National Housing Market Outlook

The Housing Market is about to Become Even More Oversupplied

October 7, 2009
While both the media and stock investors believe that housing has bottomed, they are unaware of the massive supply of homes that are already in the foreclosure process that will certainly drive home prices down even further when they are sold. We have been projecting a “W” shaped recovery for some time, and we are becoming even more convinced that we are right. The shape of the second leg down is almost completely dependent on the level of government intervention that will take place.
For a number of reasons, banks have not been aggressively taking title to homes and selling them, which has resulted in very few distressed sales in comparison to the actual level of distress in the market. This delay in REO sales, along with historically low mortgage rates and an $8,000 tax credit, has helped to stabilize the housing market – temporarily.
It is very clear that price stabilization is temporary unless something is done. Here are some facts to help project what housing will be like in 2010:
  • 13.54% of the 44.7 million mortgages tracked by the Mortgage Bankers Association are delinquent.

  • 7.57 million homeowners are delinquent, applying the same percentage to the 11.2 million mortgages not tracked by the MBA (55.9 million total mortgages in the U.S.). That means that 10% of all homeowners in the country are delinquent.

  • Based on historical trend analysis by Amherst Securities, 6.94 million homes that are already delinquent will be liquidated, which is more than a one year supply of distressed sales poised to hit the market sometime in 2010 and 2011. During Q1 2005, that figure was only 1.27 million.

  • Defaults continue to grow at the rate of approximately 300,000 per month, assuring that the number of distressed sales will grow and will continue through 2012.
2009 Government Intervention
Government intervention to date has been extremely helpful in preventing an even more dramatic decline in home prices. As shown in the chart at right, housing demand has only fallen to “normal” levels and stabilized there. Without historically low mortgage rates, support for Freddie Mac, Fannie Mae and FHA, and an $8,000 tax credit, how far would sales have fallen this year and what would that decline in demand have done to pricing?
Demand needs to continue to be stimulated to bring down supply, particularly while the country continues to lose jobs. Without continued government intervention, home prices will plummet, banks and the GSEs will continue to lose money, and the economy has virtually no chance of increasing overall employment in 2010.
Economic Growth………………………………………………………………….D
Economic growth deteriorated this month as the economy remains very weak. Annual job losses continued, marking one of the worst losses in 60 years. The headline unemployment rate increased to 9.8%, after reaching 9.7% last month. Mass layoff events – defined as a cut of 50 or more jobs from a single employer – also increased this month, and are up nearly 43% year-over-year. Currently, it takes job seekers twice the normal length of time to find employment. The CPI (all items) decreased at a slower rate in August, recording a decline of 1.5%, while the Core CPI (minus food and energy) showed an increase of 1.4%. The final second-quarter GDP growth rate is at -0.7%, which is a significant improvement from the -6.4% decline in the first quarter.
Leading Indicators…………………………………………………………………C-
Many leading indicators continue to improve, and suggest that the worst of the recession is behind us. The Leading Economic Index 6-month growth rate rose in August to its highest level since early 2004. The ECRI Leading Index – an indicator of future U.S. growth – has increased almost 21% since the beginning of the year – the largest growth rate since 1971. Stocks continued to rise through September and the four major indices now range from -10% to +2% year-over-year. The S&P Homebuilding Index rose in August, increasing 14% from the previous month, but remains down 5% year-over-year and down 72% from its peak in July 2005. The Net Employment Outlook turned negative for only the second time in the 20-year history of the index (the first was last quarter), as more employers that were surveyed foresaw staff levels decreasing than increasing. The average hours worked per week by Americans declined slightly in September, reaching its lowest levels on record, partly due to furloughs forced upon both government and private sector employees. The price of crude oil declined to a monthly average of $69.46 per barrel in September, representing a 2% month-over-month decline.
Affordability improved this month as both mortgage rates and the median resale price fell compared to last month. Currently, our housing-cost-to-income ratio has fallen to 26.7%, which is near the lowest level since we began calculating the index in 1981. Due to the correction in home prices and low mortgage rates, owning a home is now essentially the same cost as renting, making it favorable for first-time home buyers to purchase a home. Household income has fallen 6% year-over-year to $52,856 as a result of job losses and furloughs. Despite the decline, the median-home-price-to-income ratio has fallen to 3.3, which is now equal to the historical average. The 30-year fixed mortgage rate fell again in September, reaching 5.04% by month-end, while adjustable mortgage rates reached 4.52% at September month-end. 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 increased to 5.6% in the last week of August, according to the Mortgage Bankers Association. However, the share of ARM applications remains extremely low when compared to peak levels above 35% of total applications in early 2005.
Consumer Behavior………………………………………………………………..D-
Consumer behavior was mixed this month. Consumer confidence declined after increasing last month, falling to 53 – far below the historical average of 97. Consumer sentiment increased in September to 73.5, reaching its highest level since January 2008. The Consumer Comfort Index also increased in August to -46.4. The personal savings rate has fallen in the last two months after spiking at 6.9% in May. The U.S. net worth increased nearly two trillion dollars in the second quarter compared to the first quarter. This represents the first increase in net worth in almost two years, and is largely due to recent large gains experienced in the stock market. Despite the recent improvement, the second quarter year-over-year decline is the third worst on record in the 50-year history of this data point, losing $7.4 trillion of wealth in the past year. Both unemployment and inflation increased this month, resulting in a rising Misery Index (the sum of the two rates).
Existing Home Market……………………………………………………………..D+
The existing home market remains weak yet seems to be stabilizing. Seasonally adjusted annual resale activity in August declined almost 3% from last month to 5.1 million homes, an improvement of 3% compared to one year ago, according to the National Association of Realtors (NAR). The rolling 12-month count of resale sales activity has increased for the second month in a row. The national median resale price fell to $177,500, and has declined 12% year-over-year. Weak consumer confidence and increased foreclosure sales continue to put downward pressure on resale prices. The Case-Shiller index, which tracks paired sales, fell 15% in the second quarter of 2009 compared to the second quarter of 2008. In August, the number of unsold homes declined sharply to 8.5 months of supply yet remains elevated compared to history. Pending home sales volume increased this month, and represents a 12% year-over-year gain. As of the second quarter, 32% of all homes with a mortgage were worth less than the original value of the mortgage.
New Home Market………………………………………………………………….D
A few components of the new home market improved this month. Builder confidence increased in September to a Housing Market Index rating of 19 – the third consecutive month of an increasing index. The inventory of unsold homes continued to improve and has fallen to 7.3 months of supply. Seasonally adjusted new home sales are down 3% year-over-year and are down 69% from a peak of nearly 1.4 million annual sales in July 2005. The rolling 12-month count of new home sales was flat compared to last month – the first time since 2005 it hasn’t declined from the previous month. The median single-family new home price dropped sharply to $195,200 in August from July’s $215,600 median – representing an 11.7% year-over-year decline.
Housing Supply…………………………………………………………………..F
Seasonally adjusted total permits increased to 579,000 as a result of a large jump in multifamily permits, while single-family permits declined slightly. Seasonally adjusted total new home starts decreased in August to 479,000, due to a 3% drop in single-family starts, and are down 22% from one year ago.
Data Current Through October 6, 2009
Overall Grade
Economic Growth
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate) -0.7% D+
Employment Growth (1-year Change)
- Non-ag Payroll, NSA -5,813,000 D-
Employment Growth Rate
- Non-ag Payroll, NSA -4.2% D-
Unemployment Rate 9.8% F
Average Length of Unemployment (Weeks) 26.2
Median Length of Unemployment (Weeks) 17.3
% of Labor Force Unemployed 27 weeks and over 3.5%
U.S. Initial Jobless Claims 530,000
Mass Layoff Events, SA (YOY % Change) 42.6% D+
Productivity 6.6% B-
Retail Sales -8.5% F
Core CPI 1.4% A-
Full CPI -1.5% B-
Personal Income Growth, nominal -2.4% F
Federal Deficit (last 12 mos., $mil curr.) -$1,520,441 F
U.S. Immigration as a % of Total Population 0.4%
Total Population Growth 1.0%
Total Households 112,119,000
- Growth Rate 0.8% D-
Owned Households 75,607,000
- Growth Rate -0.1% D
Rented Households 36,512,000
- 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.) 8.9% B-
ECRI Leading Index 20.8% A+
Manpower Net Employment Outlook -2% F
U.S. Vistage CEO Confidence Index 69%
CEO Economic Outlook Survey 19%
U.S. Average Hours Worked per Week 33.0
Temporary Employed Workers -30.2% F
Corporate Profit Growth (pre-tax) -10.9% D
Residential Investment as % of GDP (nominal) 2.4% F
Interest Rate Spread
10-year Treasury 3.43%
2-year Treasury 0.98%
Interest Rate Spread 2.45% B+
3-month LIBOR 0.30%
3-month Treasury 0.12%
TED Spread 0.18% B
Stock Market (Return over last 12 months)
Dow Jones -10% C-
S&P 500 -9% D+
Wilshire 5000 -8% D+
S&P Super Homebuilding -5% C-
Tougher Standards on Business Loans - Large Firms 32% D+
Tougher Standards on Business Loans - Small Firms 34% D+
Crude Oil Price (Current $) $69.46 D+
ISM Manufacturing Index 52.9 C
ISM Non-Manufacturing Business Activity Index 51.3 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)
Housing Cycle Barometer 1.2 A-
US Median Home Payment / Income Ratio 26.7%
US Median Home Price / Income Ratio 3.3 C
Mortgage Rates, Fixed 5.04% A+
Mortgage Rates, Adjustable 4.52% B+
Fixed/Adjustable Spread 0.52% F
Fixed/10-year Spread 1.61% C
Fed Funds Rate 0.15%
Percentage of Adjust. Loans 5.6% A-
Equity/Owned Home (Current $) $104,096 C
Debt % in Home (LTV) 56.9% F
Median Household Income $52,599
- Growth Rate, nominal -6.0% 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 53.1 D-
Consumer Sentiment Index 73.5 D+
Consumer Comfort Index -46.4 F
Revolving Cons. Credit per Household $7,601
- Growth Rate -7.9% A+
Personal Savings Rate 4.2% D+
U.S. Net Worth Growth Rate -12.3% F
Financial Obligation Ratio 18.1% D
Misery Index (Unemployment + Inflation) 8.20 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) -14.9% F
NAR Single-Family Median Home Price $177,500
NAR Single-Family Annual Price Appreciation -12.1% F
Freddie Mac Annual Price Appreciation -4.5% F
Annual Sales Volume, SA 5,100,000 B-
Existing Home Inventory for Sale, SA 3,622,000 D
Months Supply of Unsold Homes, SA 8.5 C-
Purchase Mort. App. Index, SA 277.7 C
Pending Home Sales Index, SA 97.6 D+
Homeownership Rate 67.4% B
New Home Market
High appreciation and low inventory would mean an excellent short-term outlook for the new home industry.
Housing Market Index 19 F
Multifamily Condo Market Index 15 F
Median Price, NSA $195,200
Annual Appreciation Rate -11.7% F
Constant Quality Price Index (YOY % Change) -6.2% F
Sales Volume, SA 429,000 F
New Home Inventory for Sale, NSA 262,000 B
Months Supply of Unsold Homes, SA 7.3 C+
Months of Homes Completed, SA 3.2 B-
Months of Homes Under Const., SA 3.1 D+
Months of Homes Not Started, SA 1.1 C
Housing Supply
High construction levels are good for the economy. However, if new supply exceeds demand, prices could fall.
New Housing Units Completed, SA 760,000 F
Single-Family Starts, SA 479,000 F
Multifamily Starts, SA 119,000 F
Total Starts, SA 598,000 F
Single-Family Permits, SA 462,000 F
Multifamily Permits, SA 117,000 F
Total Permits, SA 579,000 F
Manuf. Housing Placements, SA 47,000 F
Total Supply, SA 626,000 F
Total Housing Stock 130,828,000
Homeowner Vacancy Rate 2.5% 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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