However, housing hit a soft spot in October and November as the stimulative effects of the $8,000 tax credit wound down as the tax credit’s initial deadline approached and its extension and expansion were in doubt until signed into law in early November. Consequently, single-family housing starts fell to 472,000 in October and rose slightly to 482,000 the following month for a two-month average of 477,000 starts — roughly in line with the 478,000 starts reported in June. It appears that single-family construction has reached a temporary plateau.

After the holiday season, as some households gain confidence in an improving economy and take advantage of the home buyer tax credit, residential construction should begin to return to its slow advance.

Single-family building permits tell a more encouraging story. After peaking at a seasonally adjusted annual rate of 464,000 in August, they fell to 452,000 in September and 449,000 in October, most likely because the initial tax credit was about to expire.

But in November, there was a strong rebound to 473,000, the highest since September 2008. The increase appears to be because builders have begun to rebuild their inventory of lower priced houses that that were sold because of a boost from the tax credit and in anticipation of increased demand resulting from its extension and expansion.

At the same time, builders are hardly optimistic about their prospects. The NAHB/Wells Fargo Housing Market Index (HMI) fell one point from its October and November readings to 16 in December. Though nearly double the lows of 8 and 9 recorded at the beginning of the year, the builders’ confidence was hardly stellar.

More discouraging is that two of the three underlying indexes that comprise the HMI ― current sales and sales expectations ― also fell while the third index, current traffic, held steady for the third month in a row.

The drop in expectations for futures sales indicates that builders are not confident that the extension and expansion of the home buyer tax credit will help them, They also appear to be worried about competition from the sale of foreclosed properties currently on the market and of future foreclosures.

Builders displayed a similar lack of confidence when the first-time home buyer tax credit was initially signed into law in February. At that time, the underlying index of builders’ expectations for sales fell two to 15 in February from the month before. It then inched up two points in March.

By April, presumably when builders seeing some positive effects of the tax credit, their expectations index jumped to 24. April also marked an increase in the other two underlying indexes, current sales and current traffic.

Similarly, the overall HMI only inched up one point to 9 in February from its historic low of 8 the month before and held steady in March. It wasn’t until April, when positive signs from the tax credit began to appear, that HMI rose to 14.
 

While single-family construction is showing some signs of life, the same cannot be said for multifamily construction.

On the face of it, multifamily housing starts seemed to show real strength in November, rising 67% from the month before to a seasonally adjusted annual rate of  92,000  However, multifamily starts are notoriously volatile from month to month. They averaged 142,000 during the first half of the year, 88,000 in the third quarter and 74,000 for October and November because October’s reading of 55,000 was the lowest recorded since the Census Bureau began reporting multifamily starts in 1959.

Multifamily building permits, which are less volatile, were not much more encouraging. They averaged 146,000 for the first half of this year, 113,000 for the third quarter and 107,000for October and November.

Multifamily construction is struggling against stiff competition from the single-family and multifamily rental markets, the single-family for-sale market, foreclosures and significant obstacles to construction financing.

Like housing, the economy is showing signs of revival, the road to recovery will pass through some rough patches and there will still be plenty of pain.

The first bumps in the road were evident with the revisions of third quarter gross domestic product (GDP), which measures the total output of the country. In the advance estimate, released in late October, real (inflation-adjusted) GDP growth was up 3.5% (at a seasonally adjusted, annual rate) over the quarter before. That was revised down to 2.8% in November with the second estimate. Now, with the third estimate released this month and based on more complete economic data, the measure was revised down yet again ― to 2.2%.

While the number of jobs has fallen throughout the year, job losses have been smaller and smaller in recent months. The drop in the unemployment rate from 10.2% in October to 10.0% in November is hardly victory, but it may be a tiny ray of hope.

We hope to see some modest job gains either in December (those numbers will be released in early January) or January. But even with the hoped for improvement, unemployment will remain high for many months.

Nonetheless, signs of recovery continue to be evident. Industrial production has now held steady or increased during the last five months. The November reading was up a healthy 0.8% from October. Since June, the measure has risen 3.8%. Capacity utilization now stands at 71.3%, up from its cyclical low of 68.3% in June.

Retail sales continue to bounce around, but they have risen in five of the last seven months and appear to have bottomed out in December of 2008. One encouraging note is that, on a year-over-year basis, they were up 1.8% in November, the first year-over-year increase since July 2008.

Excluding auto sales, which were affected by the “cash for clunkers” program, retail sales have risen in six of the last seven months. Auto sales, which averaged 9.7 million units in the first half of the year, have averaged 11.4 million units over the last five months. Even taking out sales from August, when the cash for clunkers program had its largest impact, and leaving in September sales, which were depressed from the program pulling sales into August, auto sales averaged 10.6 million units.

Further, money is still flowing from the stimulus package passed earlier this year. The stimulus was intended to be spread out over a two-year period. Of the $787 billion authorized, a little more than 30% ― $245 billion ― of the funds have been paid out to date. Some of the funds have been transferred to states and localities, which have yet to spend all of their proceeds. That money, along with future funds to be distributed, will be injected into the economy over the next several months.

There is a push-pull relationship between the economy and residential construction. Economic expansion, particularly improvement in employment, supports demand for housing. At the same time, residential construction ripples through the economy in many positive ways, ranging from demand for materials like lumber, cement and copper used in construction; demand for the labor to build  housing; and demand for furniture, furnishings and appliances.

General measures of inflation are generally at a low level. The Consumer Price Index (CPI) rose 0.4% in November. On a year-over-year basis, the CPI was up 1.8%. Core CPI (excluding food and energy) was flat in November, but up 1.7% on a year-over-year basis.

The more volatile Producer Price Index (PPI) for finished goods was up 1.8% in November, while core PPI rose 0.5%. On a year-over-year basis, the PPI was up 2.4% and core PPI increased 1.2%.

Meanwhile, a price index for materials used in single-family construction rose 0.5% in November but was down 2.3% on a year-over-year basis. Indeed, overall material prices for residential construction have generally been falling during the year.

However, the trend has not been so positive over the longer term. From November 2000 to November 2009, single-family building material prices have risen 32%. This compares to an increase of 24% in general CPI; 20% in core CPI; 26% in the finished goods PPI; and 16% in core PPI during the same period.

The greater increase in building materials prices is largely because of global industrialization, particularly in developing and less developed countries ― China and India, in particular ― and their demand for cement, steel, copper and energy.

This is certainly a troubling trend for the future of affordable housing ― whether it’s housing for low income households or for middle class American families.

Although the economic environment for housing is improving and the extended and expanded home buyer tax credit will provide a much needed boost, the housing market continues to struggle with significant impediments.

The job market, though improving, remains weak and potential home buyers still need large downpayments or near stellar credit to obtain a reasonable mortgage.

Builders continue to face difficulty in obtaining acquisition, development and construction (AD&C) loans. In many cases, they also have faced significant adverse changes to existing loans. These have included reductions in the size of loans previously agreed to (e.g., reductions in lines of credit), demands for increased equity for outstanding loans, and in some cases, demands for full repayment of outstanding loans. It has not been uncommon for these increased requirements to transform a performing loan into a non-performing loan.

Inaccurate appraisals are another headwind hindering a faster recovery for housing. These occur when an appraiser, often from outside the area being appraised, uses sales from a dissimilar neighborhood as a comparison or uses a foreclosure or short sale as a comparison without proper adjustment for differences in the condition of the house.

Foreclosures are another drag on numerous housing markets. Many of the foreclosures and past due mortgages are concentrated in the formerly hot markets — parts of California, Las Vegas, Phoenix and southern Florida — and economically distressed markets, primarily in the Great Lakes region of the upper Midwest.

Based on data from the Mortgage Bankers Association, in the third quarter, the five states with the highest rate of foreclosures started were, in order, Nevada, Florida, Arizona, California and Michigan. These same five states also had the highest rate of mortgages 90 days past due ― generally a sign that most of them are headed to foreclosure. Even with an improving economy and the home buyer tax credit, foreclosures will be fed by the weak employment market and are likely to continue to rise into the first part of 2010, especially in these states.

The webcast fee includes access to the webcast archive and electronic copies of the conference handout and presentation materials. Multiple viewers in one office can purchase the webcast for one fee.

The on-demand webcast also gives viewers complete flexibility in their viewing experience — pause, skip forward and backward, or jump directly to your topics of interest. The webcast is available for $250.

To view the webcast schedule, topics of discussion and a list of the presenters, click here.

To purchase and download the webcast, click here. [return to top]
 

Subscribe and get downloadable Excel tables that feature the housing starts forecast, gross domestic product (GDP), demographics and more. 

To learn more, visit www.housingeconomics.com. [return to top]