Eye on the Economy - 04/08/2009 (Plain Text Version)

View Graphical Version | Subscribe to NAHB Publications | E-mail Our Editor
NAHB Home Page | Browse Other NAHB e-Newsletters |

Economic Free-Fall Runs Through First Quarter

The contraction in real gross domestic product (GDP) for the fourth quarter of 2008 now stands at an annualized rate of -6.3%, according to the “final” estimate released by the Commerce Department on March 26. This represents a major downshift of 0.5% from the third quarter and is the sharpest decline since the depths of the 1982 recession.

The housing production component of GDP (residential fixed investment) contracted at a 22.8% annual rate in the fourth quarter and knocked 0.8 of a percentage point from the overall GDP growth rate — quite a negative contribution from a component that now accounts for less than 3% of total GDP.

Consumer spending, which now accounts for 71% of the total, contracted at a 4.3% annual rate in the fourth quarter and registered a negative growth “contribution” of -3.0 percentage points — an extremely large drag from this part of the economy. Consumer spending rarely goes negative.

Consumer spending apparently stopped falling in the early part of this year, but serious weakness in other sectors of the economy figures to keep GDP in free-fall during the first quarter. We’re estimating -5.2%.

Residential fixed investment should contract at nearly a 40% pace, we’re looking for a major downshift in nonresidential fixed investment — structures as well as capital equipment and software — and we expect businesses to cut inventory positions considerably.

Spending by state and local governments also should lose a good bit of ground in the first quarter.

The Labor Market Also Is Reeling

The sharp declines in spending and economic output naturally are battering the labor market.

Payroll employment fell by 3.72 million during the last two quarters — an average monthly loss of 620,000 jobs. The average monthly loss for the first quarter of this year came to a whopping 685,000 jobs.

The civilian unemployment rate has moved up from 6.2% last September to 8.5% in March of this year — the highest rate in 25 years.

The Labor Department’s broadest measure of labor underutilization, including discouraged workers that have stopped looking for work as well as those working only part-time for economic reasons, has soared by more than 5 percentage points during the last two quarters — reaching 15.6% by March.

The housing sector began to lose jobs around the beginning of 2006, nearly two years before the national recession began, and the losses continue to be substantial. The cumulative loss of employment in residential construction (builders and specialty trade contractors) was 973,000 by March of this year, a 28% decline, and 171,000 jobs were lost in the first quarter of this year alone.

There naturally have been sizable job losses in industries closely related to housing production. The housing finance system has lost a large percentage of workers employed during the earlier boom period, and mortgage loan brokers have been particularly hard-hit. [return to top]

House Price Performance Was ‘Mixed’ Early This Year

Widely different signals are being thrown off by available measures of house prices for the early part of this year. Indeed, some of the reported price changes really challenge credibility, particularly the purchase-only repeat-sales National House Price Index (HPI) produced by the new Federal Housing Finance Agency (formerly OFHEO).

The FHFA’s HPI showed a 22% rate of increase (seasonally adjusted annual rate) from December to January — a reading that makes little sense in a housing market with weak demand, a lot of excess supply and a lot of foreclosures.

In fact, FHFA attributed most of the measured price surge to a sizable change in the geographic mix of homes sold and financed with loans salable to Fannie Mae or Freddie Mac. FHFA also cited low sales volume in January and suggested that significant revisions to the HPI for that month are quite likely.

Another prominent repeat-sales measure of house price change, the S&P/Case-Shiller 20-City Composite Home Price Index, showed a 23% rate of contraction (seasonally adjusted annual rate) in January, as all 20 cities posted month-to-month declines.

This rate of decline is one of the largest on record and suggests that the contraction in house prices still was picking up steam as this year began.

It’s important to note, however, that the S&P/C-S index measures price change for repeat-sale transactions occurring in the three-month period ending in January. There was a surge in foreclosure sales in many areas of the country in the last few months of 2008 and the first month of 2009, and the S&P/C-S measure for January most likely was driven down by this pattern of sales at deeply discounted prices.

It’s difficult to forecast house price change. However, it’s noteworthy that recent declines in both house prices and mortgage rates have driven up measures of housing affordability to record highs, that starts of new homes for-sale are down to rock bottom levels and that some indicators of housing demand (including NAHB survey measures) have shown improvement recently.

If these trends continue, it’s entirely possible that key national measures of house prices will be stabilizing by the end of this year as the national economic recession runs its course. [return to top]

Consumer Confidence and Sentiment Remain in the Doldrums

Key measures of consumer confidence by the Conference Board and consumer sentiment by the University of Michigan remained at or below their respective record lows in March — primarily because of the extremely weak labor market conditions prevailing at that time as well as a weak outlook among consumers for income over the next six months.

The University of Michigan regularly asks consumers whether they think it’s a good or bad time to buy a house. The proportion saying “good” has been around 70% in recent months, including March, well up from the cyclical lows posted back in 2006.

The rebound in perceptions of home buying conditions has been driven primarily by lower house prices, but also by lower mortgage rates.

Weak assessments of general economic conditions obviously have been holding back prospective buyers who view house prices and interest rates as favorable.

In March, none of the consumers who rated home buying conditions as “good” cited “good times” as a reason, while a significant number of those saying it was a bad time to buy a house listed “bad times ahead” as a factor.

History shows, however, that spending by consumers often picks up well before the job market improves and consumer confidence recovers. Home sales ordinarily start up well before both employment and confidence rise, generally because low mortgage rates and enhanced affordability encourage some pent-up demand to come onto the market. [return to top]

Policy Stimulus Is Accumulating

Despite some rough spots in its design and implementation, it’s fair to say that the multi-faceted policy blitz enacted in 2008 and 2009 will limit the depth and duration of the national and global economic recessions and support the housing sector in the process.

The American Recovery and Reinvestment Act, including the temporary $8,000 first-time home buyer tax credit, already has begun to provide some support to housing and the economy. The other two legs of President Obama’s policy stool — the Financial Stability Plan and the Homeowner Affordability and Stability Plan — are gearing up and will bear some fruit before long.

The Federal Reserve has been pulling out the stops as the economic and financial market crisis has broadened and deepened.

The Fed recently pushed traditional monetary policy to the limit and has invoked emergency powers to deploy unconventional balance-sheet policies to bolster faltering credit markets — including the home mortgage market.

The Fed also is partnering with the Treasury to jump-start various asset-backed securities markets, including asset-backed security (ABS) markets for consumer and small-business loans. Both the Fed and the FDIC will be involved in portions of the Treasury’s new Public-Private Investment Program that’s designed to get troubled “legacy” assets off the balance sheets of financial institutions.

Even the independent Financial Accounting Standards Board is helping on that front by relaxing mark-to-market accounting rules to some degree. [return to top]

The Shape of Things to Come

Although uncertainties abound, particularly in the financial system, it’s likely that the combination of corrective market forces and the unprecedented policy blitz will arrest the economic free-fall in the near term, paving the way for stabilization in the latter part of this year and for the early stages of recovery in 2010.

Stabilization and recovery of the housing sector is essential to our economic scenario for the balance of this year and in 2010.

We believe that home sales bottomed out in the first quarter of this year, we expect single-family housing starts to bottom-out in the second quarter and we expect the real value of residential fixed investment — including multifamily and manufactured home production as well as improvements to residential structures — to bottom-out by year-end as the national economic recession comes to an end. [return to top]

Plan to Attend or Watch NAHB Construction Forecast Conference

Plan to attend or watch the 2009 Spring NAHB Construction Forecast Conference & Webcast on Thursday, April 23 in Washington, D.C. to get the latest facts, insights and analysis of the housing industry.

Panels of nationally recognized experts at the day-long conference will discuss economic trends, government policies, developments in the housing industry and the results from NAHB's recent surveys.

For more information and to register, visit www.nahb.org/cfc. [return to top]

Want to Know the Housing Starts Through 2017?

Find out in HousingEconomics.com's Long-Term Forecast.

Subscribe and get downloadable Excel tables that feature the housing starts forecast, gross domestic product (GDP), demographics and more.

To learn more, visit www.housingeconomics.com. [return to top]