A glut of 800,000 excess vacant homes will prolong the housing recovery for approximately one year, as the recent surge in resale listings and completed new homes offered for sale includes a record level of unoccupied homes. The surge is both the result of investor activity earlier this decade as well as the result of new-home sales cancellations.

A glut of 800,000 excess vacant homes will prolong the housing recovery for approximately one year, as the recent surge in resale listings and completed new homes offered for sale includes a record level of unoccupied homes. The surge is both the result of investor activity earlier this decade as well as the result of new-home sales cancellations.

Approximately 2.1 million of the homes offered for sale today are vacant, compared with the average over the last 10 years of 1.3 million. We expect more vacant homes to be put up for sale in 2007 because all categories of vacancy have risen significantly in the last few years. With only 6-7 million new and resale homes expected to be sold this year, we believe it will take about one year for the excess vacancy to return to normal. In certain tertiary markets, the excess supply will probably linger for years.

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 U.S. economy continued to expand at a moderate pace, as GDP outperformed and the job market underperformed expectations. According to the advance estimate, real GDP growth accelerated to a 3.5 percent annualized pace in the fourth quarter of 2006, up from 2 percent in the third quarter. For the month of January, employers in the U.S. added fewer workers than forecast, and the jobless rate rose slightly to 4.6 percent. Retail sales and personal income growth rose during the month, while core CPI inflation remained steady at 2.6 percent.

Leading Indicators: C-

Interest rates increased slightly this month, and the yield curve has remained inverted for seven consecutive months. At month-end, the 10-year Treasury rate was 12 basis points lower than the 2-year rate. All of the major stock market indices witnessed a slight pullback in year-over-year growth during the first month of 2007. The S&P Super Homebuilding Index continues to show modest gains, though it remains 20 percent below year-ago values.

Mortgage Rates: B

For the fifth straight meeting, the FOMC held the fed funds rate steady at 5.25 percent. The FOMC noted that additional firming may be needed, which reduces the likelihood of any near-term rate cut. The 30-year fixed mortgage rate increased in January to 6.25 percent, while one-year adjustable rates increased marginally to 5.49 percent. Adjustable-rate loans continue to decrease as a percentage of total loans. In the last week of January, ARMs fell to 21.4 percent of total loan activity.

Consumer Behavior: B-

During January, lower energy prices and a steady job market spurred an increase in consumer behavior. The Consumer Confidence Index rose to 110.3 and the Consumer Sentiment Index increased to 96.9. The Consumer Comfort Index is the only indicator that declined in the month of January.

Existing-Home Market: B-

Several existing-home sales indicators improved in the last month. The supply of existing homes on the market decreased to a six-month low of 6.8 months, and the pending home sales index increased 4.9 percent to 112.4. Additionally, median existing prices rose to $222,000, after four months of decline. Year-over–year price appreciation is currently flat at 0 percent. On a sequential basis, total existing annual home sales declined in December to 6.22 million, representing a 7.9 percent year-over-year drop. The national home-ownership rate remained relatively unchanged at 68.9 percent in the fourth quarter of 2006.

New-Home Market: C

New-home sales indicators improved in December. The NAHB’s Housing Market Index continued to improve, increasing to 35 in January. Gross sales of new homes rose at an annual pace of 1.12 million, and the median sales price rose from $232,200 in November to $235,000 in December. The supply of unsold homes declined slightly to 5.9 months in December, its lowest level since January 2006.

Housing Supply: C-

Housing supply indicators strengthened in December, as housing starts rose for the second straight month and the number of new building permits issued rose for the first time in 11 months. Specifically, housing starts rose 4.5 percent in December to an annual rate of 1.64 million, the highest level since September 2006. Building permits, which are a leading indicator for housing, rose 5.5 percent to an annual rate of 1.6 million in December, compared with 1.51 million in November.

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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