Economic Update
Providing a view point on the economy as it relates to housing !
Week of March 1, 2010
It appears the trend is no longer our friend, at least when looking at recent data on
new and existing home sales.
New-home sales, in particular, have had a rough go of it, though not as rough
as January's showing, where sales dropped 11.2% to an annual rate of 309,000
units. This is the lowest sales rate going back nearly half a century. The sales
drop helped push the national median price down to $203,500, a 5.6%
discount from December's median price of $215,600, while helping to push
inventory up to a 9.1-month supply.
However, the news on new-home sales becomes a little more palatable when
placed in a larger context. The fact is that at least a few homebuilders, particularly
Toll Brothers, remain upbeat. Citigroup, in a research note, pointed out that
homebuilders are forward looking, while the sales data are backward looking.
Last year, new-home sales were nearly as sluggish, but they recovered as the
year progressed. Many market-watchers believe a similar pattern could emerge
in 2010.
Existing-home sales fell 7.2%, the second-largest decline ever, to an annual pace
of 5.05 million units. Distressed sales accounted for 38% of homes sold compared
with 32% in the prior month. Meanwhile, inventory has crept up to a
7.8-month supply.
The data, when aggregated, suggest the federal homebuyer's credit is losing its
punch. We're not surprised. Tax credits only temporarily stimulate current demand,
they don't raise aggregate demand. For that to occur, we need a sustained
economic recovery with a concurrent sustained recovery in employment.
In respect to the economy, there are signs of improvement. The revised gross
domestic product report showed that the economy grew faster than expected
in the fourth quarter of 2009, posting a 5.9% annual increase. Now it's a matter
of translating economic growth into employment growth. We'll get a better
sense if that's occurring with Friday's employment report.
As for mortgage rates, the market continues to hold record lows. And, yes, we
still think this is as low as they will go. The Federal Reserve still plans to end its
mortgage-market intervention by March's end, which means rates will be set by
the more volatile, profit-seeking market. So, if anyone is thinking of locking in a
rate, we strongly recommend he or she stop thinking and start acting.
To Learn More Contact Us !
Is Housing Still the Leader?
That appears to be the case, at least according to data released from the Census
Bureau. Going back to 1968, the trend in housing starts has portended the trend
in the overall economy.
Should we be optimistic or pessimistic? That's difficult to say. Monthly figures on
starts are volatile, and housing starts fluctuate more than many indicators. It takes
several months for total housing starts to establish a trend. The good news is that
going back to October, the trend in starts has been mostly stable and up. The
bad news is that January's free-fall in new-home sales could pressure the trend to
change direction.
Or maybe not. The problem in vetting the data is that no two periods are exactly
alike and history never repeats itself perfectly. For example, Census Bureau data
show that housing completions generally lag housing starts, as would be expected,
except in the latter half of 2009, where starts have fallen off a cliff compared to
completions, creating a wide, unprecedented divergence.
So what does it all mean? Economists who believe that housing is the leading
economic indicator aren't very bullish on the economic outlook. We tend to be a
little more bullish, because it can be misleading to read too much into historical
correlations of two variables ? in this case, housing and the economy. What's more,
the more correlations are vetted and become known, the more their predictive
value tends to break down.
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