Homebuilders and their suppliers are still waiting for a clear signal that residential construction has hit bottom. The approximate stabilization of job site activity earlier in the year looked like it might be that signal. But that has now been trumped by a new round of solvency concerns in the mortgage market.

Consumer income is the only positive market driver. But that is only because of the tax rebates. Such windfall income is typically not spent in a way that commits consumers to higher monthly payment obligations, such as a new mortgage or loan payments for remodeling.

Suspicion, whether true or not, that Freddie Mac, Fannie Mae and several large mortgage holders were overestimating the value of their troubled mortgage assets crashed stock market indexes and made both consumers and business managers even more cautious about investment spending, delaying the recovery in the housing market for at least a few months. Little additional decline is expected during this period of slightly higher mortgage rates and even more cautious mortgage approval standards.

The recent rise in existing home sales is the only positive market driver in the residential remodeling market. But this is a long-term driver with a 3-4 quarter delayed impact on remodeling spending. All other indicators are negative. This includes refinancing mortgage applications, wood product shipments, building supply store sales and contractor job site work hours.

Home affordability, although slipping and certain to slip further, remains high enough to support a much higher level of home sales and housing starts, even allowing for the potential homebuyers who have been forced out of the market by real or anticipated job or income losses or tighter loan approval standards. Many potential homebuyers have withdrawn from the market because they are angered and confused by high energy and food prices and steep drops in the value of their homes, pensions and investment portfolios. They are waiting because they can not afford to make a home buying mistake. They have seen pain caused to others by pricing and mortgage term mistakes made in 2004-06.

The only cure for this depressed attitude is good news on home prices, stock indexes, oil prices or job security. This will take at least a few months.

Key Indicators of the U.S. Market Environment — June 2008
Residential Construction (New and Remodeling)

	Year Ago	Previous Month or Qtr.	Latest		Level	Recent Trend	Impact on Const.
New Residential
Affordability — 30-Year mortgage index (NAR)	110.2	130.1	May	124.9	High	Falling
Affordability — 1-Year ARM mortgage index (NAR)	112.3	136.3	May	131.5	High	Falling
Consumer income growth, % change y/y (U.S. Commerce Dept.)	6.7	4.5	May	6.3	High	Rising
Consumer real income growth, % change y/y (U.S. Commerce Dept.)	1.7	2.0	May	8.6	High	Rising
Employment change, 000s (U.S. Labor Dept.)	107	-62	June	-62	Low	Falling
Household net worth, % change y/y (FRB)	6.1	7.4	Q1	3.4	Average	Falling
30-Year fixed mortgage rate, % level (Freddie Mac)	6.70	6.32	W/E Jul 10th	6.37	Low	Steady
1-Year ARM mortgage rate, % level (Freddie Mac)	5.71	5.09	W/E Jul 10th	5.17	Low	Steady
Consumer confidence index (The Conference Board)	105.3	58.1	June	50.4	Low	Falling
Housing market index (NAHB)	28	19	June	18	Low	Steady
Homes under construction, 000s (U.S. Census Bureau)	1,164	1,001	May	982	Low	Falling
New home inventory, number-of-months supply (U.S. Census Bureau)	7.8	10.7	May	10.9	High	Rising
Existing home inventory, number-of-months supply (NAR)	8.9	11.2	May	10.8	High	Falling
Residential Remodeling
Existing home sales, 000s (NAR)	5,930	4,890	May	4,990	Low	Rising
Building supply store sales, seasonally adj. $ millions (U.S. Census Bureau)	28,231	27,961	Jun	27,707	Low	Falling
Wood product shipments, seasonally adj. $ millions (U.S. Census Bureau)	8,705	8,114	May	8,077	Low	Steady
Remodeling contractor hours worked, % change y/y (U.S. Labor Dept.)	2.2	-5.9	May	-5.4	Low	Falling
Mortgage refinancing applications, index (Mortgage Banking Association)	1,717	1,379	W/E Jul 11th	1,475	Low	Falling

Abbreviations: y/y = year over year; WE = week ending; ARM = adjustable-rate mortgage;
NAR = National Association of Realtors; FRB = Federal Reserve Board;
NAHB = National Association of Home Builders.
Table: Reed Construction Data and Reed Construction Data - CanaData.

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