What information do you need to know before you choose to build a new home?  Check out the latest economic information and forecasts from the respected Economists of the National Association of Home Builders.

EYE  ON  THE  ECONOMY

Moderately Faster Economic and Job Growth Lies Ahead

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 bode 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 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.

Contact us at the BOLD Company to discuss your particular situation and opportunities.

Record Lows Continue for Mortgage Rates

The 30-year fixed mortgage rate fell to a new low of 4.54 percent this week from 4.56 percent last week and an average of 5.25 percent a year ago.

The 15-year fixed loan rate also hit a record low of 4 percent, down from 4.03 percent a week ago and 4.69 percent last year. The five-year adjustable-rate mortgage averaged 3.76 percent, compared to 3.79 percent last week and 4.75 percent a year earlier; and one-year ARMs averaged 3.64 percent, down from 3.7 percent and 4.80 percent, respectively.

Source: The Wall Street Journal, Nathan Becker (07/30/10)

CONTACT US TO DISCUSS HOW THIS BENEFITS YOU.

Check out the latest from the respected Economists of the National Association of Home Builders.

A Pause in the Recovery or a Double Dip?

A recovery from the Great Recession was never expected to be swift or strong, but recent economic weakness has raised questions about the recovery’s sustainability. Former Federal Reserve Chairman Alan Greenspan, a man of few words, described the situation as “an invisible wall, which we have run into here. This essentially is a typical pause that occurs in an economic recovery.”

The recovery is not being pulled along by housing, and other components of growth are becoming more fragile as consumers worry about credit and jobs. However, the basic recovery path remains positive even if slightly less robust than before oil started seeping into the Gulf of Mexico and Europe decided to pull back from its expansionary efforts.

The June employment report ignited concern when non-farm payroll employment was reported down by 125,000 jobs at a seasonally adjusted annual rate, following a 431,000 increase in May. But both the May and June numbers were distorted by Census Bureau hirings and firings, which were up 411,000 in May and down 225,000 in June.

More importantly but still disappointing, the private sector added 33,000 jobs in May and 83,000 in June. Although these were hardly robust numbers, June showed the sixth consecutive month of private job gains.

During those six months, however, private temporary workers, who comprise less than 2% of private sector jobs, accounted for almost a third of the job gains, indicating that businesses are still hedging their bets, uncertain about the recovery and, in particular, how long the growing demand for their products and services will last. If demand is sustained — as NAHB is forecasting — many of the temporary positions in the private sector will become permanent.

The one apparent bright spot in the employment report — the decline in the unemployment rate from 9.7% in May to 9.5% in June — was actually a negative since it was not due to employment rising but job seekers choosing to leave the labor force, presumably because they considered their job prospects dismal.

NAHB is projecting  that the unemployment rate will be around the current 9.5% by the end of the year based on the assumption that there will be sufficient net job creation to absorb the increase in the labor force as more workers return in search of employment.

Employment stability and job growth are keys to a housing recovery. In addition to alleviating workers’ fears about losing their next paycheck, improving employment measures help boost the confidence of households that are considering buying a home.

Residential construction continues to shed jobs, albeit at a slower rate than a year ago. In June, 6,100 jobs were lost, down from the 36,900 job losses a year earlier and from the 81,700 residential construction jobs lost in November 2008.

Total construction employment — including non-residential jobs — fell 22,000 in June, down from a loss of 30,000 in May. The overall unemployment rate for construction jumped to 23.7% in June from 20.6% the month before, reflecting the  problems both residential and non-residential construction continue to face.

While the May employment report along with weak housing numbers increased speculation over a potential “double dip” in economic activity, several factors favor the continuation of modest growth.

First, states have been slower than expected in distributing the $787 billion American Recovery and Reinvestment Act funds, which could also explain some of the current softness. The longer lasting impact will support growth later this year.

Second, consumption has been contributing about half of what it would normally contribute to economic growth, but disposable personal income has been moving up and we expect this to continue.  Avoiding a double dip depends on this, along with improvements in household balance sheets that took very heavy hits during the Great Recession.

Also, the Federal Reserve’s household balance sheet estimates for the first quarter of this year show the fourth consecutive advance in household net worth. The gain was due primarily to advances in the stock market and paying down debt, mainly home mortgages and consumer credit.

We expect household wealth to trend up gradually over the balance of the 2010-2011 period. Consumers’ debt burdens have been improving since the end of 2008 and are at levels last seen at the end of 2000.

Third, productivity has increased for eight quarters as companies reduced their labor force more than output. Permanent hiring will have to occur to keep output ahead of demand as businesses reach an end to productivity gains. On the housing front, with inventories of single-family houses at a 40-year low, any increase in demand will require new building.

Difficulty in obtaining business and consumer credit has remained a significant drag, but there have been some minor signs that this may be turning around. Non-revolving credit from commercial banks — which excludes credit card debt and mortgages but includes auto loans — has risen in four of the last five months.

With bank balance sheets in better shape, it is likely there will be a slow improvement in credit availability over the coming months.

Single-Family Construction Advances Slowly, While Multifamily Continues in Reverse

The combination of the now expired home buyer tax credit, historically low interest rates and the improving employment picture has propelled single-family construction forward over the past 12 months as measured by the value of construction put in place.

Although the value of single-family construction only rose 0.8% at a seasonally adjusted annual rate in May, it was still up 32.1% from a year earlier — when construction activity was at an extremely low level. With builders working hard to complete single-family houses in time to qualify for the June closing for the tax credit, single-family construction spending can be counted on to contribute to growth in June.

However, multifamily construction spending continued its slowdown in May, falling 6.3% from April and plummeting 57.7% from a year earlier, reflecting the cumulative effects of the lack of financing for new projects and the gradual tapering off of multifamily construction starts since fall 2009.

May starts and permit numbers were up and if that improvement continues, the value of multifamily construction put in place will be on an upward trajectory in the next few months.

Pending Home Sales Down

It was no surprise that the National Association of Realtors’ Pending Home Sales Index fell sharply in May. The index is based on the signing of contracts, as opposed to the Realtors’ existing home sales numbers, which are based on settlement of those contracts.

May, therefore, marked the first month following the deadline for qualifying for the home buyer tax credit. The index fell 30.0% from April at a seasonally adjusted annual rate, and was down 15.9% from a year earlier.

As with new home sales, existing home sales were undoubtedly pulled forward into earlier months by buyers seeking to qualify for the tax credit, reducing sales in close-in, post-tax credit months. The true picture of the underlying market will not emerge until July or August.

House Prices Up

Both the 10-city and 20-city S&P/Case-Shiller composite price indices rose in April. The 10-city index was up for its 11th consecutive month, while the 20-city index was pulling out of  two months of decline on the heels of eight months of increases. Both indexes are up on a year-over-year basis — by 4.6% and  3.8%, respectively.

Prices for 11 of the 20 cities were up from a year earlier, and 10 of those 11 were up by more than 3%. Three of the nine that fell — Washington, D.C., New York City and Portland, Ore. — were down by 1% or less.

Meanwhile, the Federal Housing Finance Agency (FHFA) price index was also up in April. However, it was down 1.5% on a year-over-year basis. Prices in six of the nine Census divisions rose in April over March.

At minimum, the home buyer tax credit appears to have helped stabilize home prices and may have given them a bit of a lift. With no help from the tax credit, the next few months will provide the true test for home prices.

NAHB is forecasting that house prices will exhibit a mild upward bias for the remainder of this year and throughout next year.