Vital Signs: Plenty of Support for Housing

On deck: existing home sales, GDP, home price indexes, consumer confidence, durable goods orders, personal income, consumer sentiment, new home sales, FOMC Minutes

By James C. Cooper

No other sector of the economy has received as much policy support over the past year as housing. Tax credits for first-time buyers, aid for refinancing and loan modifications, direct Federal Reserve involvement in the secondary mortgage market, in addition to the Fed holding interest rates at rock-bottom levels, have all helped to reverse the mother of all housing slumps. That’s why some of the recent housing news is a bit unsettling.

The latest numbers suggest something of a setback. After reporting steady improvement in market conditions from January through September, builders sentiment back-tracked in October and failed to rebound in Nov.ember. Housing starts in October plunged 10.6%, the second drop in three months. While much of that decline reflected a big 35% tumble in the volatile multi-family sector, new single-family construction has gone nowhere since July. Also, the four-week average of mortgage applications to buy a home dropped sharply for the week ended Nov.. 13 to the lowest level since 1998.

The culprit may well be the first-time homebuyer tax credit, which had been expected to expire on Nov.. 30. It has since been extended and expanded to cover purchases through April, 2010. Some demand and new construction was likely pulled forward due to the previously expected expiration date, leaving a lull in activity. Given the extension, the first sign that this weakness is only temporary should show up in weekly mortgage applications, which will very likely retrace their recent declines over coming weeks.

As policy assistance wanes, the housing recovery is sure to feel the loss, but the economic supports under housing are strong, and they will be what keep the upturn going. Mortgage rates are historically low, hovering around 4.9% in mid-Nov.ember. Home prices are down sharply, and the stock market rally may also be helping, especially high-end homes. Toll Brothers (TOL), a builder of luxury homes, reported a 42% increase in orders for the three months ended in October, compared to a year ago. That strength very likely reflects fundamentally improved demand, since the tax credit was unlikely to apply at the higher levels of income need to purchase these homes.

Housing will be a big part of this week’s economic news, which will include October sales of both new and existing homes, and inventories will get plenty of attention. Much of the firming in prices recently reflects the rapid shrinkage of unsold homes. In September, it would take 7.5 months to sell the inventory of new homes, down from a peak of 12.4 months in January, and it would require 7.8 months to eliminate the stock of existing homes, down from a peak of 11.3 months in April, 2008. Current trends suggest that new home inventories will dip below six months by yearend, while unsold existing homes will slip below seven months. Based on past trends, those levels would indicate a much better balance between supply and demand, further bolstering the pricing outlook.

Recent data show that housing is not out of the woods, but historically high affordability, improving credit conditions, and a stronger economy are providing plenty of support.

Here’s the weekly calendar, from Action Economics.

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