National Housing Market Outlook

Why Isn’t Housing Recovering?

May 20, 2011
For nearly two years, corporate profits have been surging, GDP has been growing, and the majority of the key indicators we track have been moving in the right direction. Yet, home sales have remained in the dumps.
The indicators that hit closest to home (pun intended) are the ones that housing needs the most. These are the day-to-day realities that keep us feeling glum:
  • Job Growth is Slow
    • Job growth is back, but it has lagged corporate profits as corporations find ways to do more with less. Worker productivity has increased eight of the last nine quarters, which is great for companies but not so great for the unemployed.
    • Even with recent job growth, we still have 7 million fewer people employed today than at the peak in 2008, and the unemployment rate remains high at 9% officially, but a whopping total of 15.9% are underemployed or have given up their search.
  •  We’re in a “Wage-Less” Recovery
    • The median income has grown marginally in the last two quarters, but that still leaves us 6% below where we were in 2008.
    • Inflation has been squeezing our bottom line since late last year, with gas prices up 38% from one year ago (according to AAA).
  •  Home Values are Declining… Again
    • Home prices are 31% below their peak in 2006 and are heading lower in many zip codes, which is the result of having 23% of all mortgages valued at more than the house value.
This all contributes to the lack of consumer confidence, especially when it comes to buying a house. While confidence has improved, a confidence level of 65 is 30 points below its 44-year historical average.
The good news is that confidence is on an upward trajectory. Although we believe that the road to recovery will be long, we are excited that the fundamentals for recovery are moving in the right direction.
Economic Growth………………………………………………………………….C-
Trends were mixed this month, as several key metrics ticked up while others ticked down, resulting in an unchanged grade of C- for overall economic growth. The employment market improved once again this month, and YOY employment growth has now been positive for eight consecutive months. Payrolls expanded by 244K, the largest gain since May 2010. In addition, the average length of unemployment decreased to 38.3 weeks, and the labor force percentage of those unemployed over 27 weeks fell to 3.8%. That said, the unemployment rate rose slightly from 8.8% to 9.0%. Retail sales declined this month, while real GDP for 1Q11 came in at 1.8%, significantly lower than the 3.1% growth rate experienced in 4Q10. The rate of inflation (both full and core) continues to increase, 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. The ECRI Leading Index continues to rise on a YOY basis, now up for the fifth consecutive month. In addition, access to credit continued to improve in 2Q11, as a net total of -16% of large and medium firms reported tougher standards for receiving loans, which is an improvement from almost +84% reporting tougher standards in 4Q08. Among small firms, loan standards also improved as a net total of -14% experienced tougher standards, an improvement from nearly 75% reporting tougher standards in 4Q08. Other leading indicators such as the Small Business Optimism index and ISM Manufacturing/Non-Manufacturing Business Activity indices declined versus last month.
Stocks had a stellar month for the four major indices we track, with M/M gains ranging from +2.6% for the Wilshire 5000 to +3.7% for the Dow Jones. The indices have all improved significantly from one year ago, climbing between 14.9% (S&P 500) and 16.8% (NASDAQ) YOY. The S&P Homebuilding Index also improved this month, rising 4.1% M/M, though still down -16% YOY. Corporate bond spreads widened slightly this month to 175bps, while 10-year and 2-year Treasury rates rose for the month. Oil prices continued to rise, marking the second 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 Index stands at a remarkable 0.1, which is near the best possible rating for affordability. The median home price to income ratio has risen slightly to 2.9, 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. The 30-year fixed mortgage rate is currently at 4.78% and adjustable mortgage rates are at 3.15%, 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 6.7%, which is still far below the peak level of 35% of total applications in early 2005. While its growth rate is still low, household income has recovered gradually from its bottom in late 2009, rising 1.2% YOY in 1Q11.
Consumer Behavior………………………………………………………………..D+
Consumer behavior improved slightly this month, with several metrics rising. The Consumer Confidence Index, Consumer Sentiment Index, and Consumer Comfort Index all increased this month. However, due to rising inflation and a marginal increase in the unemployment rate, the misery index (unemployment + inflation) worsened this month.
Existing Home Market……………………………………………………………..D+
The existing home market continues to remain weak, with most indicators still grading at poor levels. According to the National Association of Realtors, seasonally adjusted annual resale activity fell to 5.05 million homes and median resale prices decreased month-to-month and are down 13% YOY. The S&P/Case-Shiller 10 and 20 market composite indices also fell this month, while existing home inventory rose, and months of supply fell. The homeownership rate fell in 1Q11 to its lowest level since 4Q98. While still low compared to its historical average, the Pending Home Sales Index increased this month.
New Home Market……………………………………………………………………D+
The new home market worsened this month, as our overall grade dropped from a C- to a D+. While new home sales increased to 300K units on an annualized basis, rolling 12-month sales decreased to 305K transactions, which is an 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 increased to $213,800 this month and is currently down 4.9% YOY. The months of unsold homes metric decreased to 7.3 months. Builder confidence worsened this month as the Housing Market Index dropped from 17 to 16, still far below its historical average of 50.
Repairs and Remodeling…………………………………………………………..D+
Aside from residential investment, 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.
Housing Supply………………………………………………………………………..F
Housing supply indicators are once again poor this month, with all except one indicator grading at an F. Single-family permit decreased to 394K units, and single-family starts fell to 385K units. Both of these activity levels remain low by historical standards. Both new housing units completed and manufactured housing placements increased this month. 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 May 20, 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 1,390,000 C
Employment Growth Rate
- Non-ag Payroll, NSA 1.1% C
Unemployment Rate 9.0% D-
Average Length of Unemployment (Weeks) 38.3
Median Length of Unemployment (Weeks) 20.7
% of Labor Force Unemployed (27 weeks and over) 3.8%
U.S. Initial Jobless Claims 474,000
Mass Layoff Events, SA (YOY % Change) -21.3% B
Productivity 1.6% C
Retail Sales 6.4% B-
Capacity Utilization 76.9% D+
Core CPI 1.4% A-
Full CPI 3.3% C
Personal Income Growth, nominal 5.3% C-
Federal Deficit (last 12 mos., $mil curr.) -$1,395,903 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 7.7% 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) 11.0% B
Corporate Profit Growth (pre-tax) 18.3% C+
Corporate Bond Spread (Corp Bond vs. 10-Yr Tres.) 175.0%
Capital Goods New Orders 16.5% A-
Money Supply - M2 1.9% C
Interest Rate Spread
10-year Treasury 3.41%
2-year Treasury 0.69%
Interest Rate Spread 2.72% A-
3-month LIBOR 0.27%
3-month Treasury 0.06%
TED Spread 0.21% B
Stock Market (Return over last 12 months)
Dow Jones 16% C
S&P 500 15% C
Wilshire 5000 16% C+
S&P Super Homebuilding -16% D+
Tougher Standards on Business Loans - Large Firms -16% A-
- Small Firms -14% B+
Crude Oil Price (Current $) $110.04 F
ISM Manufacturing Index 60.4 B-
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 0.1 A+
US Median Home Payment / Income Ratio 23.0%
US Median Home Price / Income Ratio 2.9 A-
Mortgage Rates, Fixed 4.78% A
Mortgage Rates, Adjustable 3.15% A+
Fixed/Adjustable Spread 1.63% C
Fixed/10-year Spread 1.37% D+
Fed Funds Rate 0.15%
Percentage of Adjust. Loans 6.5% 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 65.4 D
Consumer Sentiment Index 69.6 D
Consumer Comfort Index -43.8 F
Revolving Cons. Credit per Household $7,129
- Growth Rate -5.5% B
Personal Savings Rate 5.5% C
U.S. Net Worth Growth Rate 5.9% C
Financial Obligation Ratio 16.6% B-
Misery Index (Unemployment + Inflation) 12.14 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) -4.1% 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 220.9 C-
Pending Home Sales Index, SA 94.1 D+
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 $213,800
Annual Appreciation Rate -4.9% D
Constant Quality Price Index (YOY % Change) -2.4% D
Sales Volume, SA 300,000 F
New Home Inventory for Sale, NSA 182,000 A+
Months Supply of Unsold Homes, SA 7.3 C+
Months of Homes Completed, SA 2.9 C+
Months of Homes Under Const., SA 3.1 C-
Months of Homes Not Started, SA 1.2 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) -8.1% 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 1,326,118 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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