Nowhere is the housing market slowdown more evident than in the 19,000-plus offices around the country where builders pay for their building permits. Permits issued in the third quarter of this year fell 25 percent from the same period in 2005, and the greatest declines were in some of the largest housing markets in the country. Our preliminary feedback is that October was even worse. Here are the year-over-year declines in some of the largest markets in the country:
Riverside-San Bernardino, Calif., –51 percent
Tampa, Fla., -48 percent
Phoenix, Ariz., -44 percent
Washington, D.C., -24 percent
The decline shows the tremendous discipline builders are showing in comparison to the early 1990s, and is largely the result of rising unsold inventory levels. Many builders expect these new levels to be the levels going forward, as they have reduced employee head count by comparable percentages.
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
The U.S. economy has slowed since last quarter but still remains healthy. The advance estimate on third-quarter GDP is lower than the previous quarter at 1.6 percent. One of the factors in the deceleration in real GDP growth was the decrease in residential fixed investment. Job growth and inflation continue on an upward trend. The country has added 1.9 million jobs in the last 12 months, and reports indicate that job growth will likely be revised upward in the months to come. The core CPI inflation rose to 2.9 percent, its highest since November 2001.
Leading Indicators: C-
The leading indicators this month suggest that economic growth should continue at a slow rate in the near term. The leading economic index increased 0.1 percent this month after two months of declines. The leading index decreased 0.9 percent from March to September, for an annualized change of -1.7 percent. Slowing building permit activity has been a particularly large drag on the statistic in recent months. As builder stocks have improved, the S&P Super Homebuilding Index has rebounded in the last several months. The index is still down 21 percent from one year ago.
Mortgage Rates: B
On Oct. 25 the Federal Reserve, as expected, held the target Federal Funds rate at 5.25 percent. The pause in rate increases was due largely to a decrease in energy prices over the past few weeks, which has slowed inflation. The 30-year fixed mortgage rate at month-end remained the same as the previous month’s average, and the one-year adjustable rate was 4 points higher. Adjustable-rate loans in October fell slightly to 25.9 percent of total loan activity.
Consumer Behavior: C+
Consumer Confidence declined slightly in October, largely due to consumer fear of a weakening job market. The Consumer Confidence Index decreased from a revised 105.9 in September to 105.4 in October. The Consumer Sentiment Index increased to 93.6 in October.
Existing-Home Market: B-
The housing market continues to stabilize, evidenced by the downward trends in home sales and the high volume of homes available for sale. October annual existing-home sales fell to 6.2 million, which is down 14 percent from one year ago. The U.S. volume of existing homes available is down from last month, but at over 3.7 million listings, it is still at near record levels.
New-Home Market: C-
Annual new-home sales increased to 1.07 million, but remain 14 percent below year-ago levels. We believe the Census Bureau is overstating sales because they are counting gross sales, with no netting for cancellations. Sales are down 37 percent in the Midwest and 14 percent in the West. The Housing Market Index improved slightly this month, rising to 31. This may point to stabilizing confidence, fueled by lower energy costs, a strong job market, and a decline in mortgage rates from their recent peak this past summer. Unsold new-home inventory has fallen to 6.4 months of supply, and the supply of completed homes decreased slightly to 1.8 months.
Housing Supply: C-
Builders are responding to reduced demand as well as increased inventory by slowing construction levels. Total permit activity fell for the eighth straight month to just over 1.6 million units annually. The slowdown in construction activity confirms the large decline in orders that most builders are reporting.
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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