Eye on the Economy: The Weather Disrupts the Housing Numbers
As feared, the February housing numbers were not good. Given the unusually bad weather in the South and along the East Coast that month — with record setting snow storms in the Mid-Atlantic region and up into New England — the expectation was that many of the economic statistics would be bad, even on a seasonally adjusted basis, and they were.
Existing home sales fell 0.6% in February from 5.05 million in January to 5.02 million at a seasonally adjusted annual rate. Single-family existing home sales fell even more — down 1.4% — from 4.43 million to 4.37 million. On a more positive note, both total and single-family sales were up on a year-over-year basis — by 7.0% and 4.3%, respectively.
February marked the third month in a row that existing home sales fell since topping out in November. The February decline was partly the result of some existing home sales (closings) that would have taken place in December and early this year being shifted into November to qualify for the first-time home buyer tax credit; but more factors than time shifting and weather were probably responsible for February’s larger-than-anticipated decline in sales.
The extended and expanded credit requires a signed contract by April 30 and settlement by June 30 (see www.FederalHousingTaxCredit.com for details), leaving potential buyers of existing homes four months beyond February to complete a sale. There was a similar delayed reaction to the 2009 credit.
Existing home sales are expected to rise in subsequent months as the June 30 deadline approaches and this likely will be followed by another plateau in mid- to late-summer from the time shifted sales. After the expiration of the credit, overall economic activity should be picking up enough to support the housing recovery.
New home sales (based on a signed contract) also failed to rebound in February despite the looming April 30 contract deadline. February new home sales hit an all-time record low seasonally adjusted annual rate of 308,000, down 2.2% from January’s already low 315,000 sales.
While weather and the November tax credit deadline were partially responsible, builders also cited consumer concerns over job security and stiff competition from sales of foreclosed and distressed homes.
Facing a June 30 delivery deadline, builders are going to find it difficult to add to their current for-sale inventory to accommodate demand stemming from the tax credit. At this point, buyers in the new home market seeking to take advantage of the tax credit will have to take a completed or nearly completed property already in the builder’s inventory.
House Price Stability?
House price measures have been sending off mixed signals recently. However, the consensus is that the worst is over, with small price vacillations up and down for some time to come.
At a minimum, housing prices have been falling at a much slower pace, and they have stabilized in many markets. As of January, the S&P/Case-Shiller seasonally adjusted 10-city and 20-city price indexes had both risen for eight consecutive months.
On a year-over-year basis, the 10-city index was virtually flat from January 2009 (down 0.04%) and the 20-city index was down a scant 0.7% compared to the double-digit rate of decline prevailing from January 2008 through August 2009. The rate of price decline has been falling since January of last year. Twelve of the markets in the 20-city index saw rising prices in January on a seasonally adjusted basis.
The Loan Performance Home Price Index produced by First American CoreLogic showed similar results, with house prices down 0.7% in January from the same month a year earlier. Excluding distressed sales, the index was down 0.4%. The year-over-year percentage decline in the index has been falling since it bottomed out at -20.1% in February 2009. From February 2008 through August 2009, the year-over-year price decline was in the double digits.
And the Federal Housing Finance Agency (FHFA) purchase-only price index fell a minimal 0.1% from the third quarter to the fourth quarter of 2009 on a seasonally adjusted basis — leaving prices in last year’s final quarter down 1.3% from their level a year earlier. Prices increased in 27 states in 2009’s fourth quarter, and declined by less than 0.5% in another eight.
A 5.2% increase in February’s median new home price from a year earlier — from $209,700 to $220,500 — likely reflects a compositional shift in sales to the mid-price range, offsetting sales at the low end. Median existing home prices still seem to be suffering the effects of foreclosed home sales and short sales. February’s median was $164,300, down 2.1% from $167,900 in February 2009.
House price stability is a critical element in bringing back home buyers. For the last three months, the Michigan consumer sentiment survey has shown an increase in the number of respondents who believe now is a good time to buy, and one of the reasons cited has been an increase in low house prices.
The pent-up demand coming off more than three years of sub-normal household formation rates will help stabilize prices even as additional foreclosures come into the marketplace.
Minimal Pressure on Consumer Prices
Consumer prices as measured by the Consumer Price Index (CPI) remained tame in February, rising 2.1% on a year-over-year basis, down from 2.7% in December 2009. Core inflation — excluding food and energy — rose 1.3% on a year-over-year basis, down from 1.8% as recently as December 2009. This gives the Federal Reserve room to continue its current expansionary monetary policy to aid the economy in its recovery from the Great Recession.
Building material prices, which generally fell during much of the housing recession, are now showing signs of rising. Although price increases to date have been relatively modest overall, the cost of some materials has jumped considerably — including lumber, energy and copper.
The cost of building materials for single-family construction was up 1.3% on a year-over-year basis in February; multifamily materials prices were up 1.5%.
More troubling is that these prices have been rising for four months in a row now. With much of the world in a recovery mode along with the U.S., many of these material prices are likely to continue to rise.
Nonetheless, materials prices generally remain below their peak levels. Since peaking in September 2008, overall single-family materials construction prices are down 3% and multifamily construction materials prices are down 4.7%.
Although residential construction remains weak, lumber prices have risen considerably, largely due to shortages of logs and bad weather. Gypsum producers announced significant price increases taking effect on March 15.
These types of developments threaten to push building materials prices up faster than general inflation, adding to builders’ woes and ultimately putting upward pressure on new home prices.
The Financial Markets — Steady as They Go
Although it is difficult for builders to obtain financing, home buyers who can qualify for a mortgage can continue to expect the prospect of highly favorable interest rates. For the past six months, conventional mortgage rates (30-year fixed-rate mortgages) have hovered around 5%.
In anticipation of the Federal Reserve’s withdrawal of support from the mortgage market at the end of March, there was barely a ripple in the rates. The Freddie Mac 30-year fixed-rate mortgage rate has remained essentially flat for the last two months. In the absence of Federal Reserve support in the secondary market, if market conditions warrant — presumably if mortgage rates rise too quickly and go too high — the Fed is prepared to step back in, according to the Federal Open Market Committee (FOMC) following its most recent meeting.
Level mortgage rates and the approaching home buyer credit deadline have kept demand for mortgages rising. March purchase applications returned to their higher levels of October 2009, when the first-time home buyer tax credit was in effect. Demand for government mortgages (FHA and VA) have been on the rise since the beginning of this year.
The Federal Reserve Loan Officers Survey has shown some slowdown in the tightening of credit standards for obtaining a mortgage compared to previous quarters in 2008 and 2009. Some banks are even beginning to ease up on their tight lending standards for prime mortgages.
This suggests that going forward, more applications are likely to be approved, which in turn will encourage a rise in applications. This should support continued improvement in home sales and construction activity.
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 April 1 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.
Spring Construction Forecast Conference Now a Webinar on May 18
The 2010 Spring Construction Forecast Conference is now a two-hour webinar to be held from 2:00-4:00 p.m. EDT on Tuesday, May 18.
Mark Zandi, of Moody’s Analytics, and Chris Varvares, of Macroeconomic Advisers, will join NAHB Chief Economist David Crowe for a macro-level look at the state of the nation’s economy and its impact on housing.
To register, visit www.nahb.org/cfc.