Housing starts remain high despite slower sales and traffic (as measured by the National Association of Home Builders’ Housing Market Index). The index has returned to more normal levels, as shown in blue below, yet starts (in red) have stayed relatively flat.

We would like to believe starts will slow down, but a survey we conducted of 38 geographically diversified builders indicated that their business plans call for a 10 percent rise in starts this year.

Housing starts remain high despite slower sales and traffic (as measured by the National Association of Home Builders’ Housing Market Index). The index has returned to more normal levels, as shown in blue below, yet starts (in red) have stayed relatively flat.

We would like to believe starts will slow down, but a survey we conducted of 38 geographically diversified builders indicated that their business plans call for a 10 percent rise in starts this year.

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. Retail sales increased 8.8 percent in January over the previous year. Inflation remained flat at 2.2 percent. Personal income growth is improving at 5.8 percent, but remains below its historical average of 7.4 percent.

Leading Indicators: C

The leading indicator index is up 4.7 percent on an annualized basis over the last six months, which remains encouraging for our outlook for 2006. The rate on the 10-year Treasury rose to 4.56 percent, widening the spread between it and the Fed Funds rate to 0.06 percent. February’s returns for the four major stock indices that we track fell from January’s promising numbers. Builder stock prices have declined 3 percent over the last 12 months, despite record earnings.

Mortgage Rates: B

At month’s end, both fixed and adjustable rates had risen from January. The average fixed mortgage rate rose to 6.26 percent, and the one-year adjustable mortgage rate rose to 5.32 percent. The spread between the two has narrowed for 11 months in a row. The percentage of loans with an adjustable rate stood at 29.1 percent in February.

Consumer Behavior: C+

Consumer confidence fell to 101.7 in February, though its present situation component is at a four-and-a-half-year high, suggesting that the start of 2006 will be better than the end of 2005. The consumer sentiment index and consumer comfort index also declined in February.

Existing-Home Market: B+

The median existing-home price remained flat at $211,000. Annual sales volume decreased to 6.6 million sales per year, with declines in each region of the country except the South. The inventory of existing homes rose for the fourth month in a row to 5.3 months. The pending home sales index continued to decline, reaching 116.3.

New-Home Market: B

Annualized new-home sales fell 5 percent in January to 1.23 million units, but were up 3 percent from one year ago. The median new-home price rose to $238,100. The Housing Market Index remained flat at 57 in January, which is just slightly above the historical median. The supply of unsold homes increased to 5.2 months.

Housing Supply: B

Annualized housing starts increased to 2.3 million in January, which is up 14 percent from the revised December numbers and up 4 percent from January 2005. Single-family starts rose 13 percent over December to 1.82 million. Single-family permits rose 2 percent over December to 1.69 million, and total permits approached near-record levels at 2.33 million.

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. He can be reached at jbrec@realestateconsulting.com.

***

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