Strong Economy Will Help Housing Recover Sooner | John Burns Real Estate Consulting

Strong Economy Will Help Housing Recover Sooner


Despite the tough times in housing, the economy continues to grow, and that will make the recovery in housing happen much sooner. The energy sector in particular is thriving, spurred by a falling dollar and skyrocketing commodity prices. Many other segments of the economy remain in good shape as well, as seen in our chart of year-to-date industry stock performance below.

The economy grew at a very strong 3.9% growth rate in the third quarter, with consumer spending, exports, business investment, government and inventories all growing and offsetting the heavy decline in housing.

Economic Growth…………………………………………………………………..C
The economy is performing at a steady pace, evidenced by a higher than expected 3.9% GDP growth rate during the third quarter and a strong employment report in October. The unemployment rate remains low, though mass layoff events did experience a sequential uptick and will most likely continue to increase in the coming months due to housing and financial sector woes. Retail, productivity and federal deficit indicators improved this month, while personal income experienced a marginal decline. Core CPI – a key inflationary gauge – remains unchanged at 2.1%.

Leading Indicators…………………………………………………………………C-
Almost all of our leading indicators softened this month, highlighted by higher oil prices and a flight to quality in treasuries. Yields on 10-year and 2-year treasuries declined and the yield curve continued to widen, with investors favoring safer short-term securities. Sectors such as technology are performing very well, with the NASDAQ leading all major indices in terms of year-to-date gains. Residential investment as a percentage of GDP fell again in Q3, dropping below its historical average for the first time since Q1-2002. Home builder stocks improved slightly in October, but are still in the red, with the S&P Super Homebuilding Index down 45% over the last year.

Mortgage Rates……………………………………………………………………..B
In October, the Federal Reserve cut its benchmark interest rate by a quarter point to 4.5%. Fixed mortgage rates declined for the third month in a row during October while adjustable rates were unchanged, narrowing the spread. The 30-year fixed mortgage rate ended the month at 6.33%, while the one-year adjustable rate stood at 5.66%. As reported by the Mortgage Bankers Association, the percentage of mortgage loan applications with an adjustable interest rate increased to roughly 15% in October. The subprime credit market continues to worsen, as evidenced by the still-declining ABX 06-2 BBB- series, which has fallen roughly 80% YTD.

Consumer Behavior………………………………………………………………C+
All three gauges of the consumer weakened in October, but remain healthy. Consumer Confidence fell to 95.6 in October, a low not seen since October 2005, but remains near historical averages. Consumers continue to increase credit card spending, a trend that we foresee continuing through the foreseeable future now that home equity extraction is becoming more difficult for borrowers.

Existing Home Market……………………………………………………………D
Conditions in the existing home market are still deteriorating. Annualized home sales fell to 5.04 million in September, equating to the lowest level since September 2001, with existing home sales volume now down 19% over the last year. In addition, the level of existing home inventory now stands at 10.5 months, a level last witnessed in July 1985, equating to a precipitous 44% increase over the last year. All indicators point towards continued price declines, and it is unlikely that we will stray from continued pricing pressure in the coming months. Lastly, the homeowner vacancy rate increased during Q3-2007, while the homeownership rate fell for the fourth consecutive quarter, representing the longest string of declines ever for this indicator – dating back to 1965. Affordability and ARM reset problems continue to favor rental household growth over homeowner growth.

New Home Market…………………………………………………………………D-
The new home market continues to remain weak, with builder confidence now at an all-time low, as the NAHB’s Housing Market Index fell to 18 in October. Since its peak in June 2005, the Housing Market Index has dropped 75%. New home sales volume increased to an annual rate of 770,000, and the supply of unsold new homes declined to 8.3 months, while median new home prices increased 5% over the past year. Census Bureau new home metrics are notorious for drastic revisions, so we do not put much weight in the slightly better numbers for this month alone.

Housing Supply……………………………………………………………………..D
Builders continue to pullback on new supply, which will help the housing market in the long run. Permit activity has fallen to a 1.22 million-unit annual rate, with single-family permits declining to 868,000. Single-family permit activity is now at its lowest point since April 1992, while total permit activity is at its lowest level since March 1995. Starts continue to decline as well, falling to 1.19 million in the last 12 months. Housing completions decreased again to 1.39 million, equating to a 31% drop over the last year.

U.S. HOUSING MARKET STATISTICS
Data Current Through October 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)
3.9%
C
Employment Growth (1-year Change)
– Non-ag Payroll, NSA
1,618,000
C
Employment Growth Rate
– Non-ag Payroll, NSA
1.2%
C
Unemployment Rate
4.7%
B-
Mass Layoff Events, SA (YOY % Change)
9.8%
C
Productivity
4.9%
C+
Retail Sales
5.0%
C
Inflation (core CPI)
2.1%
B
Personal Income Growth, nominal
6.8%
C
Federal Deficit (last 12 mos., $mil curr.)
-$167,838
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.)
0.0%
C
ECRI Leading Index
-0.7%
C
Manpower Net Employment Outlook
18%
C
Corporate Profit Growth (pre-tax)
4.2%
C
Residential Investment as % of GDP (nominal)
4.5%
C-
Interest Rate Spread
10-year Treasury
4.39%
2-year Treasury
3.78%
Interest Rate Spread
0.61%
C
Stock Market (Return over last 12 months)
Dow Jones
15%
C
S&P 500
12%
C
NASDAQ
21%
C
Wilshire 5000
13%
C
S&P Super Homebuilding
-45%
F
Crude Oil Price (Current $)
$86.20
F
Inst. of Supply Managers Index
50.9
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
6.42%
A-
Mortgage Rates, adjustable
5.66%
B-
Fixed/Adjustable Spread
0.67%
F
Fixed/10-year Spread
1.94%
C
Fed Funds Rate
4.50%
Percentage of Adjust. Loans
14.7%
C+
Subprime Index (ABX.HE.BBB-.06-02)
19.9
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
80.9
C-
Consumer Comfort Index
-14.5
C
Equity/Owned Home (Current $)
$144,147
A+
Median Household Income
$48,201
– Growth Rate, nominal
4.0%
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
$210,200
NAR Single-Family Annual Price Appreciation
-4.9%
F
Freddie Mac Annual Price Appreciation
3.3%
D
Annual Sales Volume, SA
5,750,000
B
Months Supply of Unsold Homes, SA
10.5
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
2.7%
F
Statistic
Grade*
D-
High appreciation and low inventory would mean an excellent short-term outlook for the new home industry.
Housing Market Index
18
F
Multifamily Condo Market Index
18.0
F
Median Price, NSA
$238,000
Annual Appreciation Rate
5.0%
C
Constant Quality Price Index (YOY % Change)
-0.8%
F
Sales Volume, SA
770,000
C
Months Supply of Unsold Homes, SA
8.3
D
Months of Homes Completed, SA
2.9
D
Months of Homes Under Const., SA
4.0
D+
Months of Homes Not Started, SA
1.2
D+
Statistic
Grade*
D
New Housing Units Completed, SA
1,391,000
C-
Housing Starts, SA
1,191,000
D
Single-Family Permits, SA
868,000
C
Multifamily Permits, SA
358,000
D
Total Permits, SA
1,226,000
D+
Manuf. Housing Placements, SA
90,000
F
Total Supply, SA
1,316,000
D

 


Rick Palacios Jr If you have any questions, please contact Rick Palacios Jr. at (949) 870-1244 or by email.

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