Housing permits dropped 15% in January, sales fell 10% and starts fell 17%. The decline in 30-year fixed mortgage rates from over 6% to near 5% failed to stop the housing collapse because consumer confidence fell to a record low 25.0% in February. The abrupt 8% drop in pending home sales in January confirms that weak consumer confidence trumps high home affordability. More sizable declines in permits, starts and sales are likely in February and possibly March before the economic recovery program can begin to cushion the decline and then end it later in 2009.

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.

The drop in financing cost also boosted mortgage refinancing sharply and provided a small boost to remodeling spending. The Census Bureau spending reports were revised, as expected, to show a decline in remodeling spending at the end of 2008. The tracking indexes from NAHB and the Harvard Joint Center on Housing Studies had both suggested that initial remodeling spending estimates were too high.

Prospective home buyers are still waiting for the bottom in prices in most large housing markets. The latest data (December) are mixed. The Case-Shiller-Weiss index for 20 large Metro areas shows no let up in the pace of price declines. But the more comprehensive index from the Federal Housing Financing Administration (FHFA) shows only a marginal December decline in home prices. This is the interpretation. The price freefall continues in the 2004-06 housing boom cities where recent sales are dominated by distressed sales but is much less serious elsewhere. The price bottom is still many months ahead in the Southeast, Southwest and Great Lakes and may stretch into next year but will come near mid-year for the rest of the country.

Presidents Obama’s housing plan is to prevent foreclosures by partial forgiveness of monthly mortgage payments and have taxpayers pick up this cost by printing more money to invest in or lend to major banks and the large holders of credit default swaps (guarantees that mortgages will be repaid). The major holders are AIG, Citibank and Bank of America via its acquisition of Merrill Lynch. He will also stimulate additional home purchases with an $8,000 tax credit for first time home buyers and the simulative impact of the massive increase in federal spending.

This will work short-term but leaves us at the end of 2010 with a large rise in inflation or taxes to cover the cost and millions of households in homes that they can not afford and so little equity in that the foreclosure rates will come down very slowly.

Housing Market Monitor — March 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.