, with indications that they will continue to deteriorate. Annualized home sales fell to 5.5 million, which is a new 5-year low. The existing home sales volume has declined 13% in the last year, following a 12% decline in the prior 12 months. The Pending Home Sales Index, which measures contract activity and is a good leading indicator for home sales, reached a new low, indicating that sales numbers are likely to remain low for the near future. The level of existing home inventory continues to rise, reaching 10 months of supply on the market, which is the highest level since 1988.

New Home Market…………………………………………………………………D-
The new home market was weaker this month, as evidenced by a record-tying low in builder confidence: the NAHB’s Housing Market Index fell to 20, which is equal to the low reached in January 1991. The new home sales volume fell to an annual rate of 795,000, and the supply of unsold new homes in all stages rose to 8.2 months. We expect to see the new home statistics continue to worsen as the impact of the recent tightening is accounted for in the future months’ data.

Housing Supply…………………………………………………………………….D+
Housing supply continues to contract. Permit activity fell to a 1.31 million-unit annual rate, including a decline to 926,000 single-family permits. Starts continue to decline as well, falling to 1.33 million in the last 12 months, and single-family starts are now below 1 million for the first time since March 1995. Housing completions decreased again this month to 1.5 million and have dropped 19% year-over-year.

 

U.S. HOUSING MARKET STATISTICS
Data Current Through September 30, 2007
Grade*
Overall Grade
C-
Statistic
Grade*
C
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate)
3.8%
C
Employment Growth (1-year Change)
– Non-ag Payroll, NSA
1,629,000
C
Employment Growth Rate
– Non-ag Payroll, NSA
1.2%
C
Unemployment Rate
4.7%
B-
Mass Layoff Events, SA (YOY % Change)
-2.4%
C
Productivity
2.6%
C
Retail Sales
3.7%
D+
Inflation (core CPI)
2.1%
B
Personal Income Growth, nominal
6.8%
C
Federal Deficit (last 12 mos., $mil curr.)
-$221,074
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.)
1.0%
C
ECRI Leading Index
0.9%
C
Manpower Net Employment Outlook
18%
C
Corporate Profit Growth (pre-tax)
4.2%
C
Residential Investment as % of GDP (nominal)
4.8%
C
Interest Rate Spread
10-year Treasury
4.61%
2-year Treasury
3.99%
Interest Rate Spread
0.62%
C
Stock Market (Return over last 12 months)
Dow Jones
19%
C
S&P 500
14%
C
NASDAQ
20%
C
Wilshire 5000
15%
C
S&P Super Homebuilding
-46%
F
Crude Oil Price (Current $)
$79.93
D-
Inst. of Supply Managers Index
52.0
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
6.42%
A-
Mortgage Rates, adjustable
5.60%
B-
Fixed/Adjustable Spread
0.82%
D-
Fixed/10-year Spread
1.81%
C
Fed Funds Rate
4.75%
Percentage of Adjust. Loans
12.2%
B-
Subprime Index (ABX.HE.BBB-.06-02)
32.8
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
99.8
C
Consumer Sentiment Index
83.4
C
Consumer Comfort Index
-14.4
C
Equity/Owned Home (Current $)
$144,147
A+
Median Household Income
$46,326
– Growth Rate, nominal
4.5%
C
Revolving Cons. Credit per Household
$7,820
– Growth Rate
5.6%
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
$223,900
NAR Single-Family Annual Price Appreciation
0.0%
D-
Freddie Mac Annual Price Appreciation
3.3%
D
Annual Sales Volume, SA
5,500,000
B
Months Supply of Unsold Homes, SA
10.0
D
Purchase Mort. App. Index, SA
418.8
B
Pending Home Sales Index, SA
85.5
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
20
F
Multifamily Condo Market Index
18.0
F
Median Price, NSA
$225,700
Annual Appreciation Rate
-7.5%
D-
Sales Volume, SA
795,000
C
Months Supply of Unsold Homes, SA
8.2
D+
Months of Homes Completed, SA
2.7
D
Months of Homes Under Const., SA
4.0
D+
Months of Homes Not Started, SA
1.3
D+
Statistic
Grade*
D+
New Housing Units Completed, SA
1,523,000
C
Housing Starts, SA
1,331,000
D+
Single-Family Permits, SA
926,000
C
Multifamily Permits, SA
381,000
D+
Total Permits, SA
1,307,000
C-
Manuf. Housing Placements, SA
97,000
F
Total Supply, SA
1,404,000
D
Overall Grade
C-

 


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