Today’s strong economy is fueled by growth in many sectors. While manufacturing and information jobs have declined in the last three years, the other sectors have added 4.4 million jobs.

The housing industry has been contributing more than its fair share to the growth. Over the last three years, construction jobs have accounted for 13 percent of the growth, with financial services jobs adding another 7 percent. They comprise 5 percent and 6 percent of total U.S. jobs, respectively.

The resale market has been cooling for some time, but the levels of unsold inventory remain below historical averages. The “soft landing” that most economists are predicting seems to be unfolding, although we know the market is strong in many areas and quite weak in others.

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-

Economic growth remains solid. More than 2 million new jobs were added during the 12 months ending January 2006, which is a growth rate of 1.6 percent. The unemployment rate declined slightly to 4.7 percent. Retail sales increased 6.3 percent over the previous year. Inflation inched up slightly to 2.2 percent, which is still well below its historical average of 4.2 percent.

Leading Indicators: C

The leading indicator index is up 2.1 percent on an annualized basis over the last six months, which is somewhat encouraging for our outlook for 2006. As a result of the increase in the Fed Funds rate at month end, the spread between the Fed Funds rate and the 10-year Treasury index inverted for the first time since March 2001. The stock market started 2006 with relatively significant improvements, with the Dow Jones gaining 4 percent over the prior 12 months and the NASDAQ, S&P 500 and Wilshire 5000 gaining 12 percent, 8 percent and 11 percent, respectively. The S&P Super Homebuilding Index has returned 13 percent over the last 12 months.

Mortgage Rates: B+

Fixed rates fell slightly in January, and adjustable rates ticked up slightly. The average fixed mortgage rate fell to 6.12 percent, and the one-year adjustable mortgage rate was 5.2 percent at month’s end. The percentage of loans with an adjustable rate stood at 29.5 percent in January.

Consumer Behavior: C+

Consumer confidence continued to rise in January to 106.3. Consumer sentiment decreased only slightly during the month to 91.2.

Existing-Home Market: B+

The median existing-home price fell slightly in December to $211,000. Annual sales volume decreased to 6.6 million sales per year, with declines in almost every region of the country. The inventory of existing homes rose slightly again to 5.1 months. The pending home sales index fell in December, but remains strong at 116.4.

New-Home Market: B-

Annualized new-home sales rose 1.5 percent in December to 1.27 million units, ending the year up 1.8 percent from the total volume in 2004. The median new-home price fell to $221,800, and the Housing Market Index fell to 57 in December, which is just slightly above the historical median. The supply of unsold homes remained flat, at 4.9 months.

Housing Supply: C+

Annualized housing starts decreased to 1.93 million in December, with single-family starts dropping to 1.64 million permits.

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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