The economy continues to recover, as real GDP advanced a very healthy 4.4 percent in 2004, which was the best performance since 1999.

Incomes and job creation are on the rise. Mortgage rates remain very low. Sales are high and unsold inventory levels are low. The Housing Market Index stands at 70. While some markets are stronger than others, overall, this has to be the best month ever to be a home builder.

Our grading system of the economy and the housing market is a “bell curve” model, with statistics at an all-time high receiving an “A,” statistics near the long-term average receiving a “C,” and the worst times ever receiving an “F.” In this grading system, it is OK to be a “C” student. Here is our current report card:

Economic Growth: C

The economy grew at a 3.1 percent clip in the 4th quarter of 2004, which was below expectations primarily due to the international trade account deficit. However, for all of 2004, the U.S. economy grew by 4.4 percent, well above its long-term average of 3 percent to 3.5 percent. Employers continued to add to their payrolls this month, which boosted consumer confidence. Personal incomes increased 8.6 percent in 2004 on a nominal level and consumer spending rose a strong 4.5 percent in the 4th quarter.

Leading Indicators: C

The leading indicators are down 1.7 percent on an annualized basis over the last six months. The leading indicators predict very modest economic growth in the next three to six months.

Mortgage Rates: A-

The fixed mortgage rate fell to 5.66 percent, despite continued Fed tightening, while the one-year adjustable mortgage rate remained flat at 4.18 percent. The spread between long-term and short-term rates is narrowing, making fixed rates more attractive.

Consumer Behavior: C+

Consumer confidence increased again in December, as consumers remain optimistic about the economic picture in the first half of 2005. Higher stock prices and a positive job market contributed to this positive reading. Most measures remain near their long-term averages.

Existing-Home Market: B+

December sales of existing homes surprisingly fell 3.3 percent from November to a 6.69-million-annual-sales rate. The inventory of existing homes remained flat at 4.3 months.

New-Home Market: B+

December new-home sales remained relatively flat at a 1.1-million-unit annual rate. New-home sales rose in the two of the four regions in the U.S.: 56 percent in the Midwest and 6.3 percent in the West. Sales fell 15.7 percent in the Northeast and 16.3 percent in the South.

Housing Supply: B-

Housing starts surged 10.9 percent to 2 million in December from a revised 1.8 million in November, representing the largest month-to-month gain since September 1997. The rebound was a statistical fluke because it followed last month’s largest month-to-month decline since January 1994.

John Burns is the founder of Real Estate Consulting in Irvine, Calif., which monitors changes in real estate market conditions and provides consulting services, including strategic planning, market research and financial analysis.


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