National Housing Market Outlook

You are an Economist

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John Burns

November 20, 2009
Although you may not think of yourself as someone who forecasts the economy, you are making a big bet on the economy every time you make a decision that you will have to live with for several years. These decisions include land acquisition / disposition, product design, capital partners and structure, hiring and firing, as well as personal investment decisions. If you are making these decisions without much economic knowledge, you are taking more risk than your competitors. Because we are trying to help our clients with strategy, we do our best to summarize and explain the economy. Our 2010 Forecast and Strategy includes a lot of economic information and our outlook. Because of this, we are often called economists, although I think our real competency is balanced analysis of the facts, whatever they might be.
Job growth is the primary driver of housing demand, as job growth translates into more adults with incomes who can buy or rent homes. Without job growth, there is very little need for new construction. Our best estimate, which we do by buying others’ good data and forecasts by MSA and studying everything we can get our hands on, is that we will see headline job growth in July 2010 and true year over year job growth in March 2011. Most likely, it will be 2011 until we see consistent job growth, and continued government economic stimulus and support of the banking system are the big wild cards there. Our 3 most important leading indicators are:
  1. Temp Hiring: Companies will begin hiring temps before they hire full-time.

  2. Hours Worked: Companies will take people off furlough before they hire full-time.

  3. Small Business Lending: Bank lending to small businesses will need to grow before these businesses can do meaningful hiring. Anecdotally, several CEO friends of mine shared that their banks had called their credit lines, despite being profitable and one had even just landed a huge contract with one of the largest retailers in the U.S.
Looking at the Positives. Two of the most prominent leading economic indicator indices are absolutely booming, indicating that strong growth may occur in 2010. The primary reasons for the booms are 1) the rising stock market, 2) a drop in initial claims for unemployment, and 3) higher commodities prices. We are weighing this optimistic information with the pessimistic, to make our best estimate of what the 2010 economy will look like.
Also, employment losses are bottoming out, and even previous months look better because of positive revisions. The pace of job losses is moderating in nearly all sectors of the economy, particularly in Manufacturing, which has seen the greatest decline. Finally, initial jobless claims and mass layoffs have slowed and are below peaks reached earlier this year. While both remain quite high, “less negative” is a good thing.
Back to job growth. Every major MSA in the country has fewer jobs than it did one year ago (this is the right way to look at it, since employment is seasonal). The markets that experience job growth first will likely be the ones where housing stabilizes first. In order to get back to the average unemployment rate, we still have to add 7 million jobs. Also, there are another 5.5 million workers who claim to be underemployed in comparison to what they were doing prior to the downturn. 7 million jobs is a whopping 5.1% job growth over today’s number of 138 million employed people. We are optimistic that many of these displaced workers will create new companies that thrive and prosper. With such a large number of unemployed, the odds of stronger job growth than usual are actually pretty good.
For Help on the Economy: We just published our 2010 Forecast and Strategy, which includes an economic overview and forecast for the country as well as 23 MSAs, as well as many other helpful tools. It isn’t cheap, but that is because it is thorough, and we work for people who appreciate that knowledgeable decisions make them much wealthier. For more information, click HERE.
Economic Growth………………………………………………………………….D
Economic growth improved this month yet remains weak overall. Most notably, the preliminary third-quarter GDP growth rate spiked up to +3.5%, which is the first quarterly increase in four quarters. The current positive GDP growth is yet another indicator that the recession is nearing an end. Job growth remains abysmal, yet the decline eased slightly compared to last month. The economy has lost 5.5 million jobs in the past 12 months which is one of the largest declines in 60 years. Unemployment continued its upward trend, topping 10.2% in October, up from 9.8% in September. Mass layoff events – defined as a cut of 50 or more jobs from a single employer – improved this month, yet remains up nearly 12% year-over-year. 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 to -0.2% compared to one year ago, while the Core CPI (minus food and energy) showed an increase of 1.7%.
Leading Indicators…………………………………………………………………C-
Overall, U.S. leading indicators improved once again in September. The Leading Economic Index 6-month growth rate increased to 11.6% in September, recording the largest growth grate since 1983. The ECRI Leading Index, which is a gauge of future economic growth, has risen 26% since one year ago, representing the largest growth rate since ECRI began tracking the statistic in 1968. Stocks were essentially flat compared to last month. Based on October data, all four indices we track have posted positive year-over-year gains – the first time since December 2007 – and have risen 4-19% compared to one year ago. The S&P Homebuilding Index declined in October, falling nearly 9% from the prior month, yet has increased over 3% since one year ago. CEOs are now much more confident about the economy, according to the CEO Confidence Index. CEOs are now as confident about the economy as they were two year ago and based on a recent survey 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 continues to improve due to declining mortgage rates and falling median resale home prices. Our housing-cost-to-income ratio has declined recently, reaching 26.1%, which is near the lowest level since data for the index began in 1981. Owning the median-priced home is now just as affordable as 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 6% year-over-year to $52,856. 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 fell to 5.03% by October month-end, and adjustable mortgage rates fell to 4.57% by 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 fell to 6.1% in the last week of October which is a significantly smaller share than the peak level of 35% of total applications in early 2005.
Consumer Behavior………………………………………………………………..D-
Overall consumer behavior declined this month. As a result of the tough labor market, consumers are less optimistic about the economy. The consumer confidence index has fallen to 47.7 in October and remains well below the historical average of 97. Consumer sentiment fell in October to 70.6, returning to early-2008 levels. The Consumer Comfort Index worsened in October to -48.5. After recently peaking at 6.9% in May, the personal savings rate has trended down, currently equal to just 3.3% – likely the result of declining household incomes. In the second quarter, the U.S. net worth increased nearly two trillion dollars from the first quarter of 2009. 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. Since both unemployment and inflation increased this month, so did the Misery Index (the sum of the two rates).
Existing Home Market……………………………………………………………..D+
The existing home market improved this month, largely due to an increase in sales volume. Seasonally adjusted annual resale activity spiked in September, up 9.4% compared to just one month ago. Resale activity received a recent boost from first time home buyers hurrying to close before the $8,000 tax incentive which was originally set to expire on November 30th. According to the National Association of Realtors (NAR), September sales represented a 5.57 million seasonally adjusted annual rate, up over 9% from last month and year-over-year. Likewise, the rolling 12-month count of resale sales activity continues to improve for the third month in a row. The national median resale price fell to $174,900, declining 8% since one year ago. The Case-Shiller national index, which tracks paired sales, fell 15% in the second quarter of 2009 compared to the second quarter of 2008. In September, the number of unsold homes continued to decline, reaching just 7.8 months of supply yet remains above the historical average of 6.9 months. Pending home sales volume once again improved, increasing 12% year-over-year. 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
The new home market worsened overall this month. Builder confidence was flat compared to last month as the Housing Market Index remained at 17 in November. Seasonally adjusted new home sales declined this month, reaching just 402,000 transactions in the past year, representing a 3.6% drop from one year ago. The median single-family new home price increased to $204,800 this month yet has fallen over 9% year-over-year. The inventory of unsold homes has fallen to 7.5 months of supply which is a large improvement compared to 12.5 months of supply in the beginning of 2009.
Repairs and Remodeling…………………………………………………………..F
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 has improved in the third quarter, especially compared to the extremely low levels reached in the fourth quarter of 2008. The current index rose to 39.8, yet remains below the historical average of 50. The decline in residential construction eased slightly in September, yet has fallen 27% year-over-year.
Housing Supply………………………………………………………………………..F
Housing supply declined this month. Seasonally adjusted total permits fell to 552,000 units in October, as both single-family and multifamily permits declined. Seasonally adjusted new home starts also declined this month to 529,000, and remains down 31% year-over-year. Total completions increased 2% compared to last month, reaching 740,000 units, yet have declined 30% since one year ago. 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 November 19, 2009
Overall Grade
Economic Growth
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate) 3.5% C
Employment Growth (1-year Change)
- Non-ag Payroll, NSA -5,452,000 D-
Employment Growth Rate
- Non-ag Payroll, NSA -4.0% D-
Unemployment Rate 10.2% F
Average Length of Unemployment (Weeks) 26.9
Median Length of Unemployment (Weeks) 18.7
% of Labor Force Unemployed 27 weeks and over 3.6%
U.S. Initial Jobless Claims 502,000
Mass Layoff Events, SA (YOY % Change) 11.8% C
Productivity 9.5% B
Retail Sales -5.7% D-
Capacity Utilization 70.7% F
Core CPI 1.7% B+
Full CPI -0.2% C+
Personal Income Growth, nominal -2.8% F
Federal Deficit (last 12 mos., $mil curr.) -$1,554,317 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.) 11.6% B
ECRI Leading Index 26.2% A+
Manpower Net Employment Outlook -2% F
U.S. Vistage CEO Confidence Index 85%
CEO Economic Outlook Survey 45%
U.S. Average Hours Worked per Week 33.0
Temporary Employed Workers -30.2% F
Corporate Profit Growth (pre-tax) -10.9% D
Corporate Bond Prices -9.2%
Capital Goods New Orders -16.9% D-
Money Supply - M2 8.2% B+
Interest Rate Spread
10-year Treasury 3.49%
2-year Treasury 0.98%
Interest Rate Spread 2.51% B+
3-month LIBOR 0.28%
3-month Treasury 0.07%
TED Spread 0.21% B
Stock Market (Return over last 12 months)
Dow Jones 4% C
S&P 500 7% C
Wilshire 5000 9% C
S&P Super Homebuilding 3% C
Tougher Standards on Business Loans - Large Firms 32% D+
Tougher Standards on Business Loans - Small Firms 34% D+
Crude Oil Price (Current $) $75.82 D
ISM Manufacturing Index 55.7 C
ISM Non-Manufacturing Business Activity Index 55.2 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 0.8 A
US Median Home Payment / Income Ratio 26.1%
US Median Home Price / Income Ratio 3.2 C
Mortgage Rates, Fixed 5.03% A+
Mortgage Rates, Adjustable 4.57% B+
Fixed/Adjustable Spread 0.46% F
Fixed/10-year Spread 1.54% C
Fed Funds Rate 0.15%
Percentage of Adjust. Loans 6.1% B+
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 47.7 D-
Consumer Sentiment Index 70.6 D
Consumer Comfort Index -48.5 F
Revolving Cons. Credit per Household $7,916
- Growth Rate -9.2% A+
Personal Savings Rate 3.3% D+
U.S. Net Worth Growth Rate -12.3% F
Financial Obligation Ratio 18.1% D
Misery Index (Unemployment + Inflation) 10.00 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 $174,900
NAR Single-Family Annual Price Appreciation -8.1% D-
Freddie Mac Annual Price Appreciation -4.5% F
Annual Sales Volume, SA 5,570,000 B
Existing Home Inventory for Sale, SA 3,630,000 D
Months Supply of Unsold Homes, SA 7.8 C
Purchase Mort. App. Index, SA 249.9 C
Pending Home Sales Index, SA 110.1 C+
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 17 F
Multifamily Condo Market Index 15 F
Median Price, NSA $204,800
Annual Appreciation Rate -9.1% F
Constant Quality Price Index (YOY % Change) -6.1% F
Sales Volume, SA 402,000 F
New Home Inventory for Sale, NSA 253,000 B
Months Supply of Unsold Homes, SA 7.5 C+
Months of Homes Completed, SA 3.2 B-
Months of Homes Under Const., SA 3.2 C-
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) -9.4% D-
Remodeling Market Index - Current 39.8 D+
Remodeling Market Index - Future Expectations 38.7 D+
Private Residential Construction (YOY % Change) -27.0% F
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 740,000 F
Single-Family Starts, SA 476,000 F
Multifamily Starts, SA 53,000 F
Total Starts, SA 529,000 F
Single-Family Permits, SA 451,000 F
Multifamily Permits, SA 101,000 F
Total Permits, SA 552,000 F
Manuf. Housing Placements, SA 45,000 F
Total Supply, SA 597,000 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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