Affordability Improves but Confidence Worsens
The housing market continues to be depressed in most parts of the country amid increasing signs that current activity is in the neighborhood of the bottom, although a small amount of further decline is expected in the next few months. No significant improvement from the current starts volume is expected until well into next year. Home affordability is above average and rising, but this is not enough to initiate a market recovery because the confidence to buy a new home has recently worsened rapidly.

Some of the key remodeling drivers have also recently soured, but it is not yet clear whether this signal is real or a measurement problem in a chaotic market.

Builder margins remain depressed as home prices have declined more than construction costs and unavoidable overhead is spread over a smaller volume. Labor cost inflation has softened and will likely soften a little more, but it has not turned negative in most markets.

Threat of Construction Material Cost Inflation Returns
Similarly, a six-month respite in rising materials costs for residential builders appears to be over. (See Reed Construction Data’s related story entitled, “Construction Inflation Soars in November”.) Suppliers have reduced discounting after production cuts put inventories back in better balance. In addition, costs for materials from commodities priced in still rapidly expanding world markets are relentlessly increasing. The falling value of the U.S. dollar also contributes to commodity inflation.

The mortgage market is still fragile. World credit markets are strained to cover the cost of the subprime mortgage mess and related defaults of high-risk loans. There is a minimal risk that this will cause cost-of-availability problems for prime, conforming mortgages which Fannie Mae and Freddie Mac could buy. However, the risk is much higher for subprime fixed-rate and jumbo mortgages.

The recent collapse of consumer confidence that is restraining homebuying stems largely from persistently high gasoline prices. Speculators are keeping these prices well above the market clearing level, betting that something else will go wrong on the supply side. Many of the world’s revolutionary forces are now targeting oil fields, pipelines and terminals.

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