Will 2011Home Sales Rebound?

Popular Economics Weekly

Home building is set for a rebound in 2011, with single-family housing starts projected to climb 21 percent to 575,000 units, the chief economist for the National Association of Home Builders said recently. But the increase comes after a crash that has cut single-family construction 80 percent from its peak, meaning the impact won’t be felt for several years.

This is the most optimistic prediction of several housing reports. Residential construction has been increasing lately, but both the Case-Shiller Home Price Index and foreclosure picture are not yet improving. This signals that bloated housing inventories could be with us for awhile.

“You have to keep in mind that these housing increases are off a very low base. These numbers are still far, far below the levels we’d seen before the downturn,” said Frank Nothaft, chief economist for mortgage giant Freddie Mac and a presenter, along with the NAHB’s Chief Economist David Crowe, on an economic panel at the International Builders Show.

Construction spending has been improving for several months. Construction outlays in November posted a 0.4 percent gain, following a 0.7 percent boost the prior month, and have been up for three consecutive months. The gain in November was led by a 0.7 percent increase in private residential outlays, following a 3.9 percent surge in October.  Bottom line is this sector is no longer dragging the economy down, says Econoday.

The S&P Case Shiller index was somewhat pessimistic about prices—once again due to the huge inventory of unsold homes, including those foreclosures. Year-on-year, sales are up 0.2 percent for the 10-city adjusted index but are down 0.8 percent for the 20-city index which is being depressed by mid-single digit declines in Atlanta, Detroit and Portland. Phoenix, Charlotte and Seattle, also part of the 20 index, also show sizable on-year declines.

Existing home sales are back to the levels of 1997 / 1998 and new home sales fell to record lows in the 2nd half of 2010. Inventory increased 5.4 percent year over year in November and the months-of-supply (9.5 months in November) is well above normal.

Since approximately one-third of home sales are foreclosures or bank-owned properties, a declining foreclosure rate should help reduce inventories and so help prices. Although delinquencies might have peaked, the level is still very high and there are many more foreclosures in the pipeline, reports the Mortgage Bankers Association in its third quarter report.

“There is enormous pent-up demand in demographics — we didn’t form almost 2 million households during the recession, either people still living at home with mom and dad or doubling up. They are effectively out there waiting, the next ones looking to get into a new home or apartment,” Crowe said.

All of the improvement will depend on higher job creation, of course. If job creation accelerates to 200,000 or more a month by the end of 2011, as Crowe and Nothaft believe, that would set the stage for even bigger home-building gains through 2015.

Wage inflation remains anemic, however, as we said in this week’s Popular Economics Weekly column (‘The Fed’s Next Move?”).  Average hourly earnings in December edged up 0.1 percent, following no change the previous month.  On a year-ago basis, average hourly earnings growth slowed to 1.9 percent from 2.1 percent in November, suggesting little wage pressure on inflation.

More crucial are the percentage of unemployed and “marginally attached”—i.e., parttimers, says Econoday. The expanded rate of underemployment—the so-called “U-6” alternative measure—slipped to 16.7 percent from 17.0 percent in November but has remained very high throughout 2010.  This measure adds in part-time workers for economic reasons, discouraged workers, plus those not looking for work but would take a job if offered one. The parttimers ideally will migrate to permanent jobs as the economy continues to improve. The ‘magic’ number seems to be a 4 percent GDP growth rate, which if reached this year as even Fed Chairman Bernanke predicts, should succeed in boosting employment to near the required 200,000 per month in new jobs.

Harlan Green © 2011