Finding a bottom in housing prices is crucial to an economic recovery, but there are still no signs that the decline in home prices has reached an end.
New home construction hit a record low in September, falling 6.3 percent to 817,000, which represented more than a 31 percent decline from one year earlier. Applications for housing permits also declined 8 percent, forecasting weakness in home construction for the fourth quarter. Barclays Capital economist Michelle Meyer predicted that housing starts will decline another 5 to 10 percent through the beginning of 2009, according to Marketwatch. “This will bring the level of housing starts to a new post-war low,” said Meyer.
The difficult housing market and credit crisis have dragged home builders’ confidence to a new low. The index of builder sentiment prepared jointly by the National Association of Home Builders (NAHB) and Wells Fargo & Co. dropped to 14 in October, down from 17 in September, and significantly lower than its high of 72 in June 2005. NAHB chief economist David Seiders noted that the index “reflects builder assessments of the recent events on Wall Street, the rapid deterioration in job markets and the corresponding weakness in consumer confidence,” according to HousingWire.com. “The impacts of the record-breaking housing contraction have spilled over to other key sectors of the economy and weighed heavily on financial markets, and stabilizing housing is now the best chance we have to limit the severity of recession,” said Seiders.
Rising mortgage rates only add to the poor environment for housing, making mortgages, for those can obtain them, more expensive. The average rate for a 30-year fixed rate mortgage rose to 6.46% this week, the highest in eight weeks, from 5.94% last week, according to Freddie Mac (FRE). The higher rates reflect a rise in Treasury bond yields, which has occurred as bond traders expect the government will be forced to borrow more heavily. In other words, the government will need to sell more bonds driving the prices of those bonds lower and forcing yields higher. Bond prices and yields move in opposite directions. Residential mortgage rates are generally tied to Treasury yields.
The dramatic drop in housing prices has not let up. According to the S&P/Case-Shiller Home Price Indicies reported for July 2008, the 10-City Composite saw a record annual decline of 17.5 percent, and the 20-City Composite a record decline of 16.3 percent. From their peak readings in June/July 2006, the two Composites are down 21.1 percent and 19.5 percent, respectively. Las Vegas (-29.9 percent), Phoenix (-29.3 percent) and Miami (-28.2 percent) continue to be among the hardest hit areas in terms of annual home price declines. For more detail, please click on this link to review an article at Marketwatch.com.
Although there have been and will continue to be many prognosticators arguing that the economy is about to recover because energy and commodities prices have dropped, the stock market is oversold, the frozen credit markets are thawing, there is a presidential election coming, the media has overstated the problems, etc…, those of us who rely on data to tell the story will be watching the housing market. There can be no economic recovery until the housing market stabilizes, and that means prices stop falling (they don’t necessarily have to return to prior highs), housing construction and starts stem their declines, and home builder confidence begins rising.
Gregg D. Killoren
victoria1014
