National Housing Market Outlook

Misery and Politics

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John Burns

June 16, 2011
With elected and appointed officials debating the future of housing, those who make real estate decisions today have to have a view (or at least a risk/reward tradeoff) on the key issues being debated in DC these days. Officials are seriously considering substantial changes to the mortgage industry, from changing the deductibility of mortgage interest to changing the rules and leadership on government-supported mortgages, which account for more than 90% of all mortgages underwritten today. Will they make and implement changes? What will those changes do to the market in the short-term and long-term? Do they realize that home prices are falling in many markets right now, and policies designed to make homeownership more difficult might cause home prices to tumble again – right before the 2012 election season?
A Surprise from DC – At our annual client meeting last week, The Summit, two of the brightest and most well-connected individuals in DC informed us that elected officials were focused on debt and deficit reduction, and were willing to make negative changes to housing to improve the budget. While debt and deficit reduction are hugely important, the jaws in the room dropped. Are politicians really willing to risk reelection to do what is right long-term? Do government officials really think that voters care more about their long-term problems than their short-term issues? Do officials realize the ramifications of implementing a great long-term solution in a time when housing needs as much support as it can get?
Misery Defined – Economist Arthur Okun developed the Misery Index, which is simply the sum of Inflation + Unemployment, as a means of summarizing how the typical person feels about their own economic prospects. Today, the index stands at 12.2% versus the 63-year average of 9.5%, and we believe the psychological impact of high gas prices leads most consumers to believe we have even more inflation than is being reported in the numbers. Consumers are very unhappy, and there are plenty more reasons shown in the tables below that confirm our conclusion.
Misery and Reelection Don’t Mix – I assume that politicians know that no President has ever been reelected when the Misery Index was above 10.5%. (Ford, Carter and Bush Senior were the three unlucky ones since 1948, the date where the data begins), and I presume the data supports other elected officials as well. Here is the history.
On the Precipice – We are on the precipice and looking down. If the experts are correct in stating that homeownership will become more difficult in 2011 due to policy changes, expect home prices to fall, expect the budget problems to get even worse, and expect a few elected officials to join the ranks of the unemployed next November, driving the Misery Index up even further.
P.S. Before you Share Your Commentary – I want to clarify: my comments are not speaking to anything related to specific political parties – I just don’t want anyone to do anything that causes home prices to decline because there will be far more people harmed than helped if they do. I recognize there are people out there who passionately believe that government should do nothing, as well as others who passionately believe government should stay very involved.
Economic Growth………………………………………………………………….D+
Trends were mixed this month, as a few metrics ticked up while majority ticked down, resulting in a drop from C- last month to D+ this month for overall economic growth. The employment market improved once again this month, (albeit at a less than stellar pace) and YOY employment growth has now been positive for nine consecutive months. Payrolls expanded by 54K in May, the smallest gain since September 2010 when 29K jobs were lost, while the unemployment rate increased marginally from 9% to 9.1%. The government continues to slash jobs (-29K this month), and has now eliminated roughly 850K jobs over the last 12 months. In addition, the average length of unemployment increased to 39.7 weeks (new record high), and the labor force percentage of those unemployed over 27 weeks rose to 4%. While still down YOY, mass layoffs have been trending up over the last several months, rising again this month. The rate of inflation (both full and core) continued to increase this month, maintaining its steady upward trend that began in Spring/Summer 2010.
Leading Indicators…………………………………………………………………C
The leading indicators for the economy are mixed this month, with our overall grade for this subsection of indicators remaining at a C. While its growth rate fell this month, the ECRI Leading Index continues to rise on a YOY basis, now up for the sixth consecutive month. Other leading indicators such as the Small Business Optimism index and ISM Manufacturing/Non-Manufacturing Business Activity indices declined versus last month. Both the ISM Manufacturing and the Non-Manufacturing Business Activity indices have trended down since their recent peaks in February 2011, dropping 13% and 20%, respectively. Corporate profit growth has increased from last quarter, rising at a 19.9% clip YOY versus an 18.3% rate the previous quarter. Corporate profits now comprise 11.3% of total GDP, not far off the peak level of 12.3% in 3Q06
Stocks fell in the month of May for the four major indices we track, with sequential losses ranging from -1.3% for the Wilshire 5000 and NASDAQ to -1.9% for the Dow Jones. The indices have all improved significantly from one year ago, climbing between +23.5% (S&P 500) and +25.6% (NASDAQ) YOY. The S&P Homebuilding Index improved this month, rising 0.9% sequentially, though still down -2.3% YOY. Corporate bond spreads widened slightly this month to 185bps, while 10-year and 2-year Treasury rates fell for the month to fresh 2011 lows. Oil prices dropped 7.9% sequentially in May to $101, marking the third consecutive month of $100+oil.
Affordability has rarely been better for entry-level buyers, and rarely worse for move-up and move-down buyers, who need to extract equity from their existing home. As such, we continue to grade our overall affordability indicator at a D+. Mortgage rates remain near historical lows, and home prices have dropped from unrealistic boom levels to entirely sustainable levels, with some markets like Las Vegas well into “overcorrection” territory. Our housing-cost-to-income ratio remains low, now at 23%, and our JBREC Affordability IndexTM stands at a remarkable 0.4, with zero being the best possible rating for affordability. The median home price to income ratio has risen slightly to 2.92, which is less than the long-term historical norm and near a level conducive to market health. Affordability continues to be bolstered by historically low mortgage rates, which hit fresh 2011 lows in May. The 30-year fixed mortgage rate is currently at 4.6% and adjustable mortgage rates are at 3.11%, both down from last month. 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 is currently at 6.2%, which is still far below the peak level of 35% of total applications in early 2005.
Consumer Behavior………………………………………………………………..D+
Consumer behavior was mixed this month, with several metrics rising and others falling, resulting in an unchanged overall grade of D+. While all three major consumer indices rose last month, this month Consumer Confidence and Consumer Comfort decreased, while Consumer Sentiment ticked up. Due to rising inflation and a marginal increase in the unemployment rate, the misery index (unemployment + inflation) worsened this month, increasing to 12.16%; significantly higher than its historical average of 9.46% that dates back to 1948.
Existing Home Market……………………………………………………………..D+
The existing home market continues to remain weak, with most indicators still grading at poor levels and almost all of the indicators we track falling further this month. According to the National Association of Realtors, seasonally adjusted annual resale activity dropped to 5.05 million homes and median resale prices are down 5.4% YOY (though up marginally M/M). The S&P/Case-Shiller U.S. Index fell in 1Q11 to levels not seen since 2002, while the 10 and 20 market composite indices fell again this month. Existing home inventory rose along with months of supply, while the Pending Home Sales Index witnessed its 3rd worst M/M drop on record. The only bright spot this month is the Purchase Mortgage Application Index, which rose sequentially.
New Home Market……………………………………………………………………D+
The new home market is relatively unchanged from last month, with most indicators grading poorly and our overall grade for the new home market unchanged at a D+. While new home sales increased to 323K units on an annualized basis, rolling 12-month sales decreased to 298K transactions, which is a new historical low that dates back to 1963 when the Census Bureau began tracking this data point. It should be noted, however, that the sample size used by the Census Bureau to calculate new home sales is extremely small and the confidence interval consequently large. The median single-family new home price rose to $217,900 this month, but is still down 3.1% YOY. Supply of new homes continues to dwindle, as evidenced by the months of unsold homes metric, currently at 6.5 months, down from 7.2 months in March. In addition, new home inventory (NSA), declined to 175K this month, hitting a new historical low. Builder confidence was unchanged in May, as the Housing Market Index was flat at 16, still far below its historical average of 50.
Repairs and Remodeling…………………………………………………………..D+
Aside from residential investment and private residential construction, all indicators improved this month for residential repairs and remodeling. Homeowner improvement activity has actually returned to positive territory for the past four quarters, climbing 7.1% YOY. The Remodeling Market Index (current) also rose in 1Q11, increasing from 43.3 to 46.1, just below its historical average of 46.4. In addition, the Remodeling Market Index (future expectations) rose from 39.7 in 4Q10 to 46.8 in 1Q11. The Remodeling market Index (future expectations) has now crossed above its historical average. Residential investment as a percentage of GDP declined to 2.2% this quarter (new historical low), and also fell on an absolute level. Lastly, private residential construction continues its downward trend, falling 12.1% YOY in April.
Housing Supply………………………………………………………………………..F
Housing supply indicators are once again poor this month, with all except one indicator grading at an F. Single-family permits decreased to 385K units (SA), and single-family starts decreased to 394K units (SA). Both of these activity levels remain low by historical standards. New housing units completed rose this month to 554K (SA), while manufactured housing placements fell to 43K (SA). Vacancy rates in the U.S. have improved in recent quarters, but the majority of the U.S. remains oversupplied compared to history, with only 3 states undersupplied, all with small populations. The homeowner vacancy rate decreased this quarter to 2.6%.
Data Current Through June 7, 2011
Overall Grade
Economic Growth
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate) 1.8% C
Employment Growth (1-year Change)
- Non-ag Payroll, NSA 952,000 C
Employment Growth Rate
- Non-ag Payroll, NSA 0.7% C
Unemployment Rate 9.1% D-
Average Length of Unemployment (Weeks) 39.7
Median Length of Unemployment (Weeks) 22.0
% of Labor Force Unemployed (27 weeks and over) 4.0%
U.S. Initial Jobless Claims 422,000
Mass Layoff Events, SA (YOY % Change) -4.3% C+
Productivity 1.8% C
Retail Sales 6.4% B-
Capacity Utilization 76.9% D+
Core CPI 1.3% A-
Full CPI 3.2% C
Personal Income Growth, nominal 4.4% D+
Federal Deficit (last 12 mos., $mil curr.) -$1,395,870 F
U.S. Immigration as a % of Total Population 0.4%
Total Population Growth 1.0%
Total Households 112,164,000
- Growth Rate 0.7% D
Owned Households 74,491,000
- Growth Rate -0.4% F
Rented Households 37,674,000
- Growth Rate 2.8% B
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.) 5.3% C+
ECRI Leading Index 5.0% C
Manpower Net Employment Outlook 8% D+
U.S. Vistage CEO Confidence Index 105%
CEO Economic Outlook Survey 113%
U.S. Average Hours Worked per Week 33.6
Temporary Employed Workers (YOY % Change) 9.1% B-
Corporate Profit Growth (pre-tax) 19.9% C+
Corporate Bond Spread (Corp Bond vs. 10-Yr Tres.) 185.0%
Capital Goods New Orders 9.5% B-
Money Supply - M2 1.7% C
Interest Rate Spread
10-year Treasury 3.10%
2-year Treasury 0.52%
Interest Rate Spread 2.58% B+
3-month LIBOR 0.26%
3-month Treasury 0.06%
TED Spread 0.20% B
Stock Market (Return over last 12 months)
Dow Jones 24% C
S&P 500 23% B-
Wilshire 5000 25% B-
S&P Super Homebuilding -2% C-
Tougher Standards on Business Loans - Large Firms -16% A-
- Small Firms -14% B+
Crude Oil Price (Current $) $101.33 D-
ISM Manufacturing Index 53.5 C
ISM Non-Manufacturing Business Activity Index 53.6 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 0.4 A+
US Median Home Payment / Income Ratio 23.1%
US Median Home Price / Income Ratio 2.9 A-
Mortgage Rates, Fixed 4.60% A+
Mortgage Rates, Adjustable 3.11% A+
Fixed/Adjustable Spread 1.49% C
Fixed/10-year Spread 1.50% C-
Fed Funds Rate 0.15%
Percentage of Adjust. Loans 6.2% B+
Equity/Owned Home (Current $) $84,256 D-
Avg. Debt % in Home (LTV) - Homes with Mortgages 84.6% F
Median Household Income $55,986
- Growth Rate, nominal 1.2% D
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 60.8 D
Consumer Sentiment Index 74.3 D+
Consumer Comfort Index -47.7 F
Revolving Cons. Credit per Household $7,129
- Growth Rate -5.5% B
Personal Savings Rate 4.8% C-
U.S. Net Worth Growth Rate 5.9% C
Financial Obligation Ratio 16.6% B-
Misery Index (Unemployment + Inflation) 12.16 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) -5.1% D+
NAR Single-Family Median Home Price $163,200
NAR Single-Family Annual Price Appreciation -5.4% D
Freddie Mac Annual Price Appreciation -1.1% D
Annual Sales Volume, SA 5,050,000 B-
Existing Home Inventory for Sale, SA 3,870,000 D-
Months Supply of Unsold Homes, SA 9.2 D+
Purchase Mort. App. Index, SA 216.2 C-
Pending Home Sales Index, SA 81.9 F
Homeownership Rate 66.4% 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 25 D+
Median Price, NSA $217,900
Annual Appreciation Rate -3.1% D
Constant Quality Price Index (YOY % Change) -2.4% D
Sales Volume, SA 323,000 F
New Home Inventory for Sale, NSA 175,000 A+
Months Supply of Unsold Homes, SA 6.5 C
Months of Homes Completed, SA 2.5 C
Months of Homes Under Const., SA 2.9 D+
Months of Homes Not Started, SA 1.1 C
Repairs and Remodeling
High remodeling levels are good for the economy and are closely tied to consumer confidence.
Homeowner Improvement Activity (YOY % Change) 7.1% C+
Remodeling Market Index - Current 46.1 C
Remodeling Market Index - Future Expectations 46.8 C
Private Residential Construction (YOY % Change) -12.1% D+
Residential Investment as % of GDP (nominal) 2.2% 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 554,000 F
Single-Family Starts, SA 394,000 F
Multifamily Starts, SA 129,000 F
Total Starts, SA 523,000 F
Single-Family Permits, SA 385,000 F
Multifamily Permits, SA 166,000 F
Total Permits, SA 551,000 F
Manuf. Housing Placements, SA 47,000 F
Total Supply, SA 598,000 F
Total Housing Stock 131,009,000
Excess Vacancy 132611842.1% D
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
Chief Executive Officer
As CEO, John grows, leads, and supports a team of passionate, articulate, likable, and smart experts. Together, we solve today so our clients can navigate to tomorrow.

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