At the second anniversary of the current economic expansion, housing remains stuck in a rut according to Fannie Mae's Economic Outlook for June which notes that most housing indicators started the second quarter with little momentum. Housing starts and builder's confidence are still at depressed levels and the sluggish construction activity reflected in both measures is one of the reasons that the current economic recovery is less robust than previous ones have been.
Total construction spending improved in April but it was driven by home improvements rather than single or multifamily construction, both of which declined below the first quarter's average. Single-family construction spending fell for the third consecutive month to reach the lowest level since June 2009.
The report says that market conditions continue to favor multifamily and rental housing with demand outpacing supply in some markets. Consequently, rents are beginning to rise. The strong multifamily figures in the first quarter had already moved Fannie Mae to revise higher its multi-family starts projections for the year. Total housing starts are now expected to increase 3.5 percent solely because of the multi-family sector. Single-family starts will fall "modestly" in 2011 compared to 2010.
The supply of new homes hit a record low in April while sales of new homes have increased twice since they hit an all time low in February. At present the inventory of new homes stands at 6.5 months, nearing the long-term average of about six months. However, the good news does not carry over to existing homes where few of the indicators are positive. The National Association of Realtors® (NAR) is blaming the sluggish market on what is calls unnecessarily tight credit and to low appraisals. NAR reported that one-quarter of its members claimed in a survey that they had to cancel contracts or renegotiate them at a lower price because of the appraised values.
That same NAR survey showed that distressed and cash sales continue to account for a big but declining part of the market. Distressed sales made up 37 percent of all sales in April, down from 40 percent in March while 31 percent of sales were all-cash compared to a record 35 percent in March. The report states that a continued decline of distressed home sales as a percentage of the market would reduce the discount component and might give a lift to home prices in the second quarter.
The discounts serve to depress appraised values, leading to the canceled or renegotiated contracts referenced above. Homebuyers have also become accustomed to watching prices fall and continue to delay action on purchasing non-distressed homes.
There is some good news about mortgage performance. The Mortgage Bankers Association reported that short-term mortgage delinquencies were near pre-recession levels. Serious delinquencies (90+ days) have dropped for five consecutive quarters and are at their lowest levels since the beginning of 2009 and foreclosure starts are at the lowest point since the end of 2008. The report states that these figures along with the drop in the percentage of loans in the foreclosure process from the record high of the previous quarter indicate that the shadow supply of housing may have peaked, although remaining at very elevated levels. "It will likely take years for the excess supply and the shadow supply of housing to be absorbed, even with a meaningful improvement in the labor market and household formation, which has been elusive so far."
The elevated inventories continue to hold home prices down. "However, most third-party price indices adjusted for distressed sales seem to indicate that troubled loans being put through foreclosure are getting seasonally adjusted (foreclosure is not a seasonal activity), and also are likely causing an over statement of price declines for "arms length" transactions."
On the broader economy Fannie Mae believes the likelihood that "the economy will slip into another downturn within a year is still quite low, but has risen slightly." Still Fannie Mae did downgrade their economic growth outlook for 2011 from +2.9 percent to +2.5 percent in the previous forecast, which is more than a full percentage point lower than their forecast at the start of this year. Several reasons for the downgrade were cited including continued European sovereign debt problems, a marked slowdown in growth in China as it fights rising inflation, the trade-related effects of reduction in Chinese economic activity , and dampening effects surrounding U.S. monetary and fiscal policy.
Fannie Mae's economists conclude that the near-term outlook for home sales appears gloomy with both mortgage applications down in May and again in June and pending home sales dropping 12 percent in April.
"Ultimately, employment remains the key to the outlook for the economy and the housing market. If the tentative labor market recovery falters amid signs of a slowdown in consumer demand, it could jeopardize the projected moderate rebound in home sales later this year. Continued deterioration in home prices, tight lending standards, and households' desire to reduce their debt loads much further are among the main risks to the housing market and the overall economy."
