The Official Online Weekly Newspaper of NAHB
The July employment data provided little to cheer about as non-farm payroll employment was down by 131,000 jobs at a seasonally adjusted annual rate, following a 221,000 decrease in June. The numbers were adversely affected by planned layoffs of temporary decennial workers at the Census Bureau — 225,000 in June and 143,000 in July.
On the positive side, private sector employment in July increased for the seventh consecutive month, though by only 71,000, which at least was some improvement from June’s paltry 31,000 increase.
The biggest gains were in the manufacturing sector, which was up by 36,000 jobs — including 21,000 new jobs making motor vehicles and parts — and health care, up 27,000.
Employment of private temporary workers was also a disappointment, falling 5,600, the first decrease in 10 months.
At this still relatively early stage of the recovery, businesses have been employing temporary workers, hedging their hiring bets until they are certain that the growing demand they have seen for their products and services is sustainable. Many of these temporary positions eventually become permanent, so it is possible that this transition is responsible for July’s decline.
Although the unemployment rate held steady at 9.5% in July, the number of those employed declined, indicating that some job seekers left the labor force, presumably because they were discouraged by dismal prospects for employment.
In one positive sign, private sector average employment hours edged up from 34.1 in June to 34.2 in July. Also, average hourly earnings were up $0.04. Employers may be reaching the point where they have to use their current workers more and give a few raises. That is a precursor to future hiring.
Employment stability and job growth are keys to a housing recovery and are needed to help boost the confidence of households that are considering buying a home.
NAHB is forecasting slow employment gains for the remainder of the year as GDP continues to show some growth and businesses find that they can no longer depend on the productivity growth of their current workers to increase output.
In the second quarter, labor productivity fell 0.9%, the first drop since fourth quarter 2008. Over that same period, non-farm payroll employment increased an average of 175,000 jobs per month as hours worked increased faster than output. More jobs should contribute a modest lift to housing.
Residential construction continues to hemorrhage jobs, albeit at a slower rate than a year ago. In July, 16,900 jobs were lost, down from 27,700 job cuts a year earlier and 81,700 in November 2008. The continued decline in residential construction employment is in line with slowing single-family housing starts, which have been down three months in a row, and July’s sharply falling housing completions as builders reduced their work pace to hold down expenses in the face of weak demand following the expiration of the home buyer tax credit.
However, on a somewhat more positive note, total construction employment — including non-residential jobs — only lost 11,000 slots in July due to some pickup in non-residential construction. The overall unemployment rate for construction fell to 20.7% from 23.7% in June, its first decline in four months.
Federal Reserve Policy
In a statement following its Aug. 10 meeting, the Federal Open Market Committee (FOMC) observed that “the pace of recovery in output and employment has slowed in recent months.” This was hardly earth-shattering news, just an acknowledgement of what was widely understood to be the case.
The FOMC went on to observe (as has been noted in previous issues of Eye on the Economy) that household spending was advancing, if only slowly, “constrained by high unemployment, modest income growth, lower housing wealth and tight credit.” The FOMC also noted that “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.”
The FOMC held to the target federal funds rate range of 0% to 0.25%, first announced in mid-December 2008. Further, as it previously stated, the FOMC said it expected to maintain the “exceptionally low levels of the federal funds rate for an extended period.”
Announcing one new policy item, the committee said that it would roll over the Federal Reserve’s maturing holdings of federal agency debt and mortgage-backed securities into longer-term Treasury securities (primarily two- to 10-year securities). This should keep long-term interest rates low, including mortgage rates.
The FOMC’s assessment of the economy is in alignment with NAHB’s outlook. NAHB expects the federal funds rate to remain in the 0.0% to .25% range through the middle of 2011 as a relatively slow and prolonged recovery puts little stress on capacity and resources, keeping inflation in check. Low inflationary expectations should help keep mortgage rates low.
NAHB projects that mortgage rates will remain below 6% through 2010 and most of 2011.
Inflation Remains Tame
Weak economic growth is helping to keep inflation in check. The seasonally adjusted monthly Consumer Price Index (CPI) rose 0.3% in July following three months of decline, and was up 1.2% from a year earlier. Meanwhile, core inflation — excluding food and energy prices — rose a modest 0.9% from a year earlier.
The low rate of inflation gives the Federal Reserve the room to maintain its expansionary monetary policy and to keep mortgage rates low.
The rental component of the CPI rose 0.1% in July for the third consecutive month, though it was down 0.7% from a year earlier. Homeownership “prices” — which are measured by using an owner’s equivalent rent that is largely driven by the rent index without utilities — rose 0.1% in June and July, after being flat for five of the previous six months. The measure was up 0.1% from a year earlier.
The rent and owner components of the CPI make up 32% of the CPI. The soft rental market and excess vacancies have kept rents from rising, which has been a challenge to apartment owners who have seen other costs rise. It also has made it more difficult for multifamily projects to obtain financing.
However, there are early signs that the rental market may be improving. The rentership rate — the percentage of households renting — has risen in each of the past three quarters. Meanwhile, the rental vacancy rate in the second quarter improved for new construction and held steady for older apartments.
The July Producer Price Index (PPI) for finished goods rose 0.2% after three months of decline, and was up 4.2% from a year earlier. Excluding food and energy, the index was up 0.3%, its ninth consecutive monthly increase, but it was only up 1.5% from a year earlier.
Weakness in construction pushed the prices of residential construction building materials down 0.7% in June and 0.2% in July. Nonetheless, they were still up 3.7% in July from a year earlier. Lumber, gypsum, cement and copper prices were all down in July, helping builders keep new home construction affordable.
Is Consumer Sentiment Improving?
After dropping sharply in July, the University of Michigan’s consumer sentiment index improved a bit in August’s preliminary reading, rising from 67.8 to 69.6. Also, there was a modest rise in the percentage of consumers who believe that now is a good time to buy a house — from 75% to 76% — a return to the June number and its highest reading since March.
The most common reasons cited for favorable home buying conditions were low prices (63%) and low interest rates (44%).
Meanwhile, mortgage applications have generally been on the rise, with the four-week moving average for applications up in nine of the last 10 weeks. Mortgage purchase applications are also showing some improvement, with the four-week moving average up in three of the last four weeks.
Residential Construction on Hold
With the economy advancing at a snail’s pace and consumer confidence rebounding hesitantly, most potential home buyers remain on the sidelines despite low interest rates and affordable house prices.
As a result, home builders have had little to be optimistic about. This was reflected in the August NAHB/Wells Fargo Housing Market Index (HMI), which fell from an already low 14 to 13, its lowest level since a reading of 9 in March 2009.
With little prospect of increased sales on the horizon, builders are reluctant to add to their inventory. Total housing starts in July rose 1.7% from 537,000 to 546,000 at a seasonally adjusted annual rate. However, the increase was due totally to volatile multifamily starts, which jumped to 114,000 units, up 32.6% from June’s depressed rate of 86,000. The July multifamily number is close to the three-month moving average of 110,000, a level that multifamily starts have been bouncing around since March.
July’s single-family starts fell 4.2% from 451,000 to 432,000, the lowest reading since 406,000 starts in May 2006. The Northeast and Midwest, after two months of decline, saw starts rise by 6.3% and 8.8%, respectively, while the South and West experienced declines of 5.8% and 14.7%.
Single-family construction appears to be close to a bottom. Single-family building permits in July slipped slightly from 421,000 in June to 416,000, a 1.2% decline. The increase in starts reported by the Northeast and Midwest was not followed up in permits, which fell by 8.2% and 8.1%, respectively. The South was flat with 215,000 single-family permits while the West rose 6.0% from a low June number.
In a dramatic indication that demand is weak and builders have entered into a holding pattern, new single-family units completed fell a steep 27.5% in July, from 676,000 to 490,000, the largest monthly decline on record going back to 1968.
The completion rate in June reflected the push to meet the settlement date deadline at the end of the month (since extended to September) for the now expired home buyer tax credit. Now needing to complete fewer homes to keep up with weaker contract demands, builders are slowing completions to hold down the costs of installing relatively expensive finishing touches.
This is also enabling them to better customize the completed product to meet the desires and budget of the home buyer when a sale does materialize.
A Ray of Hope?
Better news appears to be emerging on the finance front. The Federal Reserve’s third quarter Senior Loan Officer Opinion Survey on Bank Lending Practices reported some easing of credit standards for prime residential mortgages among large banks over the previous three months. This marks the first net easing in the survey in more than three years.
For non-traditional mortgages (sometimes referred to as Alt-A), there was essentially no net tightening — two banks reported some tightening and one reported easing slightly. This is a significant improvement over just a few quarters earlier when there was substantial tightening of these standards.
The Fed’s third quarter survey is an indication that banks may be beginning to return to the more normal lending standards that prevailed in much of the 1990s and the first part of the 2000s.
Bank loan officers are reporting substantially different lending conditions for builders than builders have been reporting in recent NAHB surveys. The Fed’s senior loan officer survey found fewer banks tightening standards for commercial real estate, a category that includes builders’ acquisition, development and construction (AD&C) loans.
None of the large banks in the Fed’s loan officer survey tightened their lending standards, while the net percentage of smaller banks tightening was only 11%.
In sharp contrast, between one-half and two-thirds of builders surveyed by NAHB said that the availability of new production credit was worse in the second quarter than the first quarter of 2010.
This disconnect between the assessment of credit availability and an aggressive regulatory crackdown continues to point to a major hurdle to a housing recovery.
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. 20 edition. To subscribe to “Eye on the Economy,” click here.