National Housing Market Outlook

Don’t Be Fooled, But It is OK to be Optimistic

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John Burns

March 10, 2010
Over the next 3 months, the Census Bureau is going to hire about 1.2 million temporary workers. The seasonally adjusted impact of these numbers will be massive, so don’t overreact positively when the news makes headlines a few months from now.
Nonetheless, we believe that positive job creation is getting ready to occur as most of the leading indicators point to solid growth ahead, and recent job loss figures have been only slightly negative. Job creation is going to be driven by big companies who have downsized significantly, as well as small businesses who will slowly return to growth mode.
Since the length of unemployment in the labor force is still hovering near 30 weeks, (the record high since the BLS began tracking the statistic in 1948), we also believe that job-growth focused government stimulus will continue.
Economic Growth………………………………………………………………….D+
Overall economic growth was about the same this month compared to last, and the results for our economic growth metrics were mixed. The revised fourth quarter GDP growth rate increased to 5.9% from the preliminary estimate of 5.7%. Much of the growth was still the result of recent government stimulus and an increase in inventories. The pace of job losses also eased this month, although in the last 12 months the U.S. has lost 3.24 million jobs, which is equal to a decline of 2.5% of the total payroll workforce. The unemployment rate remained flat this month at 9.7%, while the broader measure of unemployment, the U-6, increased to 16.8%. The length of unemployment in the labor force declined slightly to just under 30 weeks this month, yet remains the second highest month on record since the BLS began tracking the statistic in 1948. Personal income improved in January and has returned to positive year-over-year growth for the first time since December 2008, increasing by 1.1%. The CPI (all items) decreased to 2.6% from one year ago, while the Core CPI (minus food and energy) also dropped to 1.6%.
Leading Indicators…………………………………………………………………C
Overall leading indicators held relatively steady this month, but several individual metrics actually improved. The Leading Economic Index 6-month growth rate declined in January to 9.8% from 12.2% last month and remains very high compared to history. The ECRI Leading Index – an indicator of future U.S. growth – increased in January to its highest level since May 2008. The index increased 21.5% year-over-year and has experienced positive year-over-year growth for the past 8 months. Stocks improved in February after declining in January, and all four major indices have now experienced large positive year-over-year growth, ranging from +46% to +62%. The S&P Homebuilding Index also improved this month. The spread between corporate bonds and the 10-year treasury fell in January, declining to 160 bps after peaking at nearly 270 bps in March. Since the 10-year treasury is seen as a risk-free investment, the spread between corporate bonds and the 10-year treasury displays the perceived risk of investing in corporate bonds, which has declined recently as Wall Street has become less worried about businesses failing. According to the 4th quarter CEO Confidence Index, CEOs are now much more confident about the economy. Despite the increase, the outlook index remains lower than earlier this decade. Business credit availability remains very poor but deteriorated at a slower rate in the first quarter of 2010.
This month, affordability improved due to generally declining median home sales prices throughout the country. In addition, our housing-cost-to-income ratio dropped to 25.0%, and housing affordability remains excellent compared to history. Affordability is so good that owning the median-price home is now less expensive than renting the average apartment. Household income has fallen 4.1% year-over-year to $52,389 as a result of large job losses and government furloughs. The median-home-price-to-income ratio dropped just slightly below the historical average of 3.3 this month to 3.1. The 30-year fixed mortgage rate increased slightly to 4.98% by January month-end, while adjustable mortgage rates fell to 4.29%. The Fed’s overnight lending target rate remained at a range of 0.00% to 0.25%, which is the lowest level on record. The share of ARM applications increased to 4.5% by the end of January but is still significantly less than the peak level of 35% of total applications in early 2005.
Consumer Behavior………………………………………………………………..D
Consumer behavior worsened this month as consumer confidence dropped sharply to 46.0, which was well below most economists’ expectations. Consumer sentiment also dropped this month, falling to 73.6, which is well below the historical average. The credit outstanding per household has fallen 10.4% over the last year to $7,752 per household. The personal savings rate ticked up to 4.8% but is down from the recent peak of 6.9% in May 2009. The Misery Index dropped for the first time in several months in January, falling to 12.3 from 12.7 the previous month. This was the result of a slight drop in the unemployment rate.
Existing Home Market……………………………………………………………..D+
The existing home market worsened this month as the median price and sales volume fell, and the months of supply increased. The seasonally adjusted annual resale activity declined to 5.05 million homes in January, according to the National Association of Realtors (NAR), but has increased 12% year-over-year, albeit from historically low levels. Despite the seasonally adjusted decline, on a rolling 12-month basis sales have improved for eight consecutive months, increasing 0.3% this month and 5.8% year-over-year. The federal tax credit was set to expire on November 30th until it was ultimately extended to Spring 2010. This led to a surge of closings in November, but sales have dropped over the past two months. The national median price of an existing single-family home dropped to $163,600 in January from $169,600 the previous month. The recent increase led to a 1.4% year-over-year gain and marks the first positive growth rate since July 2006. The Case-Shiller national index, which tracks paired sales, declined in the fourth quarter, but year-over-year losses for the index eased once again. The number of unsold homes increased to 7.8 months of supply, which is above the historical average. Pending home sales experienced a slight increase this month after dropping sharply the previous month. As of the fourth quarter, 24% of all homes with a mortgage throughout the U.S. were worth less than the balance of the mortgage.
New Home Market……………………………………………………………………C-
Overall, the new home market improved this month despite the reported decrease in new home sales, which we believe to be inaccurate. Builder confidence improved in January to 17 from 15 last month. The seasonally adjusted new home sales volume fell to 309,000 transactions, declining 6% year-over-year, but the sample size used by the Census Bureau to calculate this metric is extremely small and the confidence interval is quite large. The rolling 12-month total also fell this month to 371,000 transactions, which is also the lowest level since at least 1963. The median single-family new home price dropped to $203,500 and has fallen 2.4% year-over-year. The inventory of unsold homes increased again this month to 9.1 months of supply, and the volume of new homes for sale remains essentially flat at 234,000 homes, which is near the lowest volume since April 1971.
Repairs and Remodeling…………………………………………………………..D-
Conditions for residential repairs and remodeling were mixed this month, with some metrics increasing and others decreasing. Homeowner improvement activity declined 5.4% year-over-year but was slightly better than last quarter’s rate. The Remodeling Market Index decreased in the fourth quarter to 36.4 after increasing for the previous few quarters. In addition, the index remains well below the historical average of 50. Residential construction has fallen 11% year-over-year as of December, but the pace of decline has eased.
Housing Supply………………………………………………………………………..F
In general, the housing supply held relatively steady this month, albeit at very low levels. Total completions fell to 659,000 units this month, which is a 15% year-over-year decline. However, seasonally adjusted new home starts increased in January, due to increases in both single-family and multifamily starts. Seasonally adjusted total permits decreased to 621,000 this month, which is a 5% month-over-month decline, but permits have increased 17% year-over-year. Although vacancy rates in the U.S. have improved in recent quarters, the majority of the U.S. remains oversupplied compared to history. Just six states in the U.S. are currently undersupplied – Oklahoma, Wyoming, New Mexico, North Dakota, South Dakota and Alaska. The homeowner vacancy rate increased again in the fourth quarter of 2009 to 2.7%, which is up from 2.6% in the third quarter.
Data Current Through March 9, 2010
Overall Grade
Economic Growth
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate) 5.9% C+
Employment Growth (1-year Change)
- Non-ag Payroll, NSA -3,235,000 D
Employment Growth Rate
- Non-ag Payroll, NSA -2.5% D
Unemployment Rate 9.7% F
Average Length of Unemployment (Weeks) 29.7
Median Length of Unemployment (Weeks) 19.4
% of Labor Force Unemployed 27 weeks and over 4.0%
U.S. Initial Jobless Claims 496,000
Mass Layoff Events, SA (YOY % Change) -22.7% B
Productivity 6.2% B-
Retail Sales 4.7% C
Capacity Utilization 72.6% D-
Core CPI 1.6% A-
Full CPI 2.6% C
Personal Income Growth, nominal 1.1% D-
Federal Deficit (last 12 mos., $mil curr.) -$1,464,050 F
U.S. Immigration as a % of Total Population 0.4%
Total Population Growth 1.0%
Total Households 111,711,000
- Growth Rate 0.9% D
Owned Households 75,038,000
- Growth Rate 0.4% D
Rented Households 36,673,000
- Growth Rate 2.0% C+
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.) 9.8% B
ECRI Leading Index 21.5% A-
Manpower Net Employment Outlook 6% D
U.S. Vistage CEO Confidence Index 88%
CEO Economic Outlook Survey 72%
U.S. Average Hours Worked per Week 33.1
Temporary Employed Workers 3.9% D+
Corporate Profit Growth (pre-tax) -6.7% D
Corporate Bond Spread (Corp Bond vs. 10-Yr Tres.) 160.0%
Capital Goods New Orders 10.7% B
Money Supply - M2 -0.7% D+
Interest Rate Spread
10-year Treasury 3.66%
2-year Treasury 0.86%
Interest Rate Spread 2.80% A-
3-month LIBOR 0.25%
3-month Treasury 0.06%
TED Spread 0.19% B
Stock Market (Return over last 12 months)
Dow Jones 46% B-
S&P 500 50% A+
Wilshire 5000 53% A+
S&P Super Homebuilding 43% B-
Tougher Standards on Business Loans - Large Firms -6% B
Tougher Standards on Business Loans - Small Firms 4% C+
Crude Oil Price (Current $) $76.42 D
ISM Manufacturing Index 58.4 C+
ISM Non-Manufacturing Business Activity Index 52.2 C-
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)
JBREC Affordability Index 0.0 A+
US Median Home Payment / Income Ratio 25.0%
US Median Home Price / Income Ratio 3.1 B-
Mortgage Rates, Fixed 4.98% A+
Mortgage Rates, Adjustable 4.29% B+
Fixed/Adjustable Spread 0.69% D-
Fixed/10-year Spread 1.32% D+
Fed Funds Rate 0.15%
Percentage of Adjust. Loans 4.5% A-
Equity/Owned Home (Current $) $82,471 D-
Debt % in Home (LTV) 62.4% F
Median Household Income $52,389
- Growth Rate, nominal -4.1% F
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 46.0 F
Consumer Sentiment Index 73.6 D+
Consumer Comfort Index -44.5 F
Revolving Cons. Credit per Household $7,752
- Growth Rate -10.4% A+
Personal Savings Rate 4.8% C-
U.S. Net Worth Growth Rate -6.0% D
Financial Obligation Ratio 17.8% D+
Misery Index (Unemployment + Inflation) 12.33 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) -2.5% D+
NAR Single-Family Median Home Price $163,600
NAR Single-Family Annual Price Appreciation -0.4% D+
Freddie Mac Annual Price Appreciation -4.0% F
Annual Sales Volume, SA 5,050,000 B-
Existing Home Inventory for Sale, SA 3,265,000 D+
Months Supply of Unsold Homes, SA 7.8 C
Purchase Mort. App. Index, SA 226.9 C-
Pending Home Sales Index, SA 96.6 D+
Homeownership Rate 67.2% B
New Home Market
High appreciation and low inventory would mean an excellent short-term outlook for the new home industry.
Housing Market Index 17 F
Multifamily Condo Market Index 24 D
Median Price, NSA $203,500
Annual Appreciation Rate -2.4% D
Constant Quality Price Index (YOY % Change) 0.2% D+
Sales Volume, SA 309,000 F
New Home Inventory for Sale, NSA 234,000 B+
Months Supply of Unsold Homes, SA 9.1 B
Months of Homes Completed, SA 3.8 B
Months of Homes Under Const., SA 3.9 C+
Months of Homes Not Started, SA 1.4 B
Repairs and Remodeling
High remodeling levels are good for the economy and are closely tied to consumer confidence.
Homeowner Improvement Activity (YOY % Change) -5.4% D
Remodeling Market Index - Current 36.4 D
Remodeling Market Index - Future Expectations 31.4 D
Private Residential Construction (YOY % Change) -10.9% D+
Residential Investment as % of GDP (nominal) 2.5% F
Housing Supply
High construction levels are good for the economy. However, if new supply exceeds demand, prices could fall.
New Housing Units Completed, SA 659,000 F
Single-Family Starts, SA 484,000 F
Multifamily Starts, SA 107,000 F
Total Starts, SA 591,000 F
Single-Family Permits, SA 507,000 F
Multifamily Permits, SA 114,000 F
Total Permits, SA 621,000 F
Manuf. Housing Placements, SA 47,000 F
Total Supply, SA 668,000 F
Total Housing Stock 130,587,000
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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John Burns
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