Most housing market economic drivers improved again last month although the absolute level of most measures is still in the recession zone. The major improvements reported last month were for consumer confidence — up 14 points to 54.9, home affordability — up 3 points to an unusually high 174.8 and pending home sales — up 6 points to 90.3.

However, housing starts declined in the latest data for April due to a very sharp drop in multi-family starts. This is the result of a deepening recession in commercial real estate and does not indicate worsened financial problems for either homebuilders or homebuyers.

Both the new home and existing home market appear to have stabilized but no sustained improvement is expected in either for several months. The housing recovery will be slow because the economic recovery will be slow. This is typical of recoveries following a recession set off by the bursting of a credit bubble.

Already mortgage rates have begun to rise because investment managers are demanding a rate premium to cover the anticipated rise in inflation resulting from the massive borrowing used to recapitalize lenders and lessen the impact of the recession on financially marginal households. The 30-Year fixed mortgage rate inched up 13 basis points over the last four weeks with more increase ahead because 10-Year Treasury bill rates are up 40 basis points. Also upward pressure on credit costs is soon ahead when credit demand rises in a recovering world economy.

The housing recovery will also be restrained by an imminent surge in home foreclosures. This will raise the surplus inventory of homes for sale and lower their sale price, making them more competitive with new homes. A federal mortgage foreclosure moratorium and several state moratoriums recently expired putting hundreds of thousands of homes at risk for a quick foreclosure.

Housing Market Monitor — May 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.