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October 10, 2007
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By David F. Seiders
NAHB Chief Economist |
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Payroll Employment Is Not Contracting After All
A month ago, the Bureau of Labor Statistics reported that payroll employment had declined slightly in August following relatively weak gains in June and July. This pattern had prompted analysts around the globe, including yours truly, to jack up their estimated probabilities of near-term recession in the U.S. economy.
The employment report for September improved recorded history and provided positive signals for September.
Payroll job growth now stands at 93,000 and 89,000 for July and August, respectively, and the preliminary reading for September comes to 110,000.
While this is good news, the trend of job growth definitely has slowed systematically from the peak rates in 2005, particularly in the private sector, as growth of economic output (real GDP) has slowed substantially.
But payrolls apparently are continuing to advance at a decent pace and the economy does not appear to be skating dangerously close to outright recession — at least for now.
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But Housing Is Now Weighing Heavily on the Labor Market
The systematic slowing of total payroll employment growth since 2005, and particularly the third-quarter downshift in growth of private payrolls, can be pinned largely on declining employment in residential construction and closely related industries — including the beleaguered housing finance system.
The impacts of the housing downswing on total payroll employment naturally show up heavily in the construction employment numbers for residential builders and specialty trade contractors. Indeed, the declines averaged 23,000 for the August-to-September period.
We’re also seeing big declines in the housing finance industry, particularly among mortgage bankers and brokers. In this regard, employment in “credit intermediation and related activities,” excluding depository institutions, fell by about 20,000 in both August and September, pulled down by the real estate credit component.
The housing contraction also is showing up in the employment numbers for the retail sector. In this regard, building materials and garden equipment stores lost 17,000 jobs in September and furniture and home furnishing stores lost another 2,000. Everything considered, the housing contraction now is costing the economy roughly 60,000 jobs per month and there’s certainly more to come. [return to top]
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The Credit Market Crisis Is Easing But Not Disappearing
The wrenching credit market crisis that erupted in the early part of August has been easing off in some respects since the Sept. 18 Federal Open Market Committee (FOMC) meeting when the Federal Reserve enacted half-point cuts to both the federal funds rate and the discount rate.
Financial markets are becoming more normal, with improvements in the cost and availability of funds, although credit market conditions generally remain tighter than before the crisis.
The most striking improvements have been in short-term credit markets that had been severely disrupted in the stampede toward credit quality. Interbank lending has eased, the runoff in asset-backed commercial paper has been arrested, commercial paper rates have come down to pre-crisis levels, the availability of term funding has improved to some degree and borrowing by banks at the discount window has receded as the Fed has managed reserves to keep the federal funds rate on target at 4.75%.
In mortgage securities markets, the nonprime segments — subprime and Alt-A — still are functioning poorly but the jumbo securities market seems to be thawing out to some degree. Spreads of prime jumbo mortgage rates over rates on prime conventional conforming mortgages, eligible for sale to Fannie Mae or Freddie Mac, have narrowed to some degree in primary markets although these spreads remain much wider than earlier in the year.
Although the dust definitely is settling, credit market conditions will not return to pre-crisis conditions for quite a while.
Normal liquidity conditions should be restored to money markets before long and normal functioning should be restored to most credit markets in the process. However, market participants will remain heavily focused on credit risk differentials, and pricing/trading of securities structures with uncertain risk characteristics will recover only slowly.
In the mortgage sector, this means that markets for securities containing nonprime ARMs will struggle mightily for a long time. [return to top]
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Housing Demand Still Is Weakening
The dramatic downswings in gross and net home sales appeared to be slowing in the second quarter of this year. However, the erosion of economic conditions and upheaval in mortgage markets have combined to send housing demand into another serious downleg.
Sales of both new and existing homes contracted sharply in August, as did “pending” sales of existing homes — based on contracts signed.
NAHB’s proprietary survey of 31 large builders showed pronounced weakness in August, as new orders fell sharply and sales cancellations jumped, and the September numbers show further deterioration on both fronts — seasonally adjusted, three-month moving average basis.
Furthermore, NAHB’s broad-based Housing Market Index fell to a record low in September and preliminary tabulations point toward further erosion in October.
The recent downshift in housing demand definitely is related to the recent tightening of mortgage market conditions as well as to associated evidence of weakening house prices in many areas.
Evidence of eroding house values has caused many prospective buyers to adopt a “wait-and-see” attitude, putting additional downward pressure on prices.
As a result, key measures of house prices have been falling since late last year and further declines definitely are in the cards — a point accentuated by new futures markets for home prices in major metro housing markets. [return to top]
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Stubbornly High Inventories Will Delay Recovery in Housing Production
The pronounced weakness of housing demand has provoked major downswings in permit authorizations and housing starts since late-2005. Unfortunately, sales volume has fallen so fast that very little progress has been made in reducing inventories of unsold new homes — despite the fact that the government’s inventory numbers exclude homes left with builders due to sales cancellations.
The number of new homes for sale still is close to the record high reached around mid-2006 and the month’s supply moved up to a heavy 8.2 in August, as recorded by the government.
For proper assessment of relative movements in new-home sales and single-family housing starts, it’s necessary to compare sales volume to starts of single-family homes that are intended for sale —excluding starts of homes that are built on owners’ lots.
For-sale starts exceeded new-home sales by a huge margin during the 2005-to-2006 period, generating outsized increases in the for-sale inventory, and only recently have sales exceeded for-sale starts. Furthermore, completed homes have been accounting for a larger and larger portion of new homes for sale, and the length of time that completed homes remain on the market has stretched out to about six months.
The persistently large inventory of new homes for sale, together with large numbers of vacant previously-owned homes on the market, will hold down housing starts for several quarters beyond the trough in home sales.
We’re currently pegging the trough for sales in the first quarter of 2008 and we’ve set the low point for housing starts around the middle of next year.
That pattern, if achieved, will eliminate the drag from residential fixed investment on overall economic growth by the final quarter of 2008. [return to top]
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Builder Price Cuts Gain Center Stage
It’s increasingly obviously that sizeable price cuts are needed to sell completed new homes in many parts of the country. After all, prices more than doubled during the boom in some places and measures of housing affordability still remain quite low.
NAHB’s surveys of builders have been showing rising proportions of companies enacting price cuts as one type of sales incentive offered by builders during the past year. We’re also seeing more dramatic cuts by some companies during the past month.
Indeed, several public companies recently advertised discounts of up to $100,000 for special weekend sales, apparently with good success, and at least one public company has auctioned off homes with bids starting at half the list price.
NAHB surveyed about 300 home builders of all sizes during the first half of October to get a handle on the frequency, depth and effectiveness of recent price cuts. Nearly three-fifths of all respondents and three-fourths of larger companies had recently cut prices.
The average price cut came to 8%, and 37% of those cutting prices had dropped them by more than 10%. But only half the builders said their price cuts had been effective in bolstering sales or limiting cancellations.
Looking forward, one-fifth of all respondents said they were planning to do major price reductions for limited periods of time. We’ll report on the success of these efforts down the line. [return to top]
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The Fed Most Likely Will Buy More Insurance
The recent labor market data and the recent easing of the credit crisis suggest that the Federal Reserve was not actually “behind the curve” when dropping short-term interest rates on Sept. 18, and recent market developments seemingly have reduced the chances for additional rate cuts before the end of the year.
The implied probability of a rate cut at the Oct. 30-31 FOMC meeting has receded to about 50% in the fed funds futures market.
We still believe the Fed will cut rates before year-end. After all, the housing contraction actually has gained downward momentum recently, credit costs for the majority of private-sector borrowers remain higher than in July, and core consumer price inflation is quite benign — despite hefty increases in oil prices and a sliding dollar.
Furthermore, as the Fed Vice Chairman Don Kohn suggested recently, the Fed’s half-point rate cuts on Sept. 18 partly reflected the Fed’s willingness to buy insurance against the risk of a worse-than-expected economic outcome.
There’s still significant risk of a serious shortfall in near-term economic activity, largely because of downward momentum in housing production and house prices, and credit markets still are fragile in various respects.
Moreover, core inflation is likely to continue to recede over the balance of this year and much of 2008, giving the Fed the green light to buy more insurance against the risk of a really adverse economic outcome.
We still expect quarter-point cuts in both federal funds and discount rates at both the Oct. 30-31 and Dec. 11 FOMC meetings. We’re assuming the Fed will hold those rates during all or most of 2008 before extracting some monetary stimulus as the economy clearly emerges from the woods. [return to top]
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Attend the Fall Construction Forecast Conference Oct. 24
 Plan to attend NAHB's Construction Forecast Conference on Oct. 24 at the National Housing Center in Washington, D.C. The conference brings together the nation's premier housing economists and finance experts for an in-depth examination of the economic outlook for the housing industry.
Can't attend? Watch the conference webcast live.
For more information, or to register for the conference or webcast, visit www.nahb.org/cfc. [return to top]
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Want to Know the Housing Forecast for the Top 100 Metros?
 Find out in HousingEconomic.com’s 2007-2008 Metro Forecast (free preview). Get the metro forecast with in-depth analysis, overviews and downloadable Excel tables.
To learn more, visit www.HousingEconomics.com. [return to top]
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or to contact us directly, please visit www.NAHB.org
l ©2007, National Association of Home Builders |
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