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Real Estate
Market Conditions – National Trends: June 2009
New
Construction up 17% over previous three months
WASHINGTON -
Construction of new homes jumped in May by the largest amount in three months,
an encouraging sign that the nation's deep housing recession was beginning to
bottom out.
The Commerce Department said Tuesday that construction of new homes and
apartments jumped 17.2 percent last month to a seasonally adjusted annual rate
of 532,000 units. That was better than the 500,000-unit pace that economists had
expected and came after construction fell in April to a record low of 454,000
units.
In another encouraging sign, applications for building permits, seen as a good
indicator of future activity, rose 4 percent in May to an annual rate of 518,000
units.
The better-than-expected rebound in construction was the latest sign that the
prolonged slump in housing is coming to an end, which would be good news for the
broader economy.
The current
recession — the longest since the Great Depression — was triggered by a collapse
in the housing market that led to soaring loan losses and a banking system
crisis. A healthy home market is needed to support an economic recovery.
President Barack Obama
is scheduled to unveil on Wednesday the administration's plan to overhaul
financial regulation in an effort to crack down on the lending abuses that
triggered the most severe upheaval in the nation's financial system in seven
decades.
Even with the encouraging news, analysts don't expect a quick rebound in
housing, since the economy is still shedding jobs and home prices are falling in
many places, making people hesitant to commit to buying a new home.
Many economists say home construction likely will stop falling in the current
quarter but any sustained rebound isn't expected to take hold until next spring.
That's partly due to the huge overhang of unsold homes and a record wave of
mortgage foreclosures dumping more unsold homes on the market.
With foreclosures and other distressed properties for sale at deep discounts,
builders often can't compete. Rather than launching new developments, they are
waiting for signs of a broader recovery. Many economists believe that home
prices will keep falling until next spring and that sales won't start to show
significant gains until the summer of 2010.
The 17.2 percent rise in housing construction for May still left activity 45.2
percent below where it was a year ago.
The jump reflected a 7.5 percent rise in construction of single-family homes,
the third consecutive increase in this critical segment of the market.
Construction of multifamily units rose 61.7 percent in May to an annual rate of
131,000 units. This volatile part of the market plunged 49.4 percent in April.
Construction rose nationwide led by a 28.6 percent surge in the West.
Construction rose 6.8 percent in the South and 11.1 percent in the Midwest. The
Northeast had the smallest gain of 2 percent in May.
The National Association of Home Builders said Monday its housing market index
slipped by one point in June, reflecting many builders' uncertainty about when
their business prospects might improve. The Washington-based trade association
said the index fell to 15. It was the first decline since January, when the
index dropped to a record low of 8.
That report was "proof that the rise in U.S. mortgage rates lately is dampening
activity," Jennifer Lee, an economist with BMO Capital Markets, wrote in a
research note.
Earlier this month, major builders
Toll Brothers
Inc. and
Hovnanian Enterprises
Inc. reported
smaller quarterly losses, rosier sales trends and more prospective buyers
visiting model homes. Industry executives, however, say the recession and fear
of job losses are keeping many would-be homebuyers on the fence.
Pending Home
Sales Up for Three Months in a Row
Record low
mortgage interest rates boosted pending home sales for the third consecutive
month, with some benefit now from the first-time buyer tax credit, according to
the National Association of Realtors®.
The
Pending Home Sales Index,1
a forward-looking indicator based on contracts signed in April, rose 6.7 percent
to 90.3 from a reading of 84.6 in March, and is 3.2 percent above April 2008
when it was 87.5.
Lawrence Yun,
NAR chief economist, said buyers are responding to very favorable market
conditions. “Housing affordability conditions have been at historic highs, but
now the $8,000 first-time buyer tax credit is beginning to impact the market,”
he said. “Since first-time buyers must finalize their purchase by November 30 to
get the credit, we expect greater activity in the months ahead, and that should
spark more sales by repeat buyers.”
The
Pending Home Sales Index in the Northeast shot up 32.6 percent to 78.9 in April
and is 0.8 percent above a year ago. In the Midwest the index rose 9.8 percent
to 90.4 and is 11.1 percent above April 2008. The index in the South slipped 0.2
percent to 93.0 in April but is 3.5 percent higher than a year ago. In the West
the index rose 1.8 percent to 94.8 but is 2.9 percent below April 2008.
NAR
President
Charles McMillan,
a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said
there are numerous buyer assistance programs around the country. “Some states
are offering bridge loans that allow first-time buyers to use the tax credit for
downpayment and closing costs, but there are many other local government and
nonprofit programs available to buyers, depending on location,” he said.
“Just last
week, HUD announced that qualifying buyers can use the tax credit for closing
costs on FHA loans, to buy down the interest rate or make a larger downpayment.
Buyers who are wondering about their options should contact a Realtor®,
who can advise consumers on the housing assistance programs and resources
available in a given area.”
NAR’s
Housing Affordability Index2
is in record territory. The affordability index rose to 174.8 in April from an
upwardly revised 171.9 in March, and was the second highest monthly reading on
record after peaking at 176.9 in January of this year. The HAI is a broad
measure of housing affordability using consistent values and assumptions over
time, which examines the relationship between home prices, mortgage interest
rates and family income; tracking began in 1970.
A
median-income family, earning $60,900, could afford a home costing $296,800 in
April with a 20 percent downpayment, assuming 25 percent of gross income is
devoted to mortgage principal and interest. Affordability conditions for
first-time buyers with the same income and small downpayments are roughly 80
percent of that amount. The affordable price was well above the median existing
single-family home price in April, which was $169,800.
Yun
cautions that the reporting sample for pending home sales is smaller than that
of existing-home sales, so it is subject to greater variability. “In addition,
the relationship between contracts on pending home sales and closings on
existing-home sales is taking longer than in the past for several reasons,” he
said. “Mortgage processing time has increased, it is taking many months to close
on those homes requiring short sales with lender approval, and some sales are
falling through at the last moment.”
The total
number of existing-home sales is expected to improve but with dramatic local
market variation in the timing of recovery. “The market has already bottomed in
some areas, but this is an unusual housing cycle with some areas improving
rapidly while others languish or decline,” Yun said.
# # #
1The
Pending Home Sales Index is a leading indicator for the housing sector, based on
pending sales of existing homes. A sale is listed as pending when the contract
has been signed but the transaction has not closed, though the sale usually is
finalized within one or two months of signing.
The index
is based on a large national sample, typically representing about 20 percent of
transactions for existing-home sales. In developing the model for the index, it
was demonstrated that the level of monthly sales-contract activity from 2001
through 2004 parallels the level of closed existing-home sales in the following
two months. There is a closer relationship between annual index changes (from
the same month a year earlier) and year-ago changes in sales performance than
with month-to-month comparisons.
An index
of 100 is equal to the average level of contract activity during 2001, which was
the first year to be examined as well as the first of five consecutive record
years for existing-home sales.
2The
Housing Affordability Index is a relative index where a value of 100 means that
a family with the median income has exactly enough income to qualify for a
mortgage on a median-priced existing single-family home, taking into account the
relationship between median home price, average effective interest rate for
loans closed on existing homes, and median family income. The higher the index,
the better housing affordability is for buyers.
The
calculation assumes a downpayment of 20 percent and a qualifying ratio of 25
percent of gross income for mortgage principle and interest payments. The index
is a general gauge with conditions varying widely around the country.
Affordability conditions are lower for first-time buyers with smaller
downpayments and less income.
Monthly
publication of the index began in 1981 with annual data calculated back to 1970.
Existing-home sales for May will be released June 23; the next Pending Home
Sales Index will be on July 1.
Mortgage
Rates on the Rise
(June 15) Mortgage rates have risen sharply the past few weeks, going from
around 4.8 percent to almost 5.6 percent.
The moral of this tidbit is that if you are looking to buy, our interest rates
are still at historic lows, but economists predict these rates are not
sustainable.
Read more…
*Seasonally Adjusted Annual Rate.
June Market
Forecast
By
Lawrence Yun, Chief Economist - National Association of REALTORS®
 The
three straight months of rising pending home sales is welcoming and encouraging.
First-time buyers are responding to the incentives of rock-bottom mortgage rates
and the tax credit to pick up low- priced homes. Recent figures suggest about 45
percent of buyers have been first-timers, higher than the typical 35 to 40
percent during more normal years. A high proportion of the transacted homes are
distressed, either in foreclosure or requiring a lender approval short-sale,
with deep discounted prices. By the fourth quarter, existing home sales are
projected to be about 15 percent higher compared to the comparable period the
year before, if all goes as planned. Some of the recent first-time buyer
transactions will help existing homeowners to make the sale and then to buy the
next home. Other first-time buyers buying a vacant home are still helping in
terms of absorbing inventory.
Just like
war, nothing goes as planned. It is possible that the rest of the country
follows the path of trend-setting California. Home sales in the hard-hit
California market have recently recorded sales that are nearly twice as high
from the trough. Evidently California is experiencing a tipping-point phenomenon
of potential buyers suddenly wanting to enter the market all at once. People
have waited and waited for the best time to enter. Without a doubt, after having
tumbled from unsustainable heights, home prices were highly attractive and
within reach for many a fence-sitter. But why buy now if prices will be lower
later? However, when some buyers started to enter the market, other bystanders
just couldn’t let others take advantage of the great buying opportunity without
them. As a result, many are now fighting to jump into the market.
Multiple-bidding on lower-priced homes is said to be common in California.
People who lose out during a bidding war do not go home and wipe away the tears.
They come back with almost vengeance-like determination. Their next bid will be
the highest – everyone thinks. Though the year-over-year price measurement will
continue to show declines in California, and probably for the remainder of the
year, the month-to-month price trends will more likely be on an upswing. In
short, people who buy in June 2009 will likely see a price gain in June 2010.
Will the rest of the country follow California and witness not a slow recovery,
but a sharp upturn? Some of that trend is already occurring in Nevada, Arizona,
and parts of Florida. The hard-hit parts of Washington D.C. outlying suburbs are
also experiencing multiple biddings. But expecting the same phenomenon to occur
for wider parts of the country would be a stretch. The sharp upturn is likely to
occur in markets where home prices are overshooting downward (after having
overshot way upwards during the boom years). Therefore, most of Middle America
may not encounter the sharp upturn because there was never the big boom and big
bust to begin with. Still, there appears to be many hesitant fence-sitters in
Middle America based on recent depressed home sales, despite accumulated steady
overall population gains in the country.
Just like
war, things can quickly take a turn for the worse as well. Job losses will
continue through the remainder of the year. The unemployment rate will rise to
10.5 percent before all is done. Even with some economic growth from the massive
stimulus package later in the year and into 2010, the jobless rate will remain
stubbornly high at near 10 percent for the next 18 months. People without a job
or with financial capacity should not be entering the market. Foreclosures will
rise as a result, putting an additional downward pressure on prices (unless
buyers quickly snatch up these properties). Falling home values will in turn
slow economic recovery because of the slowdown in consumer spending from further
destruction in homeowners’ equity.
But even
in the depth of the recession, we are still looking at close to 90 percent of
the workforce employed. Discount perhaps 20 percent of these workers as not
having a full time job or with job loss anxieties. That still puts a sizable 70
percent of the adult population with stable jobs in a position to respond to the
combined incentives of low rates, low home prices, and tax benefits if a
first-time buyer. However, job losses will no doubt depress consumer confidence
all around, and the psychology factor is just as important in the current
housing cycle compared to the past.
One
incentive that could disappear is the rock-bottom rates. The Federal Reserve has
been actively trying to push down mortgage rates by keeping the short-term fed
funds rate at near zero and buying up mortgage-backed securities. But the
rapidly rising budget deficit and the continued printing of money to partly
finance that debt is raising concerns. The U.S. budget deficit in the current
fiscal year is likely to hit $2 trillion. In 2010, it will be easily above $1
trillion. The largest prior deficit was less than half a trillion dollars. In
relation to GDP (as it relates to overall U.S. income), the deficit for the
current year will be the highest since World War II.
Partly as
a result, the yield on the 10-year Treasury, the benchmark rate from which
mortgage rates are priced, has risen significantly over the past month from
under 3 percent and is now rapidly approaching 4 percent. Therefore, the average
mortgage rate on a 30-year fixed loan will likely rise to about 5.5 percent in
the second half of the year. If the rate tops 6 percent, then expect a
significant setback not only for housing market recovery, but also for economic
recovery.
The
first-time tax credit is also scheduled to expire by November 30th. That means
trying to entice buyers to sign a contract by early October to give enough of a
buffer to be able to get the mortgage underwritten by November. Some ready
buyers unable to get out of a longer-term rental contract may not make the
deadline. At the same time unexpected delays are popping up. Appraisals with
outside management companies are now becoming active due to a regulatory rule
change that is costing the consumer more fees, with less reliable assessment.
NAR,
therefore, is lobbying to get the tax credit deadline extended. Expanding the
tax credit to more buyers (and not only to first-timers), and with less income
restriction also make sense. We are also pushing to make appraisals include
local experts and that those experts not solely be determined by national
Appraisal Management Companies that are owned by national banks. NAR is raising
concerns with policymakers regarding the 90-day rules and the like that are
limiting appraisals to only non-comparable properties.
The
economy is likely to recover, though it is still shaky. On the positive front,
the massive depletion of business inventories sets up the conditions for a quick
ramp-up in production in the upcoming quarters. Private business inventories
fell by $29 billion in 2008 and are on pace to drop by close to $50 billion in
the first half of this year (the first quarter drop in inventory was $91 billion
in annualized pace). Federal government spending mysteriously fell in the first
quarter by 1.1 percent, which is very counter to the massive stimulus package.
The timing of payments and some of the delays in actually getting the shovels to
move are the reasons behind the fall, which then suggest a nice boost from
government spending contribution to the GDP in the upcoming quarters. Consumer
spending squeaked out a small gain in the first quarter after having fallen in
the two previous quarters. Recent rises in the stock market and the huge
mortgage refinancing activity in early 2009 may provide financial wherewithal
for consumers to hit the malls. Consumer confidence, as measured by the
Conference Board and from the University of Michigan surveys, has also been
smartly rising in the past two months in line with the recovering stock market.
A drag to
the economy, however, will continue to be from falling housing starts.
Residential investment fell by nearly 20 percent in each of the past two years
and is on pace to fall by 30 percent in 2009. Business spending on computers and
related equipment absolutely collapsed in the first quarter with a 33 percent
cut. Business spending on structures also hit a wall with a 42 percent tumble.
The net export picture had been improving but will deteriorate going ahead. The
drop in oil prices in 2008 had reduced imports, but the recent reversal in oil
prices will mean higher imports.
Overall,
the economic recovery is likely to occur in the second half but in baby steps.
The annual GDP growth for 2010 will be only 1.6 percent, half the normal rate of
expansion. The unemployment rate will climb to 10.4 percent by year end, before
dropping at a slow pace in 2010 in the baseline forecast.
Regarding
the housing market, the baseline forecast is for a better second half after a
rather meek first half. Annually, there will be 5 million existing home sales in
2009, a hair higher than in 2008, before climbing to 5.3 million in 2010. For
new homes, 2009 will be a tougher year with only 320,000 sales after struggling
through 485,000 sales last year. In 2010, new home sales will rise to 370,000.
That is still far below the peak sales in 2005 at 1.2 million.
Great
Statistical Website for Information on Housing:
HousingEconomics.com
National Association
of Homebuilders
Moody’s
predicts First recovery forecasted in five U.S. states
California, a golden state in the United States, is no longer shining in the
economic recession and Californians may move to other states to find jobs since
a new forecast says the recovery may take place first in Colorado, Idaho,
Oregon, Texas or Washington.
A new forecast from Moody's Economy.com predicts that jobs growth will return
first in those five states, starting in the last quarter of this year. Four of
those states benefit from strong high-tech industries, and the fifth, Texas, has
a strong base of energy industries.
Forecast says a second wave of jobs growth, which will start in the first
quarter of 2010, is predicted in seven states: Alabama, Georgia, Nebraska, New
Mexico, North Carolina, North Dakota and South Dakota.
The next wave, in the second quarter of 2010, is expected in seven states:
Alaska, Arkansas, Iowa, New Hampshire, South Carolina, Tennessee and Wyoming.
Other 31 states including California and the District of Columbia will wait
until the third quarter of 2010 for jobs to start growing again, the forecast
says.
The new forecast is released by Moody's Economy.com along with the monthly
Adversity Index. Each month, the website and msnbc.com use data on employment,
industrial production, housing starts and house prices to label each state or
metro area as expanding, at risk of recession, in recession or recovering.
Of the 50 states in the U.S., only Alaska was showing enough growth to delay a
declaration of recession by the end of March besides the District of Columbia. A
month earlier, North Dakota and Wyoming were also avoiding the recession.
Among metro areas, 98 percent were in recession by the end of March, up from 96
percent in the February data. That's 373 in recession, up from 367.
All eight metro areas still not in recession are judged to be at risk of
recession, meaning they are decelerating toward the downturn. Not a single metro
area in the U.S. was judged to be in recovery in February.
High-tech industry is considered as one factor that caused some states to
recover faster than others, the forecast says.
"States that have a high concentration in tech-related industries are well
positioned to take advantage of this trend, which is particularly true of
Colorado, Idaho, Oregon and Washington and to a lesser extent Texas," said
economist Andrew Gledhill of Moody's Economy.com.
"Although not scheduled to begin its recovery until a quarter later, New Mexico
also fits into this category of benefiting from a tech recovery," Gledhill
added.
Analyzing on why Texas, which has less high-tech industry, is on the list for
early job growth, Gledhill said: "The state had largely missed out on the
housing boom (as did Colorado) and was among the last to join the recession, in
large part due to lingering impacts from the energy boom of years past."
"Similarly, other expected early risers such as Washington and Colorado were
also relatively late to join the recession for various reasons. Thus, as
conditions begin to turn nationally, they have less of a hole to dig themselves
out of," he added.
Another factor is that the five early job recovery states all have in common is
less erosion in household credit conditions, with the worst of the group being
Idaho.
Gledhill said as a result, once it seems apparent that recovery is setting in,
households in these states will be more able to turn and inject money back into
their local economies. There is less de-leveraging of household balance sheets
in these states. This will in turn prompt a more favorable trend in certain
types of service industries.
The Plains states, including North and South Dakota, have suffered relatively
minor recessions, with comparably minor job losses, according to Gledhill.
He said North Dakota has the lowest unemployment rate in the country. Once the
U.S. economy begins to firm and there is less weight on cyclical industries such
as manufacturing, it does not take much to turn minor losses into minor gains,
and farm states are also helped by relatively high farm prices.
According to Gledhill, Alabama, Nebraska, North Dakota and South Dakota have
only minor housing imbalances, and none of these states recorded the exorbitant
price appreciation that was common in years past that has subsequently turned
into a steep price correction and the negatives that follow.
There are some positive trends in Southeast and Southwest, the forecast says.
Residential real estate markets in these regions are showing the first expected
indications of stability. Home sales in California are now more than double
their low point in the fourth quarter of 2007. Sales were slower to turn in
Florida but are now 25 percent above their low point registered in the first
quarter of 2008.
Homebuilding will be the next housing indicator to improve, although California
and Florida will not lead the way, as rising foreclosures will keep ample supply
on the market.
Home prices may not stabilize for another year in Florida and the Southwest.
Nevertheless, prices have fallen enough in the nation's weakest housing markets
-- aided by lower interest rates and tax incentives -- to interest both
investors and first-time homebuyers, the forecast says.
The outlook is grim for 2009, the forecast says. Employment will fall in all 50
states this year, and no area of the country will escape recession.
But according to the forecast, next year will look better. Much of the South and
West will return to moderate growth. Tech-producing areas will help lead the way
because of federal stimulus measures, renewed export demand, and an aging
domestic technology base.
Centers of international trade and regional distribution and logistics should
also stabilize as consumer demand and industrial production rebound.
Energy-producing regions should also gain as rebounding confidence in the U.S.
and global economies lifts energy demand somewhat, the forecast says. |
