National Housing Market Outlook

The Power of a Tax Credit Near Expiration

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John Burns

January 20, 2010
$8,000 is a powerful incentive for home buyers who are buying their first home, especially when half of the homes in the country are trading at below $172,000.
However, we are also a nation of procrastinators, so the tax credit is really only effective as it nears expiration. We saw this with the new home tax credit in California last Spring and we saw it with the national tax credit last Fall. Note the spike in existing home sales in October and November in the chart below. The existing home data is actually closing data, so most of these contracts were entered into in August September.
We see a large “W” shaped sales volume curve forming, with a huge decline when the December and January data is released, and a potentially even larger spike in May and June, with the new tax credit available to all buyers instead of just entry-level buyers.
Economic Growth………………………………………………………………….D
Economic growth remains sluggish but some indicators have improved since last month. The third quarter GDP growth rate was revised downward for the second time to +2.2% from the previous report of +2.8% and an initial report of +3.5%. Although GDP was revised downward, it is still quite an improvement compared to the previous few quarters. Job losses continue, but the pace of decline has eased, and the revised November numbers showed the first monthly job gain in two years. However, in the last 12 months the U.S. has lost 4.15 million jobs, which is equal to a decline of 3% of the total payroll workforce. The headline unemployment rate remained flat this month compared to November at 10.0%. 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 – increased slightly to 17.3% in December. Mass layoff events – defined as a cut of 50 or more jobs from a single employer – eased again this month to 1,797, and marks the second year-over-year decline since August 2007, falling 23% 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 October CPI (all items) increased sharply to 1.8% from one year ago, while the Core CPI (minus food and energy) remained flat at 1.7%.
Leading Indicators…………………………………………………………………C
Many U.S. leading indicators continued to improve this month, although the pace of improvement is beginning to slow. In November, the Leading Economic Index 6-month growth rate fell to 9.6%, yet remains very high compared to history. The ECRI Leading Index, which is a gauge of future economic growth, increased to its highest level in 77 weeks, and this month posted a growth rate of 24% year-over-year – the second largest annual increase since ECRI began tracking the statistic in 1968. Stocks once again improved in December, yet the recent rapid rate of increase has begun to slow. All four major indices we track have posted year-over-year results ranging from +19% to +44%. The S&P Homebuilding Index also improved in December. The spread between corporate bonds and the 10-year treasury declined sharply in December, reaching 150 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. CEOs confidence in the economy also continues to improve according to the CEO Confidence Index. Confidence as of the third quarter is now approaching early-2007 levels. The survey of CEOs also found that 83% expect their profits to either remain flat or increase in the next 12 months and 84% of CEOs plan to keep the same number of employees or increase the number of employees over the next year.
Affordability worsened slightly this month as mortgage rates inched upward and home prices remained flat. Based on our housing-cost-to-income ratio of just 26.1%, housing affordability is near its best point since 1981 – the furthest back we have reliable data. Owning the median-price home is now nearly just as affordable as renting the average apartment – a difference of just $54. Household income has fallen 4% year-over-year to $53,293 as the result of large job losses and government furloughs. Although incomes have declined, the median-home-price-to-income ratio remains below the historical average, currently at 3.2. The 30-year fixed mortgage rate increased slightly to 5.14% by December month-end, while adjustable mortgage rates fell to 4.33%. 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 3.8% by the end of December which is a significantly smaller share than the peak level of 35% of total applications in early 2005.
Consumer Behavior………………………………………………………………..D
This month consumer behavior improved compared to last month. Consumer confidence rose to 52.9 in December, yet remains very low compared to history. Consumer sentiment also experienced an uptick in December, reaching 72.5, which is also low compared to the historical average. The Consumer Comfort Index also improved in December to a monthly average of -44.5. The personal savings rate remained flat this month at 4.7%%, yet is down from the recent peak in May of 6.9%. The U.S. net worth has increased quickly over the past two quarters due to the improvements in the stock market, yet remains down $3.4 trillion compared to one year ago. The Misery Index spiked this month, largely because inflation increased rapidly, and the index is the sum of the unemployment rate and inflation.
Existing Home Market……………………………………………………………..C-
The existing home market improved this month. The seasonally adjusted annual resale activity continues to increase rapidly, reaching 6.5 million homes in November according to the National Association of Realtors (NAR). This translates into a 7.4% increase from the prior month, and on a rolling 12-month basis sales have improved for five consecutive months, increasing 3.0% this month and 3.9% year-over-year. The gains experienced recently are largely 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 was essentially flat at $171,900 in November yet has fallen 4% year-over-year. The Case-Shiller national index, which tracks paired sales, improved in the third quarter, and although the index remains down 9% year-over-year, the rate of decline eased compared to last quarter. The monthly 10-market and 20-market Case-Shiller indices also remain negative year-over-year but have experienced month-over-month improvements since May, and the annual declines have eased in recent months. The number of unsold homes declined to 6.5 months of supply in November, falling below the historical average for the first time since early-2007. Pending home sales volume declined sharply in November, falling 16% compared to last month, yet remain up 15% year-over-year. As of the third quarter, 23% of all homes with a mortgage throughout the U.S. were worth less than the balance of the mortgage.
New Home Market……………………………………………………………………D+
In general this month, the new home market was worse than last month. Builder confidence declined in December as the Housing Market Index fell one point to 16. Seasonally adjusted new home sales volume also declined this month, falling to 355,000 transactions – down 9% year-over-year. The median single-family new home price increased to $217,400 in November, but has declined 1.9% year-over-year. The inventory of unsold homes increased to 7.9 months of supply and the volume of new homes for sale has declined to 234,000 homes which is the lowest volume since April 1971.
Repairs and Remodeling…………………………………………………………..D-
The conditions for residential repairs and remodeling remain very weak this month. Homeowner improvement activity declined again in the third quarter, falling 9.4% year-over-year. The Remodeling Market Index rose in the third quarter to 39.8 and has rebounded after reaching bottom in the fourth quarter of 2008. Despite the recent increases, the index remains well below the historical average of 50. Residential construction has fallen 19% year-over-year as of November, yet the pace of decline has eased.
Housing Supply………………………………………………………………………..F
Housing completions surged in November, as builders finished homes in time to close the sale before tax credit expiration. Completions will decline significantly in the next few month. Total completions reached 810,000 – increasing 9% compared to last month, but down 25% year-over-year. Seasonally adjusted new home starts also increased this month due to a 2% rise in single-family starts and a 67% increase in multifamily starts. Seasonally adjusted total permits increased to 473,000 this month, representing an increase of 6% compared to October. However, total permits remain down 7% year-over-year and have fallen nearly 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 January 8, 2010
Overall Grade
Economic Growth
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate) 2.2% C
Employment Growth (1-year Change)
- Non-ag Payroll, NSA -4,096,000 D
Employment Growth Rate
- Non-ag Payroll, NSA -3.0% D
Unemployment Rate 10.0% F
Average Length of Unemployment (Weeks) 29.1
Median Length of Unemployment (Weeks) 20.5
% of Labor Force Unemployed 27 weeks and over 4.0%
U.S. Initial Jobless Claims 433,000
Mass Layoff Events, SA (YOY % Change) 0.0% 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 -0.3% 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.) 9.6% B
ECRI Leading Index 24.4% 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.) 150.0%
Capital Goods New Orders -10.2% D
Money Supply - M2 3.2% C
Interest Rate Spread
10-year Treasury 3.76%
2-year Treasury 0.95%
Interest Rate Spread 2.81% A-
3-month LIBOR 0.25%
3-month Treasury 0.05%
TED Spread 0.20% B
Stock Market (Return over last 12 months)
Dow Jones 19% C
S&P 500 23% B-
Wilshire 5000 27% B
S&P Super Homebuilding 18% C
Tougher Standards on Business Loans - Large Firms 32% D+
Tougher Standards on Business Loans - Small Firms 34% D+
Crude Oil Price (Current $) $74.30 D+
ISM Manufacturing Index 55.9 C
ISM Non-Manufacturing Business Activity Index 53.7 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 0.8 A
US Median Home Payment / Income Ratio 26.1%
US Median Home Price / Income Ratio 3.2 C+
Mortgage Rates, Fixed 5.14% A+
Mortgage Rates, Adjustable 4.33% B+
Fixed/Adjustable Spread 0.81% D
Fixed/10-year Spread 1.38% D+
Fed Funds Rate 0.15%
Percentage of Adjust. Loans 3.8% 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 52.9 D-
Consumer Sentiment Index 72.5 D
Consumer Comfort Index -44.5 F
Revolving Cons. Credit per Household $7,954
- Growth Rate -8.2% A+
Personal Savings Rate 4.7% C-
U.S. Net Worth Growth Rate -6.0% D
Financial Obligation Ratio 17.8% 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 $171,900
NAR Single-Family Annual Price Appreciation -4.4% D
Freddie Mac Annual Price Appreciation -4.0% F
Annual Sales Volume, SA 6,540,000 A
Existing Home Inventory for Sale, SA 3,518,000 D
Months Supply of Unsold Homes, SA 6.5 C+
Purchase Mort. App. Index, SA 222.2 C-
Pending Home Sales Index, SA 96.0 D+
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 $217,400
Annual Appreciation Rate -1.9% D+
Constant Quality Price Index (YOY % Change) -6.1% F
Sales Volume, SA 355,000 F
New Home Inventory for Sale, NSA 234,000 B+
Months Supply of Unsold Homes, SA 7.9 B-
Months of Homes Completed, SA 3.4 B-
Months of Homes Under Const., SA 3.5 C
Months of Homes Not Started, SA 1.0 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) -19.2% 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 51,000 F
Total Supply, SA 635,000 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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