Notes from Jim Haughey

Apr 25 2007 1:44PM | Permalink | Email this | Comments (1) |
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By Jim Haughey

Home affordability remains very good and continues to improve so local housing markets in cities that missed the 2004-06 housing boom are reasonably stable with some markets expanding slightly. Nonetheless, the national housing market remains depressed under the weight of a growing surplus of homes for sale and declining consumer confidence in the former housing boom cities. Good affordability is being blackballed by poor confidence. This market environment will continue into next year. The large production homebuilders, who build primarily in the former housing boom cities, will experience deeper and more persistent sales declines than the smaller builders elsewhere in the country.

More sour news for home sales and, hence, housing starts, came today when March existing home sales were reported down 8% by the National Association of Realtors and The Conference Board reported that the April Consumer Confidence Index fell 4.2 points to 104.0. Homebuilders are selling their inventory into a market overstuffed with three extra months of supply of existing homes and increasingly cautious consumers. High gasoline prices are largely responsible for the fall in consumer confidence. While this negative is likely temporary, it should persist at least into May. The confidence drop is much steeper at the low end of the income scale where energy is a larger share of the household budget. Aggravating the economic plight of low income households, tightened mortgage underwriting standards have made millions of households no longer eligible for mortgage loans.

Here is what is happening to affordability. Eventually, good affordability will permit a recovery in housing starts as soon as confidence improves enough to begin reducing the overhang of surplus homes for sale.

Home prices are steady to slightly down. Mortgage rates are cheap and steady at 6.2% for 30-year loans and 5.5% for 1-year adjustable loans. Employment is rising 152,000 jobs a month so far this year. Wage rates gains have begun to accelerate with the unemployment rate down to 4.4%. Non-wage personal income increased at nearly a 9% annual pace in the last three months. But none of this can substitute for an unwillingness (or inability) to make a major financial commitment.

What is the outlook for confidence? It could get slightly worse later this spring from the accumulative impact of higher energy prices using up household budget and credit reserves.

Reed Construction Data believes that the core of the housing market is stable enough to keep housing starts from declining significantly more. The core market is households with secure jobs, rising incomes and 10% or more downpayments. Confidence remains better for this group. Home affordability remains the key market driver.