Housing permits dropped 11% in December and both starts and sales fell 15%. This huge monthly decline is the result of the erosion of consumer income and confidence in September, October and November. The decline in fixed mortgage rates from over 6% to 5.25%, and briefly under 5%, is not yet reflected in the data. The 6% boost in pending home sales in December with lower mortgage rates and the imminent action by Congress to help housing will prevent further monthly declines at this scale but smaller declines for several more months are possible.

The drop in financing cost also boosted mortgage refinancing sharply and provided a small boost to remodeling spending. The Census Bureau spending reports do not show a decline in remodeling spending at the end of 2008 but the tracking indexes from both NAHB and the Harvard Joint Center on Housing Studies both show significant weakening in the remodeling market at the end of the year. The remodeling spending estimates may be revised sharply lower.

Prospective home buyers are still waiting for the bottom in prices in most large housing markets. The latest data (November) show an acceleration in price declines but this is likely temporary. It is the same shock impact from the abrupt worsening of the recession that appeared in most economic data. The bottom for prices is still many months ahead in large housing markets.

The National Association of Realtors reports that 45% of current home purchases are “distress” sales, mostly foreclosures or sales to avoid foreclosures. Homebuilders can not compete with a huge inventory of distressed existing homes in the major housing markets. So new home sales are now limited to distress sales of homebuilders’ inventory, custom homes and a small number of homes in smaller, stable housing markets that escaped the boom-bust market in 2004-08. Some homebuilders who still have the cash or credit to keep operating have chosen to shut down and sit out the next few months until home sales begin to improve.

Although the home affordability indexes are not yet available for December separately for fixed and variable rate mortgages, the composite home affordability index soared to a record high level with a minimal impact on home sales. Higher buyer confidence is required to raise home sales from the current depressed level. In turn this requires an easing of job losses and/or direct subsidies to home buying.

The House economic stimulus plan ignored housing, focused spending on long leadtime projects, focused hiring on more Washington bureaucrats and focused tax cuts and welfare spending increases on low income households unlikely to use their windfall to buy a home. The Senate plan appears to be correcting these problems by adding tax cuts to improve corporate balance sheets and investment spending and direct grants for home down-payments. Unfortunately, the Republican plan for permanent cuts in tax rates and mortgage rate subsidies has been rejected. This approach would have made monthly mortgage payments more affordable indefinitely for households with enough income and assets to buy a home.

The housing recession is now entering the fourth year. Increasingly builders are running out of reserves or credit to wait for a market recovery. Expect a surge in builders ceasing operations in 2009.

Housing Market Monitor — February 2009

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.