Several of the usual drivers of the housing market improved significantly in the last month. The good news included an increase in home affordability to a level usually consistent with booming home starts and sales, a small droop in home prices, a 3.5% decline in the inventory of new and existing homes for sale and a decline of 2/3’s of a percentage point in 30-year fixed mortgage rates. None of these changes will prompt homebuilders to increase housing starts soon.

Buying a house requires having the cash or credit to cover the price and the confidence to take on a large, long term debt obligation. Prospective buyers do not now have the confidence to do this. Consumer confidence improved slightly in November with falling energy prices but remains at a deep recession level. Lack of cash and credit are also constraints. While real income expanded slightly in October, it is still below the stimulus check boosted level of a few months earlier. Rapidly rising layoffs will work to reduce real income ahead although falling prices for energy and other goods will offset this negative impact for a few months.

Credit is a serious constraint for home buying. The buying boost from the recent sharp drop in mortgage rates for prime borrowers will be largely offset by the rising share of prospective homebuyers who can no longer get credit at any rate as banks reduce loans to match their shrinking assets. This aspect of the credit situation is not captured in the home affordability index.

The near term housing outlook is for a yearend pause in the decline of starts and sales with a possible small, temporary increase. This is not the end of the housing recession. Continuing layoffs will drag down the home affordability index by the beginning of 2009. The turnaround in the housing market has to wait for either 5-6 months of further declines in the inventory of homes for sale or help from Washington.

Housing Market Monitor — October 2008

Abbreviations: NAR = National Association of Realtors; NAHB = National Association of Home Builders;
FHFA = Federal Housing Finance Administration
Table: Reed Construction Data and Reed Construction Data – CanaData.