Tax credit's second coming: no miracles

By WAYNE YAMANO

Sales boomed last fall as the homebuyer tax credit's original expiration approached in November. With a new tax-credit deadline approaching, sales have improved this spring, but not nearly as much.

The pending home sales index through February, which is shown here, shows the slight improvement over January, but is nowhere near as robust as last fall. Our proprietary monthly survey and our weekly calls to our homebuilding clients have confirmed that March and April were not good months. Not only do sales remain low, but also the traffic of interested shoppers is not improving.

The Federal Reserve is done buying mortgages from the GSEs (government-sponsored enterprises -- i.e., Fannie Mae and Freddie Mac); elected officials have declared that there will be no more tax-credit extension; and recent loan modification clarifications have cleared the way for the mortgage servicers to increase their foreclosure activity, which will result in more distressed sales.

Despite the tremendous affordability that exists, we remain very cautious about the back half of 2010 because consumers just aren't showing much interest in homebuying right now.

Methodology

• We collect a complete history on 70-plus variables and forecast the important ones by forecasting each metropolitan statistical area (MSA) and rolling it up.
• In this monthly e-mail, we publish the current stats along with the historical minimums, maximums and averages as a service to the industry.
• Each indicator is graded based on a bell curve where an "A" is its historical best, a "C" is its historical average, and an "F" is its historical worst. The grades are designed to provide a simple tool for decision-makers to scan the data.
• Each of the eight categories has a grade that is nothing more than the average of the grades under it.

Economic growth: D+

Spending remains high and income improved, but the unemployment level remains very high. Overall economic growth improved slightly this month, and the results for our economic growth metrics were generally positive. The revised fourth-quarter gross domestic product growth rate increased to 5.6 percent.

The pace of job losses eased this month, and the number of mass-layoff events is plummeting, but employment has still declined 1.7 percent year-over-year. The unemployment rate was flat this month at 9.7 percent, but the broader measure of unemployment, the U-6, increased to 16.9 percent. (According to the Bureau of Labor Statistics, the U-6 includes two groups that the U-3, which is the typical unemployment rate, does not: "marginally attached" or discouraged workers, and those employed on a part-time basis for economic reasons.)

The length of unemployment in the labor force increased to 31.2 weeks this month, reaching a record-high level since the BLS began tracking the statistic in 1948. Personal income improved and has returned to positive year-over-year growth for the second time since December 2008, increasing by 2 percent.

The Consumer Price Index (all items) increased to 2.3 percent from one year ago, while the core CPI (minus food and energy) dropped to 1.1 percent.

Leading indicators: C+

Overall, leading indicators held relatively steady this month, with several individual metrics showing improvement. The Leading Economic Index has increased for the past 11 consecutive months. The Economic Cycle Research Institute Leading Index -- an indicator of future U.S. growth -- increased 13.9 percent year-over-year and has experienced positive year-over-year growth for the past 10 months.

Stocks improved once again in March, and all four major indices have now experienced large positive year-over-year growth, ranging from 43-57 percent. The Standard & Poor's Homebuilding Index also improved this month.

The spread between corporate bonds and the 10-year Treasury note declined in March, falling to 1.48 basis points (a basis point is one-hundredth of a percentage point) and is well below the peak of nearly 270 basis points in March 2009 as Wall Street has become less worried about businesses failing over the past year.

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. According to the first-quarter CEO Confidence Index, CEOs are now much more confident about the economy. Business credit availability remained very poor, but deteriorated at a slower rate in the first quarter.

Affordability: C-

Affordability continues to be excellent this month as mortgage rates and median home prices throughout the country remain extremely low. In addition, our measure of the housing-cost-to-income ratio dropped to 25.2 percent, and housing affordability remains excellent compared to the historical norm. Affordability is so good that owning a median-priced home is now less expensive than renting the average apartment.

Household income has fallen 4.1 percent year-over-year to $52,389 as a result of large job losses and government furloughs. The median-home-price-to-income ratio dropped just slightly below the historical average of 3.3 this month, to 3.1.

The 30-year fixed mortgage rate remained flat at 4.99 percent by month-end in March, while adjustable mortgage rates fell to 4.2 percent. The Fed's overnight lending target rate remained at a range of zero to 0.25 percent, which is the lowest level on record.

The share of adjustable-rate mortgage applications increased to 5.2 percent by the end of March, but is still significantly less than the peak level of 35 percent of total applications in early 2005. ...CONTINUED

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