National Housing Market Outlook

Resale Volumes: Another Shoe to Drop?

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John Burns

December 18, 2009
Existing home sales volumes are off 30% from the peak and have returned to 1998 levels (see the chart below that removes some of the month-to-month gyrations). While this might seem like a plunge, a little more historical analysis is in order.
Current resale volumes represent 4.4 transactions per 100 households, which is higher than the historical norm (since 1968) of 3.9 transactions per 100 households. Transaction volume remains well above the norms. Some of the boost in the early part of this decade was due to allowing Fannie and Freddie to raise the limits on conforming loans from $207,000 in 1996 to $417,000 in 2006, and even higher “jumbo conforming” loan limits in the last few years. With Fannie and Freddie now controlled by the government, we expect major changes there, beginning in the Spring when their budgets are due to be approved.
Sales volumes are being propped up by government intervention (tax credit, aggressive FHA lending, Freddie and Fannie bailout, and Fed mortgage rate intervention) and investor activity that now exceeds 2005 levels as a % of total activity. In other words, there would be far fewer home buyers today (just as there was in 1968-70, 1973-75, 1981-83 and 1990-92) and house prices would be falling even further.
Therefore, if you run a business that is tied to housing, pay far more attention than usual to what is going on in Washington D.C. as it is likely to determine the health of your business in 2010.
Watch all of the nuances in pending bills, which are likely to include changes to down payment requirements, FICO scores, insurance premiums, limits on certain types of buildings, dollar limits, and limits on costs that can be paid by the seller. When steady job growth returns – which it almost certainly will not in the next few months, despite this month’s encouraging news – market factors should be able to take over.
Economic Growth………………………………………………………………….D
The economy remains weak and although some indicators have improved compared to last month, they are improving from very low numbers. The third quarter GDP growth rate was revised downward to +2.8% from the preliminary report of +3.5%. Despite the downward revision, it still marks a great improvement from the second-quarter, and is the first quarterly increase in four quarters. Job losses have eased slightly compared to last month, yet remain awful compared to history. In the last 12 months the U.S. has lost nearly 4.7 million jobs, which is equal to a decline of 3.4% of the total payroll workforce – representing one of the largest declines in 60 years. The headline unemployment rate surprisingly declined this month, reaching 10.0% in November, down from 10.2% in October. The U-6, a broader measure of unemployment that covers part-time workers who would like full-time work and those who have given up looking for work, also decreased to 17.2% in November, down from 17.5% in October. Mass layoff events – defined as a cut of 50 or more jobs from a single employer – eased once again in October to 2,127, and marks the first year-over-year decline since August 2007, representing a 3.5% drop compared to one year ago. The length of time required to find employment continues to increase, with job seekers taking over twice the normal length of time to find employment. The November CPI (all items) rose to 1.8% from one year ago, while the Core CPI (minus food and energy) remained flat at 1.7%.
Leading Indicators…………………………………………………………………C-
The U.S. leading indicators took a leg down this month after a run of steady improvements in recent months. In October, the Leading Economic Index 6-month growth rate declined to 10.2% yet remains one of the largest year-over-year growth rates on record since 1983. Although the ECRI Leading Index, which is a gauge of future economic growth, also declined to 23% since one year ago, it still represents one of the largest growth rates since ECRI began tracking the statistic in 1968. Stocks continued to perform well throughout November. All four major indices we track have now posted positive year-over-year results, ranging from +17% to +40%, compared to one year ago. The S&P Homebuilding Index inched up in November and has shown a year-over-year improvement for the second time since April 2006. The spread between corporate bonds and the 10-year treasury increased slightly in November, reaching 177 bps. 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. CEOs are now much more confident about the economy, according to the CEO Confidence Index.
Affordability improved once again this month as home prices and mortgage rates continued to decline. Our housing-cost-to-income ratio has fallen to 26.1%, which is near the lowest level since data for the index began in 1981. Homeownership costs have fallen drastically in the past year, and now owning the median-priced home is just $54 more expensive than renting the average apartment – and in many parts of the country homeownership costs much less. Due to large job losses and government furloughs, household income has fallen 4% year-over-year to $53,293. Despite the decline in incomes, the median-home-price-to-income ratio remains below the historical average, currently at 3.2. The 30-year fixed mortgage rate continued to decline, reaching 4.78% by November month-end, while adjustable mortgage rates fell to 4.35%. The Fed’s overnight lending target rate remains at a range of 0.00% to 0.25%, which is the lowest level on record. The share of ARM applications declined to 4.8% in the last week of November which is a significantly smaller share than the peak level of 35% of total applications in early 2005.
Consumer Behavior………………………………………………………………..D-
In general, consumer behavior declined compared to last month. Consumer confidence experienced a negligible uptick compared to last month, reaching 49.5, and remains very low compared to history. Consumer sentiment declined in November to 67.4 and also remains well below the historical average. The Consumer Comfort Index increased slightly in November to a monthly average of -46.4. The personal savings rate fell to 4.4%, which is down from a recent peak in May of 6.9%. The U.S. net worth increased nearly $2.7 trillion dollars in the third quarter from the prior quarter. Despite the recent quarterly improvement, the decline year-over-year of $3.4 trillion remains one of the largest on record. The Misery Index – which is based on the unemployment rate and inflation – increased this month.
Existing Home Market……………………………………………………………..C-
The change from last month in the existing home market was mixed. According to the National Association of Realtors (NAR), seasonally adjusted annual resale activity continued to experience large gains in October, rising to 6.1 million home sales, and improving 10% from last month. The 12-month rolling count of resale sales activity has also improved for four consecutive months. Resale sales have experienced an increase due to the $8,000 federal tax credit that was set to expire November 30th, before it got extended to Spring 2010. The national median price of an existing single-family home fell to $173,100 in October from $175,900 in September, and has fallen 7% year-over-year. The pace of decline in the Case-Shiller national index, which tracks paired sales, improved drastically in the third quarter, and marks only the second time in over three years that the index decline eased. Although the Case-Shiller national index remains down nearly 9% year-over-year, it is a sharp improvement from 19% decline reported in the first quarter. The monthly 10-market and 20-market Case Shiller indices also remain down year-over-year, yet have experienced month-over-month improvements since May, and the annual declines have eased in recent months. The number of unsold homes declined again in October, and fell to 7.0 months of supply, reaching very close to the historical average. In October, pending home sales volume improved again, increasing almost 32% year-over-year. As of the third quarter, 23% of all homes with a mortgage throughout the U.S. were worth less than the original value of the mortgage.
New Home Market……………………………………………………………………D
The new home market was mixed this month. Builder confidence declined in December as the Housing Market Index fell to 16. The seasonally adjusted new home sales volume increased in October compared to September, reaching 430,000 transactions – up 5.1% year-over-year. The median single-family new home price increased to $212,200 in October but has declined 0.5% year-over-year. The inventory of unsold homes fell to 6.7 months, down from 7.4 months last month, and is a large improvement compared to 12.5 months of supply in the beginning of 2009.
Repairs and Remodeling…………………………………………………………..D-
The conditions for repairs and remodeling remain poor this month. Homeowner improvement activity worsened in the third quarter, representing a decline of 9.4% year-over-year. The Remodeling Market Index improved to 39.8 in the third quarter and has rapidly rebounded after bottoming in the fourth quarter of 2008. Despite the recent increases, the index remains well below the historical average of 50. The decline in residential construction eased slightly in October, although it has fallen 24% year-over-year.
Housing Supply………………………………………………………………………..F
Housing supply worsened this month. Total completions improved 9% compared to the prior month, reaching 810,000, although they have fallen 25% year-over-year. Seasonally adjusted new home starts increased this month, as single-family starts rose 2% and multifamily starts improved 67% compared to last month. Seasonally adjusted total permits also increased in November to 584,000 units. Total permit activity has fallen 7% year-over-year and over 74% since its most recent peak in September 2005. Although vacancy rates in the U.S. have improved in recent quarters, the majority of the U.S. remains oversupplied compared to history. Just four states in the U.S. are currently undersupplied – Texas, Louisiana, West Virginia and Iowa.
Data Current Through December 17, 2009
Overall Grade
Economic Growth
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate) 2.8% C
Employment Growth (1-year Change)
- Non-ag Payroll, NSA -4,659,000 D
Employment Growth Rate
- Non-ag Payroll, NSA -3.4% D
Unemployment Rate 10.0% F
Average Length of Unemployment (Weeks) 28.5
Median Length of Unemployment (Weeks) 20.1
% of Labor Force Unemployed 27 weeks and over 3.8%
U.S. Initial Jobless Claims 457,000
Mass Layoff Events, SA (YOY % Change) -3.5% C+
Productivity 9.5% B
Retail Sales 1.9% C-
Capacity Utilization 71.3% F
Core CPI 1.7% B+
Full CPI 1.8% C
Personal Income Growth, nominal -1.0% F
Federal Deficit (last 12 mos., $mil curr.) -$1,447,147 F
U.S. Immigration as a % of Total Population 0.4%
Total Population Growth 1.0%
Total Households 111,459,000
- Growth Rate 0.7% D
Owned Households 75,339,000
- Growth Rate 0.2% D
Rented Households 36,119,000
- Growth Rate 1.7% 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.) 10.2% B
ECRI Leading Index 23.4% A
Manpower Net Employment Outlook 6% D
U.S. Vistage CEO Confidence Index 85%
CEO Economic Outlook Survey 72%
U.S. Average Hours Worked per Week 33.2
Temporary Employed Workers -23.9% F
Corporate Profit Growth (pre-tax) -6.7% D
Corporate Bond Spread (Corp Bond vs. 10-Yr Tres.) 166.0%
Capital Goods New Orders -12.8% D
Money Supply - M2 5.6% B-
Interest Rate Spread
10-year Treasury 3.30%
2-year Treasury 0.73%
Interest Rate Spread 2.57% B+
3-month LIBOR 0.27%
3-month Treasury 0.05%
TED Spread 0.22% B
Stock Market (Return over last 12 months)
Dow Jones 17% C
S&P 500 22% B-
Wilshire 5000 25% B
S&P Super Homebuilding 20% C
Tougher Standards on Business Loans - Large Firms 32% D+
Tougher Standards on Business Loans - Small Firms 34% D+
Crude Oil Price (Current $) $78.08 D
ISM Manufacturing Index 53.6 C
ISM Non-Manufacturing Business Activity Index 49.6 D+
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)
Housing Cycle Barometer 0.8 A
US Median Home Payment / Income Ratio 26.1%
US Median Home Price / Income Ratio 3.2 C
Mortgage Rates, Fixed 4.78% A+
Mortgage Rates, Adjustable 4.35% B+
Fixed/Adjustable Spread 0.43% F
Fixed/10-year Spread 1.48% C-
Fed Funds Rate 0.15%
Percentage of Adjust. Loans 4.8% A-
Equity/Owned Home (Current $) $82,471 D-
Debt % in Home (LTV) 62.4% F
Median Household Income $53,293
- Growth Rate, nominal -3.9% 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 49.5 D-
Consumer Sentiment Index 67.4 D
Consumer Comfort Index -46.4 F
Revolving Cons. Credit per Household $7,954
- Growth Rate -8.2% A+
Personal Savings Rate 4.4% D+
U.S. Net Worth Growth Rate -6.0% D
Financial Obligation Ratio 18.1% D
Misery Index (Unemployment + Inflation) 11.80 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) -8.9% D
NAR Single-Family Median Home Price $173,100
NAR Single-Family Annual Price Appreciation -6.8% D
Freddie Mac Annual Price Appreciation -4.0% F
Annual Sales Volume, SA 6,100,000 B+
Existing Home Inventory for Sale, SA 3,574,000 D
Months Supply of Unsold Homes, SA 7.0 C
Purchase Mort. App. Index, SA 239.9 C
Pending Home Sales Index, SA 114.1 B-
Homeownership Rate 67.6% 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 24 D
Median Price, NSA $212,200
Annual Appreciation Rate -0.5% D+
Constant Quality Price Index (YOY % Change) -6.1% F
Sales Volume, SA 430,000 F
New Home Inventory for Sale, NSA 240,000 B
Months Supply of Unsold Homes, SA 6.7 C
Months of Homes Completed, SA 2.9 C+
Months of Homes Under Const., SA 2.9 D+
Months of Homes Not Started, SA 0.9 C-
Repairs and Remodeling
High remodeling levels are good for the economy and are closely tied to consumer confidence.
Homeowner Improvement Activity (YOY % Change) -9.4% D-
Remodeling Market Index - Current 39.8 D+
Remodeling Market Index - Future Expectations 38.7 D+
Private Residential Construction (YOY % Change) -23.6% 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 810,000 F
Single-Family Starts, SA 482,000 F
Multifamily Starts, SA 92,000 F
Total Starts, SA 574,000 F
Single-Family Permits, SA 473,000 F
Multifamily Permits, SA 111,000 F
Total Permits, SA 584,000 F
Manuf. Housing Placements, SA 50,000 F
Total Supply, SA 634,000 F
Total Housing Stock 130,302,000
Homeowner Vacancy Rate 2.6% 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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