The Official Online Weekly Newspaper of NAHB
The economy continued to grow in the second quarter, slowing down from previous quarters and not as fast as economists would like to see it, but it was growth nevertheless, with gross domestic product (GDP) advancing at an annual rate of 2.4%, its fourth consecutive quarterly increase.
GDP grew in this year’s first quarter at a 3.7% pace and in the fourth quarter of 2009 at 5.0%. The concern that this cool down presages a double dip and return to recession seems to be overblown.
First, it is not unusual to see variations in quarterly GDP growth coming out of a recession. Particularly strong quarters are often followed by weaker ones as growth in sectors responsible for the surge begins to moderate.
Second, although consumers are rebuilding their savings, they are also spending and likely to continue spending.
Third, business investment may be weakening, but it will continue to advance as companies move to take advantage of low interest rates.
Fourth, the federal government is still distributing funds provided under the American Recovery and Reinvestment Act (ARRA). A large share of these funds has been stockpiled by states, which are slowly using them to pay their vendors over time.
Buoyed by the home buyer tax credit, residential construction helped lift GDP in the second quarter, adding 0.6% to the overall growth rate, thanks to improvements in single-family activity and remodeling, with multifamily construction a negative. This was the first positive contribution from this sector since it added 0.25% to growth in the third quarter of 2009, which was the first quarter in two-and-a-half years that home building was not a drag on GDP, a grim reminder of the depth and length of the housing downturn.
Second quarter GDP also received a major boost from business investment in equipment and software, a sign that firms are generally positive about their future prospects.
Companies also continued to build their inventories, another positive for growth, although at a slower pace than in the previous two quarters. The lift from inventory investment will disappear, however, if final demand falters.
The consumer remains cautious, but has not abandoned the marketplace, contributing roughly half of the growth recorded in the second quarter, down from a two-thirds share in normal times. For now, consumers seem unlikely to increase spending given their generally glum outlook.
The University of Michigan Consumer Sentiment Index fell from 76.0 in June to 67.8 in July, its lowest reading since November. The Conference Board reported a similar drop in its July Consumer Confidence Index, which dropped from 54.3 to 50.4 , its second consecutive monthly decline.
While it is encouraging that businesses and consumers are still active participants in the economy, their growing expenditures in the second quarter led to a large increase in imports, which reduces GDP growth, and this was only partially offset by rising exports.
Ongoing spending by businesses, consumers and the government will produce sufficient economic growth to spur more hiring, which in turn will further buttress consumer spending and aid in housing’s recovery.
As a result, NAHB is forecasting moderately faster economic and job growth over the next few quarters.
Is Housing Improving?
Getting a good read on housing has been complicated in recent months by the lingering effects of the home buyer tax credit and its expiration. The tax credit pulled sales forward as buyers sought to qualify for the credit before the deadline for signing a sales contract at the end of April, leaving the pool of prospective home buyers severely depleted.
Now there is early evidence that market demand is in the process of being restored by historically low mortgage rates and affordable house prices.
New home sales peaked in April at a seasonally adjusted annual rate of 422,000, their highest level since September 2008. In May, they fell precipitously to 267,000, their lowest level since the Census Bureau started reporting these figures in 1963.
Sales in June rebounded to 330,000, an indication that buyers are returning to the market. Although this was a healthy increase, it still left sales at the second lowest level ever recorded. NAHB is forecasting further improvement in coming months as mortgage rates remain low, house prices level out and job growth continues.
Meanwhile, the inventory of new homes fell to 232,000 in June, a level last seen in 1968. Since then, the number of U.S. households has grown by more than 90%. As demand returns, a larger inventory will be clearly needed and this bodes well for residential construction, dependent upon banks increasing their lending to builders again.
Since their recent peak of 5.06 million In April, sales of existing single-family homes declined 1.6% to 4.98 million in May and 5.6% to 4.7 million in June. This was a bit surprising since the closing deadline to qualify for the tax credit was originally June 30.
The argument for extending the deadline to Sept. 30 was that a crush of credit-related sales had led to a backup and pushed closings beyond June. If this is what actually occurred, then it is a possible explanation for the sales decline in June and it suggests that existing home sales should not deteriorate further in July and August as the marketplace adjusts to the fading tax credit.
The National Association of Realtors® (NAR) Pending Home Sales Index, which is comparable to new home sales since it is based on contract signings, plunged 29.9% in May and fell an additional 2.6% in June. The index was down 18.6% from a year earlier, roughly in line with a 16.7% year-over-year decline in new home sales in June.
These declines represent the expected adjustment to the expiration of the home buyer tax credit. As we move beyond the tax credit, the true picture of the underlying market will begin to emerge by July or August.
House Prices Find a Floor
Aided by the home buyer tax credit, house prices have stabilized and begun to inch up. The S&P/Case-Shiller 20-city price index has risen in 10 of the last 12 months. On a year-over-year basis, the May index was up 4.6%.
Further, 19 of the 20 cities saw an increase in prices from the previous month on a non-seasonally adjusted basis. Thirteen of the 20 were up on a year-over-year basis, with three of them — San Diego, San Francisco and Minneapolis — up by double digits.
Not quite as rosy, the Federal Housing Finance Agency (FHFA) price index has been up in each of the last three months, although the May index was down 1.1% from a year earlier. Prices were up in seven of the nine divisions of the country in May, but only two were up on a year-over-year basis.
June median new home prices were down a modest 0.6% from a year earlier, while June median single-family existing home prices rose 1.3%.
At a minimum, the home buyer tax credit has helped stabilize home prices and may have given them a bit of a lift.
NAHB is forecasting that house prices will exhibit a mild upward slant during the remainder of this year and throughout next year.
Single-Family Construction Slows, While Multifamily Stabilizes
The combination of the home buyer tax credit, low interest rates and an improving employment picture lifted the value of single-family construction put in place on a year-over-year basis for five straight months through June, when it was up 26.7%. At a seasonally adjusted annual rate, the measure rose for 12 consecutive months until June, when it fell 0.7%, undoubtedly showing the waning effects of the home buyer tax credit.
Multifamily construction spending, on the other hand, showed its first signs of life in June, rising 0.3%, although still down a hefty 52.0% from a year earlier, supporting NAHB’s view that it is bouncing along the bottom as the industry continues to struggle with high vacancy rates and the paucity of financing for new projects. Multifamily construction should be stable for the balance of the year and gradually climb in 2011.
Homeownership Rate Slips
The Census Bureau reported that the nation’s rate of homeownership slipped from 67.2% in this year’s first quarter to 66.9% in the second quarter, its lowest level since the fourth quarter of 1999, a result of foreclosures and continued uncertainty surrounding the housing market.
Homeownership stood at 67.2% in the second quarter of last year. Over the ensuing year, it actually rose in the Midwest — from 70.5% to 70.8% — while in the Northeast it fell slightly from 64.3% to 64.2%. The worst declines — from 70.0% to 69.1% in the South and 62.5% to 61.4% in the West — occurred in regions with the highest foreclosures..
Over the same period, the stock of year-round vacant homes for sale edged up to 1.97 million from 1.9 million. This was an improvement over 2008’s average of 2.23 million, suggesting that this may only be a temporary setback.
Unfortunately, the same cannot be said for the stock of year-round vacant units for rent, which rose to 4.44 million from 4.38 million a year earlier. The large number of available rental units has put downward pressure on rents and dampened financing for the construction of new multifamily rental properties.
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 Aug. 4 edition. To subscribe to “Eye on the Economy,” click here.