Homebuilders Need to Make Further Production Cuts
The economic environment for homebuilders worsened further in December and almost certainly in January as well. Recent gains in home affordability are now being eroded by the stall in job growth and the related stall in real income growth under pressure from rising fuel and food prices. Most of the financial turmoil from defaulting subprime mortgages remains contained on Wall Street. But enough of the problem is spilling over to keep the jumbo mortgage rate premium 50 basis points above normal and to persuade prospective homebuyers that home prices have yet to hit bottom.
Already glum reports on construction spending, both new and remodeling, and employment were revised even lower in the last month. This is usually a signal that marginal producers are shutting down at an accelerating pace. The Consumer Confidence Index has been stuck below 90 for three months. This is too low to prompt an increase in homebuying.
Homebuilders likely need to make further production cuts during the winter to avoid adding to the current excess of homes for sale.
Two Reasons why Recession will be Mild and Brief
The probability of a recession early this year is now over 50%. Should this happen, the housing market will also be hit by a brief drop in household formation as the unemployed move in with family and friends. Any recession would be mild and brief since it would begin without a serious surplus inventory problem generally in the economy as well as still-rising export sales to a world economy expanding much faster than the U.S.
