By David Crowe NAHB Chief Economist

The Bureau of Economic Analysis (BEA) has revised growth of the gross domestic product (GDP) in the second quarter down from 2.4% to 1.6%`, indicating that the decline from the first quarter’s 3.7% was worse than originally thought. The revisions primarily raised imports and lowered private inventory investment and exports, subtracting from growth, but also increased personal consumer expenditures, partially offsetting the decline.

The downward revision suggests that there is now a greater possibility of the economy suffering a double-dip recession, although most economists continue to believe that this will not occur.

NAHB has lowered its forecast of growth through the end of the year as the early indicators of weaker-than-expected economic activity have accumulated. Nonetheless, the forecast still sees improvement in the next two quarters as the economy gains momentum, producing growth rather than stagnation.

There were some positive signals in the GDP report. Signs of improvement in personal consumption and income bode well for coming quarters, as do continued increases in corporate profits.

Improving demand overall can be seen in growth in real gross domestic purchases — purchases by U.S. residents wherever produced — which increased 4.9% in the second quarter and 3.9% in the first quarter. The growth in imports subtracts from GDP growth, but it is a signal that demand is there.

The home buyer tax credit helped lift residential fixed investment (RFI) 27.2%, which contributed 0.58% to overall second-quarter growth. However, the boost from RFI will fade and become a drag on GDP in the third quarter due to the slowdown in construction following the expiration of the tax credit.

RFI is expected to make a positive contribution to growth once again starting in the fourth quarter, as activity picks up and gains momentum through 2011 and 2012.

New-Home Sales Hit a Pothole

Falling 12.4% from June, new-home sales in July were at their lowest level since they started being tracked in 1963. The three months following the April 30 deadline of the home buyer tax credit were the three worst for new home sales in history.

All four census regions recorded declines, with the largest in the West (-25.4%) and Northeast (-13.9%) and smaller declines in the Midwest (-8.3%) and South (-8.7%).

Inventories of unsold new homes held steady at 210,000, the lowest level since September 1968. The months’ supply rose to 9.1 months because of the slow sales pace.

The median sales price fell to $204,000, down 4.8% from $214,200 a year earlier, attributable to  a combination of price reductions and a shift in the marketplace to more modest homes. Homes sold in the $150,000 to $300,000 range, which is where most first-time home buyers make their purchases, picked up share.

The slump in sales has been primarily due to consumer reluctance in the face of recent softness in job formations and economic activity. The housing market itself remains relatively attractive, characterized by historically low mortgage interest rates, stability in house prices and continued pent-up demand from the delayed household formations of the last several years.

Depending upon various assumptions about longer-term household growth, the recession reduced household formations by between one-half million and 1.5 million as individuals remained in their parents’ home, doubled up, moved in with relatives or otherwise postponed the normal transition from a dependent to an independent household.

To date, the housing recovery has not been evenly distributed across the country. States that have traditionally accounted for a large share of U.S. housing production have fallen the farthest from the “normal” — pre-boom average annual production levels of 2001 to 2003 — and have yet to recover. States that have represented a small share of total U.S. residential construction are getting back to normal, but with only a minimal impact on the national numbers.

Three states that typically account for one-quarter of U.S. housing production — Florida, California and Georgia — are unlikely to produce one-third of their normal level of housing in 2010. With the exception of Texas, which is both large and recovering, the seven states closest to their long-term normal levels make up less than 4% of production in a normal year.

Until the larger housing markets begin to heal and begin their long march back toward normalcy, the national numbers will remain weak despite the healthier markets where demand is good, vacancies are low and house prices are stable.

Existing Home Sales Drop as Well

The National Association of Realtors® (NAR) reported a sharp 27.2% drop in existing home sales in July to a seasonally adjusted annual rate of 3.83 million units, down from a downwardly revised 5.26 million units in June. A decline of this magnitude was foreseen by pending home sales — a leading index based on contracts signed — which fell 30% in May.

Unlike new home sales, existing home sales numbers are based on closings, not signed contracts, making July the first month to reflect the impact of the expiration of the home buyer tax credit on resales. (The closing deadline for the credit was June 30, which was since extended to Sept. 30.)

Slowing economic growth and consumer uncertainty compounded the effect of the expiration of the tax credit. Given near-term economic weakness and high unemployment, existing home sales are likely to remain soft in August and September.

However, with economic growth back on track in the fourth quarter of 2010, existing home sales are expected to recover much of the ground they lost in the third quarter.

The rate of decline in July was consistent across housing sectors and regions of the country. Single-family home sales fell 27.1% to 3.37 million and condominium and coop sales declined 28.1% to 460.000. Regionally, home sales were down 29.5% in the Northeast, 35.0% in the Midwest, 22.6% in the South and 25.0% in the West.

Consumer Confidence Inches Upward

Consumer confidence remained weak in August, with the University of Michigan Consumer Sentiment Index inching up only a slight 1.1 points to 68.9. This followed a sharp 8.2 point downturn in July.

The index found consumers feeling a bit more comfortable about the current situation, which increased 1.8 points to 78.3, than about their future expectations which gained only 0.6 points, rising to 62.3.

Among the 76% of respondents who said they believed that current home buying conditions were good, 65% cited low prices and 46% low interest rates. Although most consumers recognize that the housing market offers some of the best housing affordability opportunities in a generation, that view is not reflected in actual home buying activity.

The Conference Board’s Consumer Confidence Index painted a similar, but slightly more positive picture. The August index rose from July’s 51.0 to 53.5, moving back toward June’s 54.3 level.

Although the index measuring current confidence reflected frustration and dissatisfaction in the state of the economy and job market, dropping from July’s 26.4 to 24.9, the index on expectations rebounded to 72.5, up from 67.5 in July and almost matching June’s 72.7.

Also, those who said they planned to buy a home in the next six months edged back up to June’s 2.0%, from 1.9%. Those who plan to buy a new home in the next six months rose to 0.4%, up from 0.3%, the highest since April.

Home Prices Hold Firm in June

The Standard and Poor’s Case-Shiller Home Price Index (HPI) indicated that house prices rose strongly in June. The national index for the second quarter rose 4.7% from the first quarter on a not seasonally adjusted basis and 2.3% seasonally adjusted.

On a non-seasonally adjusted basis, the monthly composite index of 10 large metropolitan statistical areas (MSAs) and composite index of 20 major cities both rose 1.0% from May to June, and 3.1% and 3.2%, respectively, in the three months from April to June (NSA).

Seasonally adjusted, the Composite 10 and Composite 20 indexes were essentially flat (up 0.3%) for the month and up 1.4% for the three months ending in June. Prices were up in 17 of the 20 cities covered by the index on a non-seasonally adjusted basis and in 10 of the 20 cities seasonally adjusted.

The S&P Case-Shiller HPIs are considered to be among the more reliable and consistent of the many housing price indexes available for the U.S. They use a “repeat sales method” that measures the change in price on the same existing single-family house between one sale and the next, which better captures the true appreciated, or depreciated, value of a property.

In comparison, the National Association of Realtors® median home price series is subject to distortion based on the composition of sales according to such factors as the size of the home and where it is located.

There is considerable divergence between the seasonally adjusted and not seasonally adjusted Case-Shiller HPIs, which is also the case with the Federal Housing Finance Agency’s index. In analyzing the seasonal adjustment factor, a report recently posted on the Standard and Poor’s website noted that “turmoil in the housing market in the last few years has generated unusual movements that are easily mistaken for the normal seasonal patterns, resulting in larger seasonal adjustments and misleading results.” This suggests that Case-Shiller’s not seasonally adjusted numbers are more reliable.

After reaching a trough in the spring of 2009, house prices have shown moderate growth, according to Case-Shiller, despite some month-to-month volatility. Not seasonally adjusted, the Composite 10 index and Composite 20 index rose 7.0% and 6.3%, respectively, from April 2009 to June 2010. The national index was up 6.8% from its March 2009 trough.

Not seasonally adjusted, year-over-year prices have increased in 16 of the 20 MSAs), with the strongest gains occurring in California MSAs (Los Angeles, 9.2%; San Francisco, 14.3%; and San Diego. 11.2%) and Minneapolis (10.7%). The weakest markets include Tampa, Fla. (-1.7%), Charlotte, N.C. (-2.7%), Las Vegas (-5.2%) and Seattle (-1.8%).

House prices in these indexes have followed the same pattern of rising and softening seen in other housing market indicators such as housing starts and sales of new and existing units, which largely reflects the effects of the home buyer tax credit. House prices in June probably still showed  the support provided by the tax credit and the coming months may see a  retrenchment similar to what has been seen in other indicators.

In most parts of the country house prices have returned to what can loosely be described as pre-boom levels. Also, the consensus of forecasters polled by Standard and Poor’s is that house prices will continue to rise for the next several years.

NAHB expects any near-term price declines to be mild and temporary. It is clear that the volatility in the indexes after they reached their troughs has been related to the timing of the tax credit and that, more importantly, the underlying trend is upward.

Residential Construction Expenditures Continue to Slow

The U.S. Census Bureau reported that private residential construction expenditures were at a seasonally adjusted annual rate of $240.3 billion in July, 2.6% below June’s $246.7 billion, while on a year-to-date, not seasonally adjusted basis it was up 2.8% to $23.0 billion from $22.6 billion for the same period a year earlier.

Single-family construction fell 2.5% from June to $115.3 billion, its third consecutive monthly decline. However, on a year-to-date basis, it was up 14.8% from a year earlier to $65.5 billion.

With single-family starts down in recent months and builders slowing completions of homes under construction, single-family construction spending is likely to continue to slide in the near term.

As advances in the economy emerge over the next few months and help improve consumer confidence and demand for housing, residential construction activity will pick up, and so too will construction spending. Access to credit to provide home buyers with mortgages and home builders with AD&C loans will be key to determining how fast single-family construction rebounds.

Multifamily construction, which has been pummeled over the last 12 months, fell 1.5% in July to $13.0 billion, its lowest level since April 1994. Spending, year-to-date, has plummeted 57.2% from $19.2 billion a year ago to $8.2 billion in July.

Weak demand for condos, high rental vacancy rates and miniscule rent increases have combined with a harsh financing environment to slow multifamily construction to its current snail’s pace, however, there is evidence that prospects for multifamily projects are slowly improving.

The three-month moving average for multifamily housing starts has been generally rising throughout the course of this year, which should begin to turn multifamily construction spending upward.

Improvements — which exclude maintenance expenditures and improvement expenditures on rental, vacant and seasonal properties — have now fallen for three consecutive months. This is a bit troubling since remodeling, both improvements and maintenance, has been a source of support for many builders in this down housing market.

In July, spending on improvements fell 2.9% to $112.0 billion from June’s $115.3 billion. Nonetheless, it was still up a healthy 10.6% on a year-to-date basis, to $67.1 billion, from July 2009.

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 Sept. 2 edition. To subscribe to “Eye on the Economy,” click here.