The Official Online Weekly Newspaper of NAHB
Unfortunately, employment is a lagging indicator, so we’ve had to wait for any improvement on this crucial front for housing and the economy; the good news is that at long last some encouragement can be derived from the job statistics.
The Bureau of Labor Statistics reported for March the first significant increase in monthly employment since December 2007 — with a gain of 162,000 jobs at a seasonally adjusted rate. Further, revisions to previous months showed that the situation had stabilized, with virtually no change in employment from December to March following average losses of more than 200,000 per month last fall.
The increase was helped by the addition of 48,000 temporary workers to conduct the decennial census and by a thaw in hiring delays in February caused by unusually stormy weather. Despite March’s indication of positive job growth, the unemployment rate held steady at 9.7% as more discouraged job seekers were motivated by a brightening outlook to renew their search.
NAHB expects job gains to continue at a modest pace, but it will take many years to recover the eight million positions that disappeared during the recession and return to peak total employment levels last seen in late 2007. Nonetheless, the change in direction in employment is significant, especially for housing demand, which has been severely weakned by declining consumer confidence.
Households don’t tend to buy homes — the biggest financial commitment of a lifetime — when they have lost a paycheck or see massive job cuts all around them. As employment makes gains, prospective home buyers will grow increasingly secure that their jobs have survived and that they might even have reasonable expectations for increased earnings.
A better employment picture will also have a palliative impact on household formations, enabling them to return to more normal, heathier patterns. Recessions often dampen the formation of new households in the face of obvious economic constraints, and this is what occurred in the most recent downturn.
Household formations slowed from a 20-year average annual growth rate of 1.3% to under 1% in 2008 and to a post-World War II low of 0.34% in 2009, leaving 1.2 million fewer households today than if we had continued growing uninterrupted at the pre-slump average.
Delayed household formations will add to the impetus behind the creation of new households, which in turn will stimulate housing demand. However, ongoing economic growth, improved consumer confidence and more reasonable lending standards for housing are all needed for housing demand to reach its full potential.
Among the first to benefit from the emergence of those who hunkered down in the homes of friends and relatives for the duration of the recession will be the rental sector, where apartments provide the easiest means for establishing or reestablishing self sufficiency.
The recent renewel of employment prospects reflects continued advances in the rest of the economy. Rising for the past nine months, industrial production is now up 4.0% on a year-over-year basis. Over the past nine months, capacity utilization has climbed to 73.2%, a level last seen towards the end of 2008. Productivity has been increasing at a 7%-to-8% clip for the past three quarters, as businesses have resorted to squeezing more out of fewer employees as an alternative to reassembling a fuller workforce in the face of lingering economic uncertainties. This strategy will become untenable as sales pick up, and hiring will recommence on a larger scale.
Retail sales have picked up in five of the last six months, increasing a solid 1.6% in March alone. On a year-over-year basis, they were up a healthy 10.0%.
Segments that demonstrated growth both on a monthly and on a year-over-year basis included furniture and home furnishing stores, food and beverage stores, clothing and clothing accessories stores, food services and drinking places, and sporting goods, hobby, book and music stores. Even auto and truck sales, requiring a more significant financial commitment from consumers, were up 18.1% from a year earlier.
Some Positive News on the Housing Front
Back on the housing front, the NAHB/Wells Fargo Housing Market Index (HMI) rose four points to a still relatively low 19 in April after languishing below that level for half a year. The index found builders gaining confidence from a bump in sales and traffic attributable to buyers seeking to sign a sales contract by the April 30 deadline to qualify for the home buyer tax credit; the closing deadline for the credit is June 30. The subcomponents of the index showed builder sentiment on traffic up by four points and current sales up by five. The home buyer tax credit also undoubtedly helped lift the National Association of Realtors’ Pending Home Sales Index a healthy 8.2% in February.
The one wrinkle in the April HMI came from the component measuring builder expectations for the next six months, which rose only one point to a level lower than it was a year earlier when the market was just beginning to turn.
Continued foreclosures and competition from short or distressed sales that are holding down house prices and making it difficult to sell new homes at a price that covers costs are among the factors tempering the enthusiasm of builders as they gaze at prospects six months down the road. Distressed sales continue to further aggravate the problem of low appraisals and failed sales to buyers unable or unwilling to come up with additional equity.
A consistent bright spot remains at the lower end of the price distribution. Starter and modest homes are selling well in many markets because first-time home buyers are unencumbered by an existing home they need to sell, and those with a job and the financial means can readily see the advantages of today’s low home prices and mortgage rates, which could be almost as fleeting as the home buyer credit.
The lower end of the price spectrum is likely to continue to be the best segment of the housing market while current home owners further assess their ability to sell at a price that will enable them to attain what they desire in their next house.
Consumer Confidence Turns in Mixed Signals
Recent retail sales data suggest more grounds for optimism about the economy, but the consumers who are driving these brisker sales remain indecisive about the outlook. The University of Michigan Sentiment index improved in December and January, but fell in February and was flat in March, which brought it back to September’s level. Similarly, the Conference Board’s Consumer Confidence Index rose from November through January, fell sharply in February and recovered somewhat in March to just below its December 2009 level.
However, both surveys show an improved outlook for home buyers. The percentage of responses believing now is a good time to buy a house rose in February and March to 77%, matching responses in October. Over the most recent three months, the Conference Board’s Sentiment survey saw a rise in the percentage of those who planned to buy a house in the next six months.
As of March, 2.8% of the consumers who were polled identified themselves as would-be home buyers, the highest share since August of last year. While about 5% of households buy a home in a typical year, the improvement in attitude is pointing in a direction that is favorable for a rise in household home purchases.
The Mortgage Markets Say Goodbye to the Fed
As it promised, the Federal Reserve stopped purchasing mortgage-backed securities and GSE debt at the end of March. In the first full week of no Fed purchases, the Freddie Mac 30-year fixed-rate mortgage rose 22 basis points (from 4.99% to 5.21%).
During the same period, the 10-year Treasury note rose from 3.79% to 3.94%, a rise of 15 basis points. As a no-risk rule of comparison to 30-year mortgages, the spread between the 10-year Treasury note rate and mortgage rates is the more appropriate measure. This spread widened by only seven basis points, remaining at 127 points, well below the long-term average of 169 basis points.
A general rise in economic activity and continued borrowing by the federal government will push up long-term rates slowly, including mortgage rates. However, the rise will be modest and exert only a slight drag on housing demand as the economy and jobs return and incomes revive.
At current incomes and house prices, the average household can afford more than 70% of the homes that have been recently sold. At the peak of the market in the mid-2000s, the typical household could afford only 40% of the homes sold.
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 16 edition. To subscribe to “Eye on the Economy,” click here .
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.