Economic growth has reached historical averages, which means the outlook is positive for job creation and there is no need for the Fed to try to slow down the economy. Rates are slowly creeping upward, which is pricing some buyers out of the market, but not enough buyers to significantly slow down sales volumes or price appreciation. In some markets, high supply levels have created competitive markets, but conservative lenders, equity providers and public builders have generally prevented over-supply conditions.
Our grading system is a “bell curve” model, with statistics at an all-time high receiving an “A,” statistics near the long-term average receiving a “C,” and the worst times ever receiving an “F.” In this grading system, it is OK to be a “C” student. Here is our current report card on the economy and the housing market.
Economic Growth: C
Economic growth is running near its long-term average, resulting in a “C” grade.
High productivity helps keep inflation low, which in turn helps mortgage rates stay low. First-quarter productivity was 3.8 percent per year, while productivity has averaged 5.1 percent over the last year. When productivity is high, employers are getting a lot out of their employees, whether they are assembly line workers or service providers. When productivity is high, employers don’t feel pressure to raise prices because of rising labor costs, which helps keep inflation low.
The chart below shows how we have had 11 consecutive years of productivity growth, and three consecutive years of outstanding productivity growth. Technology and process improvements are responsible, as are demographics. Experienced employees are more productive than employees who need training. Today’s Baby Boomers are highly productive, as opposed to the late 1970s and 1980s when they were “in training.”
Leading Indicators: B-
All 5 leading indicators we track are showing that the economic outlook is slightly better than average. For the housing industry, this is probably the perfect scenario because Federal Reserve Chairman Alan Greenspan does not feel the urgency to raise rates to slow down economic growth. Expectations of several Fed interest-rate hikes are already incorporated into mortgage rates, as the spread between mortgage rates and the Fed Funds rate is near an all-time high.
Mortgage Rates: A-
The adjustable mortgage rate rose from 3.75 percent to 3.98 percent in May. The fixed mortgage rate rose to 6.28 percent from 6.01 percent. This is an increase of $31 per month, or 3 percent, on the average $221,200 new home in the United States. Mortgage payments have risen 12 percent, or $118 per month, since the historically low rates of last June.
Consumer Behavior: C
Two of the three Consumer Behavior indices declined slightly. Consumer Confidence rose from 92.9 to 93.2, while Consumer Sentiment fell to 90.2 from 95.8. The Consumer Comfort Index also decreased to -18 from -13.
Existing-Home Market: B+
The existing-home market rose to 6.64 million sales per year, which is very close to the national record of 6.68 million sales. Price appreciation over the last year is 8.6 percent.
New-Home Market: B+
Annualized new-home sales decreased 11 percent in April, resulting in “The Sky is Falling” articles in newspapers all over the country. The reality is that the decline occurred because March new-home sales were uncharacteristically high. April new-home sales were the 10th highest seasonally adjusted month on record. Builders remain optimistic with the Housing Market Index still at 69.
Housing Supply: C+
Single-family permits set a new record at 1.54 million permits per year, while multifamily permits rose to 459,000 permits per year. It is hard to argue that builders are overbuilding when prices are rising, unsold inventory levels are low, and capital sources are not allowing much speculative construction.
John Burns is the founder of Real Estate Consulting in Irvine, Calif., which monitors changes in real estate market conditions and provides consulting services, including strategic planning, market research and financial analysis.
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