Everything considered, labor market indicators are consistent with the evolving slowdown in economic growth (real GDP) but the evidence does not argue for a cut in short-term interest rates by the Fed in the near term – particularly in view of ongoing upward movements in average hourly earnings along with evidence of limited labor market “slack.”

The housing production boom that ran from mid-2003 through early 2006 generated strong growth in employment in this sector (residential builders and specialty trade contractors), and the recent downswing in housing starts and residential construction put-in-place has been taking a toll on this part of the job market since March.  But recent resurgence of private nonresidential construction has generated rapid job growth in that sector, essentially offsetting the falloff in the residential component.  This general pattern is likely to persist as the housing downswing runs its course.
 

Later on October 4, the Fed Vice Chairman, Donald Kohn, delivered an address that devoted a lot of attention to housing.   Governor Kohn noted that the adjustment in housing markets has proven to be “more rapid and deeper” than many economists had predicted, and he expressed a good deal of uncertainty about how the adjustment process will “work itself out.”  In this regard, he suggested that housing starts may now be “closer to their trough than to their peak,” a proposition that squares with NAHB’s outlook.  He also noted that the speed of the necessary rebalancing of supply and demand in housing  markets will depend largely on the speed of adjustment to house prices. 

The former Fed Chairman, Alan Greenspan, also weighed in on the housing downswing during the early part of October.  Greenspan suggested that “…we are coming to the end of this downtrend…the worst of this may well be over.” [return to top]
 

The HMI for October edged up from 30 to 31, halting the dramatic downslide but leaving this measure of builder sentiment in an historically low range.  The stabilization apparently reflected recent declines in mortgage rates and energy prices along with a strengthening stock market and a good job market; indeed, these factors also led to a nice rebound in consumer sentiment during the early part of October (University of Michigan series).  It’s also apparent that price cuts and nonprice sales incentives provided by builders have helped buoy buyer demand – an essential precondition to a fundamental rebound in housing market activity. [return to top]
 

The recent stabilization of the NAHB and MBA survey measures during the early part of October hopefully signals a near-term bottom for home sales, a process undoubtedly fostered by welcome declines in interest rates and energy prices along with deepening sales concessions in the markets for both new and existing homes.  Indeed, the University of Michigan’s home buying conditions index actually moved up nicely in early October, reflecting a surge in the number of respondents who think now is a good time to buy because prices are relatively low and good deals are available. [return to top]
 

The September bounce in housing starts, in the face of the continuing downslide in permit issuance, reflected a large draw-down of the backlog of unused permits obtained earlier by builders; indeed, the draw-down was one of the largest on record.  This development possibly was provoked by relatively good weather conditions in some parts of the country, and the starts presumably were based on order backlogs accumulated earlier by builders.

We’re viewing the September bounce in housing starts as a temporary phenomenon that probably will be reversed (wholly or partly) in October.  Indeed, the ongoing slide in permit issuance and the reduced backlog of unused permits are likely to keep seasonally-adjusted housing starts on a declining trend through the balance of the year. [return to top]
 

With respect to housing, the Fed’s balance sheets show a year-over-year gain of 10.5% in the market value of homes owned by households, a 12.6% rise in home mortgage debt, and an 8.7% gain in owner’s equity – to a record $10.982 trillion.  The ratio of mortgage debt to the market value of homes moved up to 45.9%, compared with 45.1% at the middle of last year, although neither the change nor the level is of concern at this point.

The “holding gains” on household real estate from mid-2005 to mid-2006 came to nearly $1.7 trillion, although the quarter-to-quarter changes decelerated during this period.  A further slowdown is inevitable in coming quarters as house prices continue to slow and possibly even decline to some degree, and the lower housing production levels now in train will also take some growth out of household real estate holdings.  As a result, the powerful housing wealth effect that’s been propelling consumer spending for several years will be losing strength over time, although the weakening process should be gradual and spread over an extended period.  [return to top]
 

If you can't attend in person, sign-up for the Webcast.

To register for either the conference or the Webcast, visit www.nahb.org/cfc. [return to top]
 

HousingEconomics.com combines unique scientific research with practical applications providing insights that are original and useful. This interactive Web site at the executive level provides critical data and information quickly, easily and frequently, and includes the following features:

• Home Builders Forecast ― state, metro, non-residential, remodeling, etc.
• Exclusive access to NAHB’s staff of economists
• The Seiders Report
• Housing Market Statistics — 29 tables including housing starts, home prices, building permits, home sales, value of new construction, etc.
• Housing Activity
• In-Depth Analysis

For details, visit www.housingeconomics.com. [return to top]