The Week Ahead

Vital Signs: Is a Housing Rebound at Hand?


The main focus of this week's economic reports will be housing. The recent news from this key sector has been almost uniformly positive. Sales of both new and existing homes have clearly bottomed out. Inventories are coming down. Housing starts are up, and prices are stabilizing.

Given that it was the housing slump that led the damage to both Wall Street and Main Street, and a housing rebound will be crucial to repairing both the financial markets and the economy. However, with unemployment still high, mortgage foreclosures still rising, and few signs that loan modification programs are helping, it's clear that the road to a housing recovery will be a long one.

Through June, sales gains have been impressive, Sales of existing homes hit bottom last November, and since then they have risen 7.7%. New home sales hit their low point this January, and they are up 16.7%. Demand is responding favorably to steep price declines created by foreclosures and other distressed sales, along with low mortgage rates and a tax credit for first-time homebuyers, who accounted for 29% of June sales, according to the National Association of Realtors. The NAR has also noted that the share of distressed sales in the total is waning, suggesting growing strength in traditional homebuying.

Progress in cutting inventories, so crucial to any stabilization in home prices, is slow, but the pace has picked up in recent months. It would take 9.4 months to sell the June supply of existing homes, down from a peak of 11.3 months a year ago, but still well above the normal 5 months. The progress for new home inventories has been dramatic, with the supply having fallen from a peak of 12.4 months this January to 8.8 months in June. A continuation of the pace of sales gains this year would cut the supply close to the normal 5 months by yearend.

Builders have slashed construction of single-family homes so far below the comparable sales level that their inventories can continue to fall even as they begin to build more homes. Since February, starts of single-family homes are up 32% through June, the largest four-month rise in 18 years. However, builders will continue to face stiff competition from the existing home market, as buyers are lured by the deeply discounted prices of distressed properties.

Firmer prices will be the last stage of the housing upturn, but even there the news has been encouraging. The Standard & Poor's Case Shiller index rose in May for the first time in almost three years. This index is not adjusted for the normal spring strength, and it includes homes with subprime and other nonconventional mortgages, which means it is heavily influenced by foreclosure sales. The price index from the Federal Housing Finance Agency, which is seasonally adjusted and includes homes only with conventional mortgages, also rose in May and had begun to show signs of stabilizing in previous months.

Rising foreclosures will continue to weigh heavily on the housing outlook, especially since the government's mortgage modification program, the Home Affordable Mortgage Program, has resulted in only 240,000 modifications since July. The program was set up to provide 3 to 4 million modifications over the next three years. So while the housing outlook is clearly improving, the progress over the next several months is sure to be slow.

Here's the weekly calendar:

  Top Economic Reports Report Date Time For Median Estimate Last Period Empire State Index Monday, Aug 17 8:30 a.m. August -0.1 -0.6 Producer Price Index Tuesday, Aug 18 8:30 a.m. July -0.2% 1.8% Producer Price Index (excluding food & energy) Tuesday, Aug 18 8:30 a.m. July 0.1% 0.5% Housing Starts (Millions) Tuesday, Aug 18 8:30 a.m. July 0.595 0.582 Philadelphia Fed Index Thursday, Aug 20 10:00 a.m. August -4.5 -7.5 Leading Indicators Index Thursday, Aug 20 10:00 a.m. July 0.3% 0.7% Existing Home Sales (Millions) Friday, Aug 21 10:00 a.m. July 4.970 4.890 Source: Action Economics
  Other Reports and Events Reports/Event Date Time For Treasury International Capital Report Monday, Aug 17 9:00 a.m. National Association of Home Builders Survey Monday, Aug 17 1:00 p.m. ICSC-UBS Store Sales Tuesday, Aug 18 7:45 a.m. Aug 9-15 Johnson Redbook Weekly Store Sales Tuesday, Aug 18 8:55 a.m. Aug 9-15 Mortgage Applications Wednesday, Aug 19 7:00 a.m. Aug 9-15 Initial Unemployment Claims Thursday, Aug 20 8:30 a.m. Aug 9-15 SPEECH: Fed Chairman Bernanke Friday, Aug 21 10:00 a.m.
Cooper is BusinessWeek's senior editor and senior economist and writes the influential Business Outlook column.

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