Eye on the Economy: Can Housing Improvement Persist in a Slowing Economy?

*Eye on the Economy is an NAHB newsletter that is published every two weeks and takes a larger view of recent economic and housing policy news.

Recent economic data clearly indicate that the economy is experiencing slowing growth rates, with job creation and growth in Gross Domestic Product (GDP) at weaker-than-expected levels. Despite these headwinds, the housing sector continues to be a source of relatively positive news.

New single-family home sales in May gained strength but remain at historically low levels. According to Census Bureau and Department of Housing and Urban Development data, the seasonally adjusted annual rate of new home sales increased to 369,000, an increase of nearly 20% year over year.

Inventories of new homes remained relatively unchanged at 145,000, a 4.7 months-supply, which marks a cycle low and suggests that any growth in future demand will require increases in home construction.

In fact, construction spending remains a source of strength for the economy. Data from the Census Bureau show that private residential construction spending increased 2.8% in May. Judged on a three-month moving average basis, residential construction spending has increased during each of the last eight months. Strength remains for both remodeling and multifamily construction expenditures, while single-family construction spending has shown more recent improvement.

Despite this growth, employment in the home building sector has not picked up. Data from the Bureau of Labor Statistics show that home building employment (including builders, remodelers and various trade contractors) remains down 1.5 million on net or 42% from the peak.

There was mixed news for existing home sales. The May report from the National Association of Realtors (NAR) indicated that existing home sales declined 1.5% from April, reaching a 4.55 million seasonally adjusted annual rate. However, this rate marks an increase of more than 9% year over year. Nonetheless, the NAR Pending Home Sales Index, a forward-looking indicator based on signed contracts, increased 5.9% in May, its highest level since the expiration of the federal home buyer tax credit program.

The slow but steady improvement for housing market conditions is reflected in current housing price reports. For example, the most recent editions of the Case-Shiller Home Price Indices showed a 1.3% increase for the month of April for the 20-City Composite Index. This marked the first increase in seven months.

All told, the improvement in housing and weakness in job creation are embodied in recent changes in the NAHB/First American Improving Markets Index (IMI). After falling to a level of 80 in June, the index rose to 84 in July. The IMI is a count of metropolitan areas that are classified as improving based on a conservative evaluation of local home prices, job growth, and building permits. The markets on the list represent 33 states and the District of Columbia and continue to show broad geographic distribution. House prices remain the most fragile of the three components of the IMI.

As noted earlier, the broader economy has been exhibiting growing weakness. The June employment report from the Bureau of Labor Statistics indicated that only 80,000 net jobs were created during the month. This was the third month of weak job creation and suggests concern about the state of the recovery (in April, only 68,000 jobs were created and only 77,000 in May). The unemployment rate remains at 8.2%.

Weak job creation has taken a toll on consumer confidence. The Conference Board’s Consumer Confidence Index and the University of Michigan Consumer Sentiment Survey both dropped during June, with the Conference Board down more, almost 8% from the May reading.

With Congress debating how to avoid the “fiscal cliff” in the face of current macroeconomic weakness, the Federal Reserve announced an extension of the ongoing monetary policy sometimes called “operation twist.” The policy seeks to keep long-term interest rates low, which in theory should help stimulate the economy. The extension will result in a continuation of present policy and result in the additional exchange of short-term securities for long-term securities of an amount totaling $267 billion through the end of 2012.

Extension of operation twist will have only indirect effects on mortgage rates and housing. That is, to the extent that the policy improves economic growth and employment, the extension will have a positive impact on housing. But the more binding constraint with respect to housing finance is access to mortgage debt, rather than mortgage interest rates.

Other analysis and information appearing on NAHB’s Eye on Housing economics blog include:

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