Eye on the Economy: The Economy Shows Slow Improvement
Although the long anticipated turnaround in employment has yet to occur, some slight improvement on this front is providing hope that job gains may only be a month or two away. Nonfarm payroll employment fell 36,000 in February at a seasonally adjusted annual rate. Though greater than the loss of 26,000 jobs in January, given the extremely bad weather over much of the nation that month, the “true” job losses might not have been quite as large.
With the return of more normal weather this month, March employment numbers, due out in early April, will likely be the first positive employment report in more than two years and provide additional proof that the U.S. economy is in the early stages of a recovery.
The Federal Reserve seems to agree with this assessment. In its press release for the March 16 Federal Open Market Committee (FOMC) meeting, the Fed said that “the labor market is stabilizing.”
At the same time, the unemployment rate held steady at 9.7% in February, down from its peak of 10.1% in October 2009.
Other indicators also show progress. Industrial production — often one of the first indicators to turn positive — has increased for eight months in a row. Capacity utilization — a measure of how fully the available industrial capacity is being used — stood at 72.7% in February, up from its recent low of 68.3% last June. And consumers are spending more, with retail sales rising for the past two months and in four of the past five months. On a year-over-year basis, sales are up 4.1%.
We need to see improvements in retail and employment as an indication that consumers are ready to take on more significant purchases such as homes.
A Drifting Housing Market?
The housing market is tough to read these days. Recent data appear to have been subdued by strong winter storms and continuing weak consumer confidence. Builders remain concerned as well, as the NAHB/Wells Fargo Housing Market Index (HMI) reflects.
After a brief rebound in February to 17, from 15 in January, the HMI fell back to 15 in March (anything above 50 indicates more positive responses than negative and anything below 50 the reverse). The best that can be said at this point is that the index has been essentially flat for nearly a year now, moving in a narrow range.
The Federal Reserve appears to be just as disappointed as NAHB in the housing market’s performance. In the latest FMOC statement, the Fed noted that “housing starts have been flat at a depressed level.” As recently as December it was citing “some signs of improvement over recent months” in the housing sector.
The expiration of the 2009 first-time home buyer tax credit in November did move up some sales that otherwise would not have occurred until December and January. As a result, new home sales have fallen for three months running, reaching a new record-low seasonally adjusted rate of 309,000 in January.
On the positive side, single-family housing starts were essentially unchanged in February from January (down to 499,000 from 502,000 at a seasonally adjusted annual rate) despite the storms that buffeted the South and Northeast. While total starts did drop off significantly from 611,000 to 575,000, this was mainly due to the volatile multifamily starts number, which fell from a relatively strong (based on recent experience) 109,000 units to 76,000. The January/February average of 92,500 starts is in line with the November/December average of 89,500.
Building permits data also suggest a positive direction for single-family construction, which has held steady — at just above a seasonally adjusted annual rate of 500,000 — for the last three months.
The same can’t be said for multifamily permits, which have been falling for two months, no doubt a reflection of the difficulty in obtaining financing for new projects. The one encouraging note — that multifamily permits have been holding above 100,000 — could be tested in coming months.
The home buyer tax credit, which was first expected to expire at the end of November, has affected the timing of home buying in recent months, but its extension and expansion have yet to show a significant impact on sales, as evidenced by January’s disappointing numbers. So far, prospective home buyers have remained hesitant in moving forward even in the face of the new deadlines of April 30 for signing a sales contract and June 30 for closing.
Nevertheless, NAHB expects the latest phase of the credit to increase sales in the period immediately ahead. At this point, most of the eligible new homes have been completed or are under construction.
There were 97,000 completed new homes on the market according to January’s new home sales report, although some had been unsold for more than a year. In the February starts report, there were another 31,000 completions and 284,000 homes in some stage of construction. That should be sufficient to meet expected demand.
However, with builders continuing to experience difficulty in obtaining financing nationwide, it is entirely possible that some shortages could occur in healthier markets where demand is stronger.
Uncertainty seems to rule the day for consumers at present. Consumer confidence, as measured by the University of Michigan’s Consumer Sentiment Index, has fallen in the last two months. At 72.5, the index is back down to its December reading. At the same time, the percent of those surveyed who think it is a good time to buy a house rose to 75% in March from 72% in January, back up to its November level.
Households aren’t leaping to take advantage of the housing opportunities they perceive in today’s market because they are still concerned about job prospects and the state of the economy and not because of any negative concerns about the housing market.
Despite all the headwinds, NAHB is forecasting 550,000 single-family starts this year, a 25% increase over 2009’s disappointingly low starts level. Among our assumptions are that the economy will continue to improve, employment will soon be on a growth path, interest rates will remain close to today’s historically low levels, the positive effects of the home buyer tax credit will soon emerge and builders will need to start replenishing inventories that are now at very low levels.
The Financial Markets Are Holding Their Own
Although it is still not easy for builders to obtain financing, home buyers who can qualify for a mortgage face highly favorable interest rates.
For the past six months, conventional rates on 30-year fixed-rate mortgages have hovered around 5%. Despite the Federal Reserve’s plans to withdraw support from the mortgage market by the end of this month, there has been barely a ripple in the rates. In fact, the Freddie Mac 30-year fixed-rate mortgage rate was down in the last two weeks.
Also, the spread of the Freddie Mac 30-year fixed-rate mortgage rate over the 10-year Treasury note rate has declined significantly in recent months. As of last month, that spread was the narrowest it has been since December 1997. February’s spread of 1.30% was a significant improvement over the recent peak in the spread in December 2008 at 2.91% and an indication of the relative bargain a home mortgage is at present for those who can qualify.
NAHB forecasts that the spread will widen to 1.6% by the second half of this year, a tad below its long-run historical average of 1.7%.
Although it is premature to say the foreclosure problem is over, the Mortgage Bankers Association (MBA) recently provided some positive news, reporting that the number of foreclosures started in the fourth quarter was down from the third quarter, which had been down from the second quarter. Also, fourth-quarter delinquencies on all mortgages fell slightly to 9.5% of home loans from 9.6% in the third quarter.
The one troubling note in the MBA report was that delinquencies past due by 90 days or more continued to rise. However, 30-day delinquencies have fallen for the past three quarters, suggesting that a slow improvement may be occurring and that the worst is over.
The MBA report contains state data as well and shows that mortgage stresses are concentrated in a handful of states. In fact, 10 states accounted for almost 70% of all foreclosures started in the fourth quarter of 2009. In descending order, they were Florida, California, Illinois, New York, New Jersey, Arizona, Ohio, Michigan, Texas and Georgia.
NAHB Chief Economist David Crowe analyzes the economy from the point of view of the housing market every other week in the free e-newsletter, “Eye on the Economy.” The preceding is a reissue of his March 19 edition. To subscribe to “Eye on the Economy,” click here.
Web Site One-Stop Shop for Tax Credit Info
Builders and other industry professionals can help spur home sales by referring prospective home buyers to www.federalhousingtaxcredit.com. The NAHB Web site provides detailed information on both the extended $8,000 first-time home buyer tax credit and the new $6,500 repeat buyer tax credit signed into law by President Obama.
Consumers can use the Web site to find information on both tax credits — including frequently asked questions and links to social media sites that provide updated information as it becomes available. It also includes a number of home-buying resources for consumers.
Industry professionals are encouraged to highlight the tax credit Web site when marketing to their potential home buyer market.