Eye on the Economy: Government Shutdown Adds to Uncertainty


Pending Home Sales August 2013

Recent data concerning consumer and builder confidence suggest that at the end of the summer a pause occurred with respect to economic improvement. Adding to this is the uncertainty associated with the shutdown of the federal government. Besides the direct impact from lost or delayed government services, the shutdown is also a warning concerning the impending political debate regarding the debt ceiling, an issue which could have significantly larger economic impacts, including higher interest rates.

Direct impacts from the ongoing shutdown include possible delays in FHA-insured single-family loan approvals, FHA multifamily insured financing, rural housing loans, and E-Verify for hiring. Additionally, with the closure of the IRS, it may be difficult for prospective homebuyers to acquire lender required forms to obtain mortgages. A two-week government shutdown is unlikely to have a large impact on housing and the economy, but a shutdown that spans a month or more could be quite costly.

Loss of economic data, including this week’s BLS jobs report, is another drawback caused by the shutdown. The loss makes it more difficult for the Federal Reserve to conduct monetary policy at this critical moment.

Many analysts expected the policy of quantitative easing, which involves the purchase by the central bank of government bonds and mortgage-backed securities, to perhaps taper to an end sometime this year. However, at the September meeting of the Federal Open Market Committee, the Fed decided not to taper at this time. Economic growth, 2.5% for the second quarter, remains modest at best, and job creation continues to be disappointing compared to prior recessions. The lack of data from the BEA and BLS will thus make the Fed’s job harder.

Dampened consumer confidence is the result of uncertain economic policy and weaker than hoped for economic growth. The Conference Board’s Consumer Confidence Index fell 2.6% in September, and the Thomson Reuters and University of Michigan Consumer Sentiment Index was down 9% from the six-month high reached in July.

While household balance sheets have rebounded with gains in assets values due to rising home prices (e.g. since January 2012, the Case-Shiller Index is up 12.5%) and stock market gains, income growth lags. In fact, a sizable gap exists between current disposable income and where that measure should be if 2000-2003 growth trends had been in place since the end of the Great Recession.

Mortgage interest rates continue to rise for home purchases. For example, according to the Federal Housing Finance Agency, the average rate for a conventional mortgage used to purchase newly built homes rose by 26 basis points in August, to 4.2%. The combination of sluggish income growth and higher mortgage interest rates appears to be having an impact, at least for existing homes sales.

August pending existing home sales, as reported by the National Association of Realtors, fell 1.6%, but remain 5.8% higher than a year ago. Nonetheless, the monthly decline signals that existing home sales may have peaked temporarily. While August existing home sales were up 1.7%, and 13.2% higher than a year ago, the recent drop in pending sales suggests flat or declining volume ahead.

In contrast, new home sales bounded back in August after a weak July. In the latest report from the Census and the Department of Housing and Urban Development, the pace of new home sales was up 7.9% to a seasonally adjusted annual rate of 421,000. This rate is up 56% from lows set in 2011, but is well the underlying historical demand of 800,000 per year.

The number of completed homes for sale rose slightly to 37,000 from 35,000 in July even as the median number of months from completion to sale fell to three months, the lowest in the past 25 years. Sales of completed homes rose to more than half of all sales during the collapse as builders tried to clear their inventory. More recently, completed homes represent 30% of all sales, which is more representative of the 1990s.

In analysis news, NAHB economists took a look at the relationship between housing starts and the NAHB/Wells Fargo Housing Market Index (HMI), a measure of builder confidence. In recent months, there has been some speculation that perhaps the relationship between the HMI and starts has been strained, with the HMI rising faster than starts. In fact, the history of the HMI shows that gaps tend to open between these two measures at turning points in the business and building cycle, whether on the decline or rebound. Thus, the current reading of the HMI is consistent with a recovery in starts.

As the recovery continues, property taxes continue to be a key source of revenue for state and local governments. In fact, as of the second quarter of 2013, property taxes represent 34% of total tax receipts, the largest single component.

Two recent NAHB demographic analyses shed light on the future of housing demand. First, the aging of the American population has distinct geographic patterns. By 2030, the number of people 65 or older will total 72.1 million or 19.3% of the population. States in the Northeast and the Midwest are losing population aged 45 and younger, while states in the South and the West are gaining a share of younger households.

This changing nature of the American family is also noted in Census data that shows the share of total households defined as married couples with children has declined dramatically in the last few decades. In 1970, the share of the population in these traditional households was more than 40%; in 2012 it was just 19.6%. In contrast, the share of the population living alone has grown from 17.1% in 1970 to 27.5% today.

Finally, IRS data for 2010 shows what impacts the 25C retrofit tax credit for existing homes and the 25D tax credit for power production property had on the housing stock. The most common use of 25C was window replacements, with 2.2 million homeowners investing in $7.8 energy efficient windows. Solar panels were the most popular 25D item, with more than 100,000 homeowners spending $1.5 billion on residential solar equipment.

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  1. The federal government shutdown isn’t doing housing any favors.

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