Real estate's July report card
Guest perspective: Will housing have a hard or soft landing?
Monday, July 17, 2006
By John Burns
The length of time that it will take to work through these issues is impossible to forecast. However, if the Fed can a) maintain positive job growth of 1.5 percent-plus per year and b) keep mortgage rates from rising too much further, most markets will return to normal once resale supply returns to a normal level. Builders who paid high land prices in the peripheral areas are probably going to have the toughest time during this adjustment period.
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 is healthy. Economic growth in the first quarter was revised to 5.6 percent. Growth in June was slower than expected but still solid, adding 1.85 million jobs in the last 12 months. The core CPI inflation rose to 2.4 percent, and total inflation was 4.2 percent.
Leading Indicators: C-
The leading indicators declined for the second month, suggesting that economic growth is likely to be more moderate than the pace of the first quarter. The spread between the 2-year and 10-year Treasury was essentially 0 at month-end, which is concerning. The S&P Super Homebuilding Index continues to decline, having fallen 36 percent in the last year and 41 percent since its peak.
Mortgage Rates: B-
Mortgage rates continued to rise in June, with the one-year adjustable mortgage rate 19 basis points higher at 5.82 percent at month-end, while fixed mortgage rates rose to 6.78 percent. The Fed raised its short-term interest-rate target for the 17th consecutive time to 5.25 percent, hinting that at least one more increase is likely.
Consumer Behavior: C+
Consumer confidence rose in June to 105.7, due largely to an improved outlook for the next six months and for the labor market. While consumers may be delaying home purchases because of affordability issues or investment perceptions, they have a confident outlook for the future, which is critical to a housing market recovery.
Existing-Home Market: B
While home-buying activity remains high, rising listings is creating a much more competitive housing market. May sales of existing homes fell to a 6.7 million annual sales rate, down nearly 7 percent from one year ago. The inventory of existing homes continues to rise, rising to 6.5 months of supply, the highest value since July 1997. There are a record number 3.6 million existing homes available for sale.
New-Home Market: B-
May new-home sales rose to a 1.23 million-unit annual rate, higher than many economists expected. New-home sales fell only in the Northeast during the month. The Housing Market Index, which measures builder confidence, dropped another four points to 42, a decline of 42 percent in the last year. Unsold new-home inventory has fallen to 5.5 months of supply, while the supply of completed homes fell slightly to 1.2 months.
Housing Supply: C+
Construction is declining. Housing starts increased to 1.96 million in May from 1.86 million in April, but remain down 4 percent from one year ago. Single-family starts rose to 1.58 million. Permit activity fell for the fourth month in a row to 1.93 million units, more than 8 percent below the permit level in May 2005.
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 email@example.com.
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