Eye on the Economy - 04/25/2007 (Plain Text Version)

By David F. Seiders, NAHB Chief Economist

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Home Buyer Demand Shifts Downward — Again

A variety of indicators strongly suggested that the demand for single-family homes had stabilized late last year following a substantial downward correction from the record sales pace (gross and net) recorded during the second half of 2005. However, more recent signals point toward renewed downward pressure on home sales and renewed upward pressure on sales cancellations.

The NAHB/Wells Fargo Single-Family Housing Market Index (HMI) slipped in April following a similar setback in March, and the HMI now is only marginally above the apparent cyclical low last September.

The March-April slippage was broad-based by geographic region, and all three components indexes (buyer traffic, current sales and expected sales) registered consecutive monthly declines.

NAHB’s proprietary survey of 30 large home builders — accounting for about one-fourth of total for-sale housing in the U.S. — showed a sizeable decline in seasonally adjusted gross home sales in March, and seasonally adjusted cancellation volume spiked upward following a series of monthly declines from the peak last fall.

As a result, seasonally adjusted net sales dropped abruptly in March following an essentially stable pattern that had prevailed since mid-2006.

The government’s data on new home sales (gross) for March, released today, is consistent with the weakening process signaled by NAHB’s survey measures. Sales volume ticked up in March, under good weather conditions, but recovered little of the substantial and weather-related setbacks in January and February. Furthermore, the first-quarter average was down by 14% from the final quarter of 2006, constituting an additional down leg following the sharp downward correction during 2006.

The Subprime-Related Tightening of Mortgage Lending Standards Is Behind the Demand Shift

The recent problems of the subprime mortgage market, along with associated tightening of lending standards in other components of the U.S. mortgage market, definitely lie behind the renewed downward pressure on home buyer demand. Indeed, this phenomenon is documented by surveys of builders conducted by NAHB in the early part of April.

Forty-five percent of all builders surveyed in April said tighter mortgage lending standards had adversely affected their home sales so far this year, and roughly three-fourths of larger companies (those starting more than 100 units per year) reported adverse effects on sales volume. For those reporting negative impacts, the median sales reduction was on the order of 10%.

More than one-fourth of builders surveyed in April said that sales cancellations were up because prospective buyers were unable to qualify for mortgages in the current environment. Those reporting this problem said that about 10% of their backlog of signed sales contracts had been cancelled in the process. [return to top]

Heavy Inventories of Vacant Housing Units Are Weighing on the Markets

Conventional measures of new and existing homes for sale show a heavy inventory overhang at this time. However, that’s only part of the story. Measures of vacant (unoccupied) for-sale and for-rent units in both single-family and multifamily sectors portray an extraordinarily large volume of vacant housing units on the market — a weight that should hold down new housing production for some time even when housing demand is in a recovery mode.

In absolute terms, there was a record 5.9 million vacant year-round housing units on the market at the end of 2006, and these units accounted for a record 4.66% of all housing units.

Assuming that a “normal” vacancy rate is about a percentage point lower, there’s an excess of about 1.3 million vacant units on the market — largely a legacy of the investor/speculator buying binge during the boom period.

The for-rent component of the vacant housing inventory on the market is hanging around the record high attained three years ago, despite a substantial decline in multifamily rental vacancies since then, as the single-family component has trended upward.

The for-sale component has moved up aggressively since early 2004, reflecting major upswings in both single-family and multifamily (condo) components. [return to top]

The Supply-Demand Imbalance Is Exerting Downward Pressure on Home Prices

Home prices soared during the housing boom of 2003-2005, ultimately destroying affordability and precipitating the downward correction in home sales and housing production that so far has run through 2006 and early 2007.

Rates of house price appreciation slowed dramatically during 2006, and the evolving supply-demand imbalance — aggravated on both sides by the subprime-related problems in the mortgage market — recently has been pushing house prices into the red zone.

The year-over-year change in the median price of existing homes sold has been in the negative range so far this year. However, this series is extremely volatile on a month-to-month basis, making sequential analysis quite difficult — even on a seasonally adjusted basis. Furthermore, movements in this measure reflect compositional shifts in homes sold as well as true price changes.

The relatively new S&P/Case-Shiller Home Price Index uses a repeat-sales methodology (minimizing compositional effects), and the 20-City Composite measure now is available through February. This series (seasonally adjusted by NAHB) shows a series of declines that began last July, and the evolving supply-demand pressures are bound to generate further declines as 2007 rolls along. [return to top]

The Short-Term Outlook for Housing Production Has Weakened

NAHB’s current forecast for housing production in 2007-2008 is considerably weaker than the forecast put in place earlier this year, primarily because of the unexpected problems of the subprime mortgage sector and tightening standards in other parts of the U.S. mortgage market.

The mortgage market problems are not only taking a toll on effective housing demand, the also are adding to the already heavy inventory overhang as low-quality loans made during the boom go into default and foreclosures mount. Furthermore, the downward home price pressures figure to take some toll on residential remodeling over the balance of this year and in 2008.

NAHB’s forecast now shows double-digit declines in the housing production component of GDP (Residential Fixed Investment) in both the first and second quarters of this year — a factor that will keep overall economic growth in a decidedly slow-growth mode.

We expect RFI to flatten in the third quarter before embarking on a gradual recovery over the balance of the 2007-2008 forecast horizon, although the level of production at the end of this period still will be well below our estimate of the demographically based trend. [return to top]

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Find out in HousingEconomic.com’s State Starts Forecast (sample).

The starts forecast includes downloadable Excel tables of total, single-family and multifamily starts by region and state.

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