Existing Home Market Stabilizes but New Homes Still in Distress
The U.S. housing market weakened further in December. There was a big step forward in the essential precondition for market recovery — stabilization of the existing home market — with existing home sales steady and the inventory of homes-for-sale declining to 288,000 units below the July peak. But there was no progress in the new home markets. Permits, starts and sales all declined further and the inventory of new homes for sale became two weeks longer.

Mortgage Market Conditions Worsened
Just as significantly, mortgage market conditions worsened. December had two separate but brief periods of upward spikes in mortgage costs and downward spikes in mortgage availability. Both were set off in the broader financial market when lenders got news that questioned the ability of major borrowers to repay their loans.

In the first instance, several major lenders admitted to a capital shortage when they transferred funds to cover expected subprime mortgage losses. In the second instance, the collapse of bond insurers made every borrower with mortgage-related assets less credit worthy.

Both panics were ended, or perhaps only postponed, by massive cash injections by the Federal Reserve Board and other central banks. The January 4th report on December U.S. job gains, a very disappointing +18,000, appears likely to set off another brief financial crisis.

U.S. has Entered a Period of Subpar Economic Growth
The economic outlook, and hence demand for new housing, has been soured further by the combination of persistent high energy prices and uncertain cost and availability of financing throughout the economy. U.S. Gross Domestic Product (GDP) growth has clearly entered a period of distinctly subpar growth, which will persist through the spring. Several months of depressed buyer confidence have now produced weak job growth, slowing consumer spending, reduced capital spending and a new period of accumulating surplus inventories.

Good News Centers on Affordability
The only good news is continued improvement in home affordability due to rising incomes, falling home prices and steady-to-falling credit costs for prime mortgage applicants. This demand will not become effective until buying confidence recovers.

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