Housing Market Key Indicator Alert 6/29/08
By: Hanley Wood

Latest Data Remains Lackluster
Housing starts and building permits continued to pull back in May. Housing starts fell to their lowest levels since March 1991 while building permits declined 1.3% from the previous month. Sluggish conditions in the housing markets also caused builder confidence to fall to all-time lows with the NAHB Housing Market Index (HMI) dropping a single point to 18 which ties the lowest reading ever recorded in the index’s 22-year history.

The same negative catalysts that have plagued equity markets in the past several months were at work again last week. Negative housing news, concerns of possible collapses in the financial sector, and rising crude prices dragged the Dow Jones Industrial Average down to its lowest levels since mid-March. The broader S&P 500 index also closed trading at around its lowest levels since March 19. Crude prices ended Monday’s trading session higher as violence in Nigeria continues to cause declines in production. Crude ended the trading session today up about 1% to $136.74/barrel.

This week will be full of housing and economic reports that will give us a better gauge on the current conditions in the market. Reports on May new and existing home sales will show whether the spring home-buying season this year showed any promise for a rebound in housing while final GDP estimates gives a clearer picture on economic growth domestically. The Federal Reserve will also be meeting this week and is widely expected to keep rates unchanged. The Fed is struggling to find a balance between increasing inflationary pressures and a fragile economy.

The Economy
Housing starts fell 3.3% to a seasonally adjusted annual rate of 975,00 in May which is the lowest pace since March 1991. Total permit issuances also dropped 1.3% from April levels with single-family issuances declining 4.0% from the previous month. The number of multi-family (5+) building permits jumped 6.4% to 314,000 in May.

Leading economic indicators posted slight gains suggesting that the worst of the economic downturn may be behind us. Leading indicators in May posted a 0.10 point increase for the third straight month. The leading index now stands at 102.10, up from an April figure of 102.00. The index is down 0.70 points from its levels six months ago when it was 102.80. Only four out of the ten components posted a monthly increase.

Price data in May also showed slight signs of rising inflationary pressure with increases in both consumer and producer prices. Higher food and energy prices caused the consumer price index to jump 0.6% on a seasonally-adjusted basis while core prices increased 0.2% on a seasonally-adjusted basis from the previous month. On an unadjusted basis, headline CPI increased 4.2% from its year ago levels while core CPI increased 2.3% year-over-year in May.

Housing Market
National average mortgage rates increased to 6.42% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on June 19th. This is the fourth straight week that rates have increased and the highest rates have been since September 2007. In the week ending June 18th, the MBA’s seasonally-adjusted Purchase Index declined to 360.2 from 376.2 in the previous week. Purchase applications have declined in two out of the past three weeks. The latest figure reflects a 4.25 percent decrease from last week and a 20.12 percent drop from the same period last year.

New and existing home sales moved in opposite directions in April. New home sales posted a rare 3.3% increase in April to a seasonally-adjusted 526,000 homes, up from a revised March figure of 509,000. This is the first time since October 2007 in which seasonally-adjusted annualized sales have posted a monthly increase. Sales for the previous three months, however, were revised lower by 30,000 units. At the current sales pace, there are 10.6 months of new homes supply on the market. The number of new homes for sale continued to decline as builders continue to scale back production. New home inventory declined to 454,000 which is the lowest it has been since May 2005. In April, median new home prices rebounded from its lowest levels since September 2006 in March to $246,100 in April. It was also the first time since November that median new home prices recorded a year-over-year gain.

Annualized sales of total existing homes declined 1.0% in April to 4.89 million units. Sales of existing homes are down 17.5% from the 5.93 million units in April 2007. Median existing home prices in April increased for the second straight month to $202,300 from a revised $200,100 in March. The number of existing homes for sale increased jumped 10.5% to 4.552 million units in April. At the current sales pace, there are 11.2 months of existing homes supply on the market. Existing home affordability declined slightly in March due to the increase in median existing home prices..

The Forecast

Expecting a Lift

by Lawrence Yun, NAR Chief Economist

NAR's latest pending home sales index slipped yet again. The index in March again came in soft, falling one percent from the prior month. Of course, what you'll hear in much of the media reports will be that March's index was the lowest reading since the index was created in 2001. However, smarter observers will note that for all intents and purposes, the index has actually been moving in a very narrow range from August of last year to March of this year. It's important to remember that this time period reflects post credit crunch conditions where subprime loan originations virtually disappeared from the market place.

But the pending sales index report did have some bright spots. The Northeast region continues to show some good signs of recovery. In March, pending home sales in the region rose 12.5 percent. The West and South regions were essentially unchanged. Only the Midwest region experienced a meaningful decline with a 10.4 percent fall. As with all things "real estate," some local markets fared better than others. Pending sales rose in localities where affordability conditions have measurably improved. For example, Bakersfield and Providence both showed outright year-over-year gains in March.

As for actual closings, existing-home sales finished the first quarter of this year with a 4.95 million annualized unit sales pace. That is essentially unchanged from the 5.00 million existing-home sales in the fourth quarter of last year. Home sales will continue to trend soft in the current quarter with the expectation of 5.01 million sales. In the second half of this year, look for a measurable lift to the 5.6 to 5.9 million unit range.

There are several reasons to expect the lift. Mortgages will become more widely available. Both Fannie Mae and Freddie Mac recently announced plans to further provide liquidity, including in the new higher conforming jumbo markets. California, where jumbo loans had accounted for close to half of sales in 2005, was witnessing only 10 to 15 percent of jumbo loan originations in early 2008. Any reversal in the share of the jumbo loan market will have a huge impact in markets like those in California.

Legislation is also being debated to make the higher conforming loan limit (now at $729,750 versus $417,000 a year ago) permanent rather than temporary as it is currently. The temporary status of the higher loan limit has not yet drawn investor interest in holding on to GSE backed jumbo loans, even though the spread between jumbo and regular conforming loans has narrowed.

Another key reason for a solid recovery is due to wider use of FHA loans. Many lenders are trying to get HUD approval so they can make loans. Consumers are digesting the benefits of this safer loan product that carries much lower interest rates. As consumers realize that FHA loans no longer carry the stigma as being purely for low-and-moderate income households with credit blemishes, more and more consumers will utilized the loans, thereby steadily replacing the disappearance of the subprime loans.

And let's not forget those tax rebates. Tax rebate checks are showing up in bank accounts. There are some who say the rebate is not enough to make an impact on the economy. But rebates did make a difference in 2001. And today's rebate checks are larger than the ones back then.

Other developments are pointing towards better times. Exports continue to ramp up solidly. Business profits are surprisingly solid - outside of homebuilders and the financial industry. Business spending will grow as a result. These factors indicate that the economy will be better in the second half of this year after having stalled in the first half. The improving economy will also life consumer spirits, some gaining enough confidence to buy a home.

All that means that home prices will also improve in the second half of 2008 in many parts of the country. The return of jumbo loans and higher-priced home purchases will result in a higher recorded median home price. (Recent lower median prices were driven by fewer than normal transactions requiring jumbo loans.) As we know all real estate is local and there are large variations across markets. Even though the national median price will be lower in 2008, due to the weak first half and major price declines that already occurred in few markets, more than half of the country is likely to experience a price growth this year.

And there's a possibility of more good news. Legislation providing for a tax credit for homebuyers has been passed by both chambers of Congress, although the White House has hinted at a veto because it did not like the "big" housing stimulus bill. The White House has opposed several aspects of the stimulus bill, though it has not (yet) come out actually opposing the homebuyer tax credit concept if applied for any homes and not just foreclosed ones. The homebuyer tax credit will make market conditions much stronger than what we call for in the current baseline forecast.

Risks do still exist. Very high oil prices could stick around and that will hold back consumer spending growth. Inflation could notch higher, which then will result in higher mortgage rates. Despite these risks the economy and the housing market look to improve markedly in the second half of 2008. The momentum will carry forward into 2009.