By David Crowe NAHB Chief Economist

Employment in May increased by 431,000 jobs at a seasonally adjusted rate following an increase of 290,000 jobs the month before, which should be good news for housing.

However, the large increase in May was primarily because the Census Bureau added 411,000 temporary census workers. (Overall, government jobs increased only 390,000 for the month, largely because of cutbacks at the state and local levels).

The private sector added 41,000 jobs for the month, including 31,000 temporary workers, and the unemployment rate fell from 9.9% in April to 9.7% in May.

The heavy reliance on temporary workers indicates that businesses are still uncertain about the recovery and, in particular, how long the boost in demand for their products and services will last. Hiring temporary workers at this stage in the recovery enables employers to hedge their bets. If demand is sustained — as NAHB forecasts — many of the  temporary positions in the private sector will become  permanent.

Despite the disappointing private sector job growth for May, NAHB is forecasting that employment will continue to improve throughout 2010 and 2011. The unemployment rate peaked at 10.1% in October 2009. NAHB expects it to be near 9.3% by the end of the year.

Employment stability and job growth are keys to a housing recovery. In addition to alleviating workers’ fears about their next paycheck, improving employment measures help boost the confidence of households that are considering buying a home.

While overall job growth has been positive, residential construction has been bleeding jobs, albeit at a slower pace during the past few months. In May, 6,100 jobs were lost, down from the 6,800 job losses the month before and from the 81,700 residential construction jobs lost in November 2008.

Total construction employment — including non-residential employment — fell 35,000 in May after rising the previous two months. The overall unemployment rate for construction inched upward to 20.6% in May from 20.3% the month before.

Residential Construction Story Is Still Mixed

The slow but steady improvement in single-family construction activity is reflected in the value of construction put in place, with the seasonally adjusted annual rate rising 3.4% in April from the month before and 29.0% from a year earlier — when construction activity was at an extremely low level.

Multifamily construction continued its slowdown in April, with a 1.9% decline from March and a precipitous 57.4% drop from a year earlier.

In April, remodeling expenditures for improvements rose 6.3% from March and were up 6.5% from a year earlier.

Delinquencies and Foreclosures Worsen — or Do They?

The Mortgage Bankers Association (MBA) reported that seasonally adjusted delinquencies for all loans rose to 10.1% in the first quarter, up from 9.5% the previous quarter and 9.1% a year earlier.

At the same time, foreclosures started for the first quarter rose to 1.17%, up slightly from 1.14% in the fourth quarter 2009, but down from 1.34% a year earlier.

In another hopeful sign, foreclosures started for subprime loans fell to 3.29% in the first quarter from 3.51% the previous quarter and 4.55% a year earlier. This may be largely because lenders made few subprime loans during the last year or so. Fraudulent loans should have been weeded out by now, along with households that were in over their heads from the start.

Most foreclosures now should arise from normal life events such as unemployment, illness and divorce, and from borrowers who choose to walk away from their underwater mortgage, even though they can make their  monthly payments.

There remains cause for concern over the percentage of loans that are 30 days past due — a measure of loans that are slipping into trouble and possible candidates for future foreclosure. After falling for three consecutive quarters, the delinquency rate rose to 3.45% in the first quarter from 3.31% the quarter before, though the rate was down from 3.77% a year earlier.

Federal Housing Administration loans turned in better performances — with the rates for 30-day, 60-day and 90-day delinquencies all lower in the first quarter of 2010 than the quarter before.

The disparity may be attributed to the seasonal adjustment process, the MBA points out. While the process normally clears up seasonal variations, it may actually be creating some confusion at present. So, while getting a true reading on delinquencies may still be a bit premature, the MBA, with a note of caution about the process, believes that the delinquency situation may be improving.

However, foreclosures continue to be concentrated in relatively few states. Florida and California account for more than a quarter (29%) of all foreclosures started in the first quarter. When including Texas, Georgia, Arizona, Illinois and Michigan, the seven states account for more than half (52%) the foreclosures started. With Ohio, Nevada, New Jersey, New York and North Carolina included, the 12 states account for 67% of the foreclosures started.

Clearly, the country is not out of the foreclosure mess, yet, but the worst may be over and we can expect a slow improvement in coming quarters. At minimum, there seems to be no further degradation in mortgage quality. As the economy continues to improve, that should help reduce the rate of foreclosures.

Nonetheless, foreclosures are a drag on the market as home builders are forced to compete with a “fire sale” product.

Lumber Prices Continue to Fall

The Random Lengths composite framing lumber price index continues to fall from its peak in late April of $367 per 1,000 board feet. For the week ending June 4, the index was down to $291, its lowest level since the end of January. But that was still more than $40 higher than late December prices and $88 higher than a year earlier.

The higher prices earlier this year brought about reduction in export fees and higher quotas for Canadian lumber exports to the U.S., under the terms of the Softwood Lumber Agreement, in May. All fees and quotas — with the exception of a 10% export fee imposed on select provinces for previously violating the agreement — were eliminated this month as a result of higher prices in March and April.

Export fees and quotas will be re-imposed in July because of the declining lumber prices since April, and fees and quotas will likely be imposed in August, as lower lumber prices are expected to continue.

The run up in lumber prices through April, along with increases in other materials such as gypsum wallboard and copper products, added to the cost of construction, explaining some of the increase in the April residential value put in place numbers.

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 June 10 edition. To subscribe to “Eye on the Economy,” click here.