Spending for new residential construction fell 6.1% in January which is a 60% annual rate of decline. After three years of recession some homebuilders can no longer wait for a market rebound. A large share of first time buyers lack the cash, the credit or the confidence to purchase. Some of them are still waiting for prices to hit bottom. A smaller share of move up buyers are in the same position but more than 20% of this group are trapped in homes worth less than their mortgage principal.

Nothing that has been done to aid the housing market has yet been able to stop the continuing collapse of the market. Aggressive monetary policy has produced a record high home affordability index. Various efforts to forestall foreclosures have kept many home out of the “fore sale” inventory. Both of these policies will continue. Resources are being added to partially forgive residential mortgage debt so the impact of these policies will become more significant.

A significant amount of the nearly $800 billion of fiscal stimulus will begin to be spent in April with the spending pace picking up all year. This will also contribute to cushioning the market slide. But this will be less effective than the monetary stimulus underway for more than year. The $8,000 refundable tax credit for new home buyers is too small and is targeted at the income group least likely to buy a home. The much larger tax cuts and welfare grants to non-taxpayers will be more significant. But the impact is much reduced because it is temporary, dribbles out over eighteen months and is also targeted to the income group least likely to buy a house. These fiscal boosts are partially offset by the fiscal drag from anticipated tax increases on higher income households.

Combined, the monetary and fiscal boosts to the housing market are expected to end the housing recession late in the year. In the current depressed environment, only a small rise in home purchases for several months can absorb enough inventory to halt the price decline in most markets, excluding the most depressed markets in the Southeast and Southwest.

This will only happen if confidence and credit conditions do not worsen further. This is still uncertain. The Obama financial market plans remain fuzzy enough to keep lenders very cautious about lending. Their first priority is to keep enough capital to retain their own solvency. Several months of threatening an open-ended recession by Team Obama has worsened consumer confidence which is the most critical variable to ending the recession. Now that he President has a good start on his socialist agenda it is in his interest to promise that the economy will get better.

U.S. Residential Building Construction
(thousands of units)

(1) Monthly figures are seasonally adjusted at annual rates (SAAR figures).
(2) Based on a survey of homebuilders; excludes homes built under contract and multi-family rental units.
(3) Manufactured home data is for November and December.
Forecasts and table: Reed Construction Data.