Several months ago, we told our clients we thought we were entering a "W"-shaped recovery, with the "first leg up" in the W driven by four things:

  • tremendous affordability for those who are currently paying rent;
  • the $8,000 federal tax credit, which is currently set to expire on Nov. 30, 2009;
  • government-backed FHA, USDA, Freddie Mac and Fannie Mae lending programs that offer far more aggressive loans than a bank would make; and
  • positive media reports about rising median home prices, which are primarily driven by a location mix shift away from the poorer areas of town, but also driven by price stability at the lower end of the market.

Since then, sales volumes and pricing have stabilized in many areas. Our monthly survey covering about 2,000 new home communities (and available for free to all participating homebuilders) shows that:

  • sales rates have stabilized at about 1.5 sales/month/community;
  • prices net of incentives are relatively flat in California, Texas, the Northeast and the Midwest, and primarily at the lower price ranges in most areas;
  • standing inventory per community has fallen from 6 homes last July to 3.2 homes today; and
  • builders are starting more homes per community than they have in a long time.

(E-mail us here if you would like to be a part of our builder survey)

However, traffic through the sales offices remains low, and most of the buyers are first-time buyers motivated by the $8,000 tax credit and monthly payments that are comparable to their rent. Without the tax credit, sales and pricing would still be declining.

Our best estimate is that sales slow substantially in December and throughout the first quarter of next year because of the demand "pulled forward" by the tax credit, and that the market stabilizes when job growth turns positive, which will hopefully be next spring or summer. The recovery will be driven by the pace of job growth, mortgage rates and decisions made by the government on whether to continue or discontinue the incentive programs.

While we believe there is another leg down, we don’t believe that the decline will be that much further, so smart investments made with a long-term perspective should pay off handsomely. With plenty of short-term money chasing deals right now, smart investments are tough to find. Longer-term investments tend to be more appropriately priced.

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: D

The economic growth indicators showed some signs of improvement this month, but still remain weak overall. The preliminary estimates of second-quarter real GDP growth showed an annualized drop of -1 percent, which is a large improvement from the -6.4 percent decline in the first quarter.

There was some positive news in employment this month: The most recent headline unemployment rate declined one-tenth of one percent this month to 9.4 percent. Although job losses have slowed, the total labor force decreased at a more rapid pace due to workers retiring or giving up looking for employment, resulting in a falling unemployment rate. Regardless, the unemployment rate remains near its highest level since 1983. In addition, the measure of unemployment that includes part-time workers looking for full-time work declined to 16.3 percent.

The economy has lost 5.7 million payroll jobs in the last 12 months, or approximately 4.2 percent of the total. Mass layoff events — job cuts of more than 50 jobs — also declined slightly this month, yet have increased 61 percent year-over-year. The Core CPI (all items less food and energy) declined to 1.5 percent, while the Full CPI fell to -2.1 percent in July.

Leading Indicators: D

The leading indicators were mixed this month, although many have improved since the beginning of the year. The Leading Economic Index continues to improve, reaching 4.5 percent in June, which is up from 2.4 percent in May.

Stocks have continued their multimonth rally and, as of the end of July, the S&P 500 had risen 34 percent from February’s lows. Homebuilder stocks also performed well in July, increasing over 22 percent in the past month, and have declined just 6 percent year-over-year.

The price of crude oil has trended up since February, but fell 8 percent in July from June, reaching an average of $64.09 per barrel. …CONTINUED

Affordability: C

This month, affordability worsened slightly due to a small uptick in median home-sale prices. As a result, the housing-cost-to-income ratio increased to 28 percent, but remains very attractive and is well below the peak of 44 percent during this housing cycle. The median-home-price-to-income ratio also remains very attractive, currently equal to 3.4 and still below the historical average of 3.7.

The 30-year fixed mortgage rate fell to 5.25 percent by the end of July, but remained above the sub-5 percent levels experienced in prior months.

The share of adjustable-rate mortgage (ARM) applications reached 5.4 percent in the last week of July, according to the Mortgage Bankers Association, primarily due to the rise in fixed mortgage rates. However, the share of ARM applications remains extremely low when compared to peak levels above 35 percent of total loans in early 2005.

Consumer Behavior: D-

Consumer behavior deteriorated this month, as Americans became slightly more pessimistic about the U.S. economy. The Consumer Confidence Index, which had improved from March to May, declined for the second straight month, reaching 46.6 in July. Also, both the Consumer Sentiment Index and the Consumer Comfort Index declined in comparison to the previous month. American’s personal savings rate continues to skyrocket, reaching 6.9 percent year-over-year for a total of $769 billion in savings — the highest level since 1993.

Since the recession started, the U.S. has been hammered with falling home prices and a crumbling stock market, resulting in a loss of more than $10 trillion of wealth in the past year and equal to a total U.S. net worth of $50.4 trillion in the first quarter of 2009.

Existing-Home Market: D

Although the existing-home market remains extremely weak, a few indicators improved this month. The seasonally adjusted annual resale activity in June increased 3.6 percent from the previous month to 4.89 million homes, but remained down 0.2 percent from one year prior, according to the National Association of Realtors (NAR). The median resale home price increased in June to $181,600, according to NAR, but has fallen 15 percent from one year ago.

By comparison, the Case-Shiller index, which tracks paired sales, fell a record 19 percent in the first quarter compared to the beginning of 2008. The supply of unsold homes fell in June to 9.4 months of supply, yet remains high compared to historical levels. The pending home sales volume remained flat compared to the previous month, but increased nearly 7 percent from one year ago.

New-Home Market: D-

Many indicators in the new-home market have improved since last month, but the overall market remains weak. Builder confidence improved in August, following a steady upward trend since reaching bottom in January. The median new-home price reversed the gain experienced last month, falling to $206,200, according to the Census Bureau, and has fallen 12 percent year-over-year. The median new-home price can fluctuate greatly month-to-month, as it is dependent on the mix of housing types sold during that period.

The seasonally adjusted new-home sales volume increased in June compared to May, resulting in 384,000 transactions.

The inventory of new homes for sale has trended down since January and is currently at 8.8 months of supply, and the unsold completed homes component of that amount equals four months of supply.

Housing Supply: F

The supply of housing generally increased on a seasonally adjusted basis, but remains very low compared to history. Seasonally adjusted new home construction starts increased slightly in June, due to the gain in single-family starts. Despite the recent increase, construction levels remain near their lowest level on record since at least 1959.

Total permits increased in June as a result of an increase in both single-family and multifamily permits. Seasonally adjusted total permits have fallen 52 percent year-over-year, however, and remain near their lowest level since the Census Bureau began recording permit statistics in 1960.

The annual new home completion volume held steady in June at 818,000 units and has fallen 28 percent over the last 12 months. Second-quarter homeowner vacancy fell to 2.5 percent, but remains well above the long-term average of 1.5 percent.

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

Copyright 2009 John Burns


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