The real bears in this market believe housing will lead the economy into recession. Thus far, these bears are wrong. The housing market peaked in June 2005, and two years into the downturn, economic growth is still positive. Unemployment remains very low, at only 4.5 percent, and consumers have started ramping up their credit card debt again.
The rate of increase in credit card debt slowed substantially from 2001 through 2006, as many consumers used mortgage refinancing dollars to fund their spending needs. Today, credit card spending is glowing at an 8 percent annual rate while retail sales are growing 5 percent. With personal income up 6 percent, the retail spending doesn’t seem completely out of line with what you would consider to be a healthy level of spending.
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
Wage gains accompanied by a steady job market are helping the consumer as well as the overall U.S. economy move forward from what turned out to be the slowest quarterly GDP expansion rate — 0.7 percent — in more than four years. In addition, year-over-year retail sales and personal income both increased during the month of May, while core inflation moderated, providing the framework for moderate growth in overall economic expansion during the second quarter of 2007.
Leading Indicators: C-
A spike in Treasury yields introduced a bout of volatility into the U.S. stock market during the month of June, as the yield curve widened to its highest level since October 2005. As such, aside from the NASDAQ, all of the major stock market indices declined in June. The S&P Super Homebuilding Index — which measures home builder stock performance — suffered its worst sequential decline (-17 percent in June), dating back to September 2001, in which the index dropped 18 percent sequentially. Currently, the S&P Super Homebuilding Index is down 16 percent year-over-year. Oil prices continue to climb this summer, approaching the historic levels witnessed one year ago.
Mortgage Rates: C+
The yield on 10-year Treasury notes (a benchmark that influences home mortgage rates), rose significantly in the month of June, driving the 30-year fixed mortgage rate to 6.67 percent, while one-year adjustable rates increased to 5.65 percent. Both of these represent levels not seen since July 2006. Troubles are still mounting in the subprime market, as evidenced by a historical low set in June for the ABX 06-2 BBB- series, which has declined roughly 36 percent year-to-date.
Consumer Behavior: C+
Consumers’ perceptions of the overall economy took a leg down this month, as all three of the major consumer gauges declined in June. A drop in the stock market and turmoil surrounding the housing market/subprime industry appear to have heightened consumer uncertainty with overall economic conditions.
Existing-Home Market: C-
The existing-home market continues to deteriorate, as May sales declined to 5.99 million annualized units, equating to a year-over-year drop of roughly 10 percent. Most troubling is the surge in existing-home inventory that has resulted in 8.9 months’ supply, the largest since August 1992. The inventory glut continues to place downward pressure on prices, as evidenced by the 2.4 percent decline in single-family median home prices over the last year. Existing-home sales are likely to decline further in coming months, as the NAR’s Pending Home Sales Index fell to its lowest level in nearly six years.
New-Home Market: D+
Almost all of the new-home indicators deteriorated further this month, as the market continues to search for a bottom in this cycle. In May, new-home sales decreased roughly 2 percent sequentially to an annual rate of 915,000, representing a 16 percent year-over-year decline. In addition, the NAHB index dropped two points sequentially in the month of June, representing a new low for the year, and a low not seen since February 1991.
Housing Supply: D+
During the month of May, starts declined while permits increased. That said, we still foresee both housing construction indicators to continue their respective pullback trend in the coming months. Specifically, total housing starts decreased in May to a seasonally adjusted annual rate of 1.47 million, representing a sequential decrease of roughly 2.1 percent and a 24 percent year-over-year decline. Total building permits increased roughly 3 percent sequentially in May, and are now down 22 percent year-over-year to a seasonally adjusted annual rate of 1.5 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.
