The “big ticket” consumer purchase industries (housing and automobiles) continue to slow while the rest of the economy picks up steam. Here is what the home-building industry is facing:
- Rising Competition – The number of people selling homes is increasing and the number of people buying is decreasing.
- Poor Affordability – Rising prices and interest rates have priced many renters out of home ownership.
- Consumer Shift – Individual investment dollars are transitioning out of real estate and into the stock market or into the real estate markets that have not appreciated much in the last five years, such as Texas, Carolinas, Georgia and New Mexico.
- Urban Sprawl – Home builders bought land in the outlying areas because that is where it was available. Now we are finding that, even in areas with a strong Employment/Permit ratio like D.C., buyers aren’t willing to drive as far to work. Clearly, oil prices aren’t helping sales either.
- Standing Inventory (see discussion below)
The great news in all of this is that as long as 1) the economy continues to grow and 2) rates don’t rise too much farther, builders will sell homes. Sales may not be at the pro forma price or sales rate, but homes will sell. This should make for a more difficult period than the last two soft landings (in 1994-1995 and 1998-2000), but a period that is far better than the last “hard landing” in the early 1990s, when consumers were losing their jobs and the capital available to home builders was wiped out by an Act of Congress – the 1989 FIRREA Act.
Standing New-Home Inventory
In January, we commented on how rapidly rising home sales have masked the fact that there are more than 500,000 unsold new homes under construction. Now, 128,000 unsold homes are completed and ready for immediate move-in. This is the highest level in history, and an increase of 22 percent from one year ago.
Our grading system of the economy and the housing market 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:
Economic Growth: C
GDP increased at an annual rate of 4.8 percent through the first quarter of 2006, the highest rate of increase since third-quarter 2003. Job growth slowed, adding 1.9 million jobs to the economy in the 12 months through April, which is down from 2.1 million through March. Retail sales continued to increase in March, rising 7.9 percent over the previous year. Inflation remained flat at 2.1 percent for the third straight month. Personal income growth improved slightly to 6 percent, and remains below its historical average of 7.4 percent.
Leading Indicators: C-
The leading indicator index is up 3.9 percent on an annualized basis over the last six months, up from the previous month’s value of 2.9 percent. The rate on the 10-year Treasury rose to 5.07 percent, and the rate on the 2-year Treasury rose to 4.92 percent. The stock market posted modest gains in April, and the Dow Jones Industrial Average, S&P 500, NASDAQ and Wilshire 5000 have all posted double-digit returns over the last 12 months. Builder stock prices have returned to their levels of 12 months ago, as measured by the S&P Super Homebuilding Index, which has shown a 0 percent return over the last year.
Mortgage Rates: B
At month’s end, both fixed and adjustable rates had risen from March. The average fixed mortgage rate rose to 6.58 percent, and the one-year adjustable mortgage rate rose to 5.68 percent. The spread between the two did not change from March, following a steady narrowing over the previous 12 months. The percentage of loans with an adjustable rate was 28.2 percent in April.
Consumer Behavior: C+
Consumer confidence continued to rise in April, reaching 109.6. The Consumer Sentiment Index and Consumer Comfort Index decreased during the month and are below their historical averages.
Existing-Home Market: B
Existing-home sales continued to rise in March, reaching an annual sales volume of 6.92 million, with increases in the Northeast and the Midwest. The median existing-home price remained flat at $218,000, following four months of declining prices. The inventory of existing homes increased to 5.5 months, with the volume of existing inventory surpassing 3 million homes for the first time since April. The pending home sales index declined in March to 116.2, which is 6 percent below its March 2005 value.
New-Home Market: C+
Annualized new-home sales rebounded in March to 1.21 million units following a dreadful February. Still, sales are down more than 7 percent from one year ago. The median new-home price fell to $224,200. The supply of unsold homes decreased to 5.5 months. The Housing Market Index continues to decrease, reaching 50 in April, its lowest value since November 2001. An analysis of the regional components of the Housing Market Index shows that the index for each region of the country is down significantly from one year ago. The Northeast index, which rated a 73 in April 2005, is currently rated 49. In the Midwest, the index has dropped from 53 one year ago to 32. The South has dropped from 72 to 55 and the West from 81 to 70.
Housing Supply: C+
Annualized housing starts decreased to 1.96 million in March, which is down nearly 8 percent from the revised February numbers but up 7 percent from March 2005. Single-family starts fell 12 percent for the month to 1.59 million. Single-family permits fell 7 percent from February to 1.54 million, and total permits fell to 2.06 million.
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. He can be reached at jbrec@realestateconsulting.com.
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