Almost all market drivers for residential construction declined again last month. Permits, starts and sales fell although the monthly year to date average for starts remains above the low point last December. Mortgage rates inched higher to ration scarce mortgage capital. Home affordability fell although it is still above average. Consumer confidence remains at a recession level although it increased marginally when gas prices began to decline. Home prices continued to fall. However, the decline is slowing and is increasingly concentrated in a small number of very depressed markets. Remodeling activity appears to be up slightly but the data is not reliable enough to be sure.

Inventories of unsold homes, both new and existing declined. Ultimately, it is the absorption of surplus inventories that will permit a housing recovery to begin. Another tidbit of good news was the much delayed passage of housing legislation by Congress that takes effect October 1st. The short term impact will be positive. This includes subsidies to first time homebuyers, a more explicit guarantee for Fannie Mae and Freddie Mac bonds which will keep the two mortgage giants alive for at least a few more months, FHA guaranteed mortgages with principal writedowns for up to 400,000 households at risk of foreclosure and 4$ billion dollars of “walking around” money for local government officials. Long-term, there will be a boost in inflation from this fix.

Reed Construction Data still thinks that the housing market is at or near the bottom for this cycle with little further decline ahead in starts or job site construction spending but no significant improvement until late this year at the earliest. Don’t confuse the job site with brokers’ office. Downstream, the real estate and mortgage market continue to worsen, slowing the absorption of unsold homes. Foreclosure notices will not peak until fall and actual foreclosures will continue to rise well into next year.

Not all of the losses from the collapse of the subprime mortgage market have been recognized yet by lenders. There will be more announcements of huge losses. More lenders will fail and be sold off for a few cents on the dollar to surviving lenders. Fannie Mae and Freddie Mac still have their head in the sand. They have not recognized all of their losses and are hoping to avoid doing so. If the bond market forces them to mark their assets to market they will be bankrupt and will probably be seized by the US Treasury.

Housing Market Monitor — July 2008

Abbreviations: NAR = National Association of Realtors; NAHB = National Association of Home Builders;
OFHEO = Office of Federal Housing Enterprise Oversight.
Table: Reed Construction Data and Reed Construction Data - CanaData.

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