Thursday, December 17, 2009

Housing, the Economy Show Some Life

From the National Association of Homebuilders article:

More emerging data is signaling that the economy is in the early stages of recovery from a long, hard recession. The second estimate of third quarter gross domestic product (GDP), based on more complete data than what was available for the "advance" estimate issued last month, showed that GDP advanced 2.8% from the second quarter at a seasonally adjusted, annual rate.

While down from the 3.5% reported in the advance estimate, this was the first rise in this measure after four quarters of decline.

Residential construction, which has been a drag on GDP since the first quarter of 2006, subtracting roughly 1% growth from overall GDP each quarter (on an annualized, seasonally adjusted basis) on average for the last three and a half years, contributed a half percentage point of growth to overall GDP growth.

Retail sales have risen in four of the last six months. Excluding auto sales, which were affected by the “cash for clunkers” program, retail sales have risen in five of the last six months. Auto sales, which averaged 9.7 million units in the first half of the year, have averaged 11.4 million units over the last five months (July through November).

Even taking out sales from August, when the cash for clunkers program had its largest impact, and leaving in September sales, which were depressed from the program pulling sales into August, auto sales averaged 10.6 million units.

Another indication of the improving health of the economy, industrial production has now risen for four months in a row (July through October), as has capacity utilization. That is not to say that the economy has returned to anywhere near full strength. October’s capacity utilization of 70.7%, while an improvement over the low reading of 69.2% in April, is hardly robust.

Looking forward, businesses have drastically reduced their inventories over the past year and a half. That liquidation appears to be close to an end. Continued improvement in business will force businesses to rebuild some of their inventory. At minimum, businesses will have to replace some if not all of the inventory used to meet this rising demand.

Further, money is still flowing out from the stimulus package passed earlier this year.

The stimulus was intended to be spread out over a two-year period. Of the $787 billion authorized, only about 30% — $238 billion — of the funds have been paid out to date. Some of these funds have been transferred to states and localities, which have yet to spend all of the proceeds. That money, along with the future distribution of stimulus funds, will be injected into the economy over the next several months.

Employment is also showing what passes for improvement in this lagging indicator. Although we are still waiting for the first report of job gains, only 11,000 jobs were lost in November. While still a loss, this is much better than the 111,000 lost jobs in October or the 304,000 jobs lost as recently as July.

It was also the smallest decline in jobs since job losses started turning down in January 2008. Further, the unemployment rate fell from 10.2% in October to 10.0% in November. 

Perhaps even more encouraging, employment at temporary help services has now increased for four months running. Also, the rate of increase of employment in this area has risen each month. In November, it increased by 2.9% over the October figure, which was up 2.5% over the September number.

This is a hopeful sign; in the early stages of a recovery, employers who see an improvement in business often hire temporary workers to meet their immediate employment needs. They are more comfortable with temporary workers as they try to determine if the increase in business is part of a longer term advance in demand or just a temporary blip. If demand continues to increase, they will move from using temporary workers to hiring permanent, full-time employees.

Meanwhile, total residential construction employment fell 3,200 in November, the smallest monthly decline in that measure since the loss of 2,000 construction jobs in November 2006. However, the unemployment rate for construction (which includes both residential and commercial construction) rose to 19.4% in November from 18.7% in October.

The smaller loss of residential construction jobs is an early indication that the improvement in housing is beginning to take hold.

First-Time Home Buyer Tax Credit Does Its Work

Single-family housing starts have generally been rising since early this year. They hit a low of 357,000 in January and February of this year (seasonally adjusted, at an annual rate), their lowest level since current records of housing starts began in 1959. There was one stumble when starts fell in August from July, yet they still averaged almost 500,000 at an annual rate in the third quarter. But in October, single-family housing starts fell to 476,000 from September’s 511,000.

The drop-off appeared to be due to the looming expiration of the first-time home buyer tax credit, which was subsequently extended and expanded. It simply was impossible for a builder to start a home in October and deliver it by the end of November in time to qualify for the tax credit.

New home sales fell in September to 405,000 from 415,000 in August. A new home sale is recorded when a contract is signed and a deposit made. September would already have been too late to start a home and have it ready by the Nov. 30 deadline for closing on a home to qualify for the credit. However, a buyer could have purchased a completed or nearly completed house from a builder that month and still have had sufficient time to settle by that deadline.

In October, new home sales rebounded to 430,000. This was most likely due to first-time home buyers who had failed to act in time to qualify for the tax credit but were now interested in buying; non-first-time home buyers (i.e., sellers of existing homes) who had successfully sold their homes (many benefiting from first-time buyers buying their house — an expected ripple effect from the tax credit); and a few first-time home buyers who could still manage to qualify for the tax credit (some builders were advertising that they could make this happen if the buyer was willing to follow some requirements — presumably, such as buying a completed house out of the builder’s inventory and working with a bank that had agreed in advance to expedite buyers’ mortgages).

By the end of October, it looked like the home buyer tax credit was going to be extended (as it was). It’s not clear if that was sufficient to motivate some buyers to sign a contract for a new home that month.

Single-family existing home sales rose smartly to 5.33 million sales (at a seasonally adjusted, annual rate) in October from 4.86 million in September. That was the highest sales rate since the 5.75 million sales in February 2007.

Since existing home sales are based on sales closings (i.e., settlements), they represent contracts signed in previous months, incorporating the effects of the first-time home buyer tax credit at work. At the same time, distressed sales constitute roughly 30% of existing home sales. Single-family existing home sales have generally been rising since they hit their cyclical low of 4.05 million in January of this year.

Inventories of Unsold Homes Continue to Fall

As of the end of October, the inventory of new homes for sale had fallen to 239,000, the lowest it has been since May 1971 when it stood at 236,000. October’s months’ supply — the amount of time it would take to sell the current inventory of homes based on the month’s sales rate — fell to a respectable 6.7 months from 7.4 months in September and was down considerably from the historic high of 12.4 months in January this year.

Meanwhile, the inventory of single-family existing homes for sale fell to 3.0 million in October from 3.1 million in September and 3.3 million in August. The months’ supply of existing single-family homes for sale fell to 6.8 months in October, down from 7.6 months in September. That was down considerably from June 2008’s cyclical peak of 11.0 months.

Multifamily Construction Struggles

Multifamily units (in buildings with two or more units) were started at a seasonally adjusted annual rate of just 53,000 in October, their lowest level since starts began to be reported in 1959. Multifamily starts, which are notoriously volatile from month to month, averaged 142,000 in the first half of the year and averaged 80,000 from July through October.

Multifamily building permits, which are less volatile, have not been much more encouraging. In the first half of this year they averaged 146,000. From July through October, they averaged 110,000. In both July and October, 101,000 multifamily permits were pulled, the lowest number reported since the series began in 1960.

Multifamily construction is struggling against stiff competition from the single-family rental market and significant obstacles to construction financing that began in 2008.

Data on the Value of Construction Put in Place verify the differing trends in single-family and multifamily housing. The value of single-family construction rose 1.9% in October after rising 2.6% in September. By contrast, the value of multifamily construction fell 2.1% in October after falling 5.0% in September.

Housing Prices Show Some Life

The S&P/Case-Shiller national house price index rose in the third quarter, the second increase in a row. The index rose by 1.8% and 1.9% in the second and third quarters, respectively, on a seasonally adjusted basis.

Nonetheless, the national index was down 8.9% from third quarter 2008, leaving national prices at around their fall 2003 level. Meanwhile, the S&P/Case-Shiller 10-city and 20-city indexes have both shown four consecutive months of increases.

Similarly, the Federal Housing Finance Agency’s (FHFA) seasonally adjusted, purchase-only housing price index (formerly the OFHEO housing price index) has risen in four of the last five months as of its September reading. On a year-over-year basis, the index was down 3.0%.

It would appear that the activity generated by first-time home buyer tax credit helped boost demand, and that led to some price stability.

The battle between house prices and inventory overhang comes down to the amount of demand generated by the extension and expansion of the tax credit against rising foreclosures as a poor economy and weak labor market continue to reduce housing demand and increase mortgage failures.

The balance between the demand and supply forces is precarious. NAHB’s forecast places demand in the winner’s column, but it is a close call. 

Housing Still Faces Significant Headwinds

Although the economic environment for housing is improving and the extended and expanded home buyer tax credit will provide a much-needed boost to housing (for information on the credit, go to, the housing market still faces significant headwinds, even as there are signs that these challenges may be starting to recede.

In addition to the expected weak job market recovery, potential home buyers need large downpayments and/or near stellar credit to obtain a reasonable mortgage.

Also, builders continue to face difficulty in obtaining Acquisition, Development and Construction (AD&C) loans. Not only have builders found it increasingly difficult to obtain these loans, but in many cases they have faced significant adverse changes to existing loans. These have included reductions in the size of loans previously agreed to (e.g., reductions in lines of credit), demands for increased equity for outstanding loans and, in some cases, demands for full repayment of outstanding loans.

It has not been uncommon for these increased requirements to transform a performing loan into a non-performing loan.

Inaccurate appraisals are another force hindering a faster recovery for housing. These occur when an appraiser — often from outside the area being appraised — uses sales from a dissimilar neighborhood as a comparison or uses a foreclosure or short sale as a comparison without proper adjustment for differences in the condition of the house.

Foreclosures remain a drag on numerous housing markets. Many of these foreclosures are concentrated in the formerly hot markets — parts of California, Las Vegas, Phoenix and southern Florida — and economically distressed markets, primarily in the Great Lakes region of the upper Midwest.

Even with an improving economy and the home buyer tax credit, foreclosures will be fed by the weak employment market and are likely to continue to rise into the first part of 2010, especially in these areas.

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