Jobs, income and credit residential market drivers are all improving except for home affordability which is slipping but is still at a near record high level. But the confidence and inventory of homes for sale market drivers have recently worsened after improving earlier in the year. Near record high home affordability is being trumped by near record low consumer and homebuilder confidence.

The result is a late spring slippage in home starts and sales which will likely worsen during the summer. The post homebuyer tax credit slippage is so far less than expected. But the recent worsening in buying and investing confidence and the overall slowing in economic growth assure a sour summer in the housing market before the impact of home purchases advanced by the tax credit wanes and double digit residential expansion resumes in the fall.

Low buyer confidence is the key headwind restraining housing recovery. Preliminary economic reports for June are relatively weak for the second month. Confidence readings are likely to worsen a little further. Private employment gains will continue but short of the 130,000 plus jobs a month needed to stabilize the unemployment rate. Foreclosures have not yet peaked. Several hundred thousand homeowners in a variety of mortgage payment subsidy programs will fail to make reduced payments and drop back into the foreclosure track. Booming business investment and hiring looks likely to pause during the weaker economic growth expected in the second half of 2010.

Some homebuilders are still on the sidelines unable to get land and development financing. This is preventing a surge in speculative starts for which there is not yet any demand. The usual “build ahead” for an expected increase in demand will be weak in this housing recovery.

The residential pickup later this year will be entirely in single family housing although it does spill over into modest priced condo’s outside of resort areas. Starts of vacation condo’s and apartments remain weak. Multi-family recovery will not begin for seven to ten months. Inventories are still very excessive and demand has not yet begun to increase. Second home demand, as always, will not revive until several years in to recovery. Apartment demand follows jobs. Newly hired workers need six months of paychecks to form a new household and move out from friends or relatives homes.

The types of homebuyers that drove the overheated market in 2005-06 remain largely on the sidelines and will return very slowly. This includes buyers concerned that home prices have not yet hit bottom. While less of a buying restraint in 2010, this is still a significant loss of potential home buyers. The missing also includes all potential buyers motivated in part by prospective capital gains. This restraint has not lessened much in the last few years. The likelihood of large home price increases in the next 2-3 years is very slim. Also among the missing are potential home buyers either under water with their current mortgage or not confident that their income is secure enough to make a long term financial commitment.

Key Indicators of the U.S. Market Environment — July 2010 Residential Construction (New and Remodeling)
	Year Ago	Previous Month or Qtr.	Latest		Level	Recent Trend	Impact on Const.
New Residential
Home Affordability Index  (NAR)	174.2	168.3	May	162.0	High	Falling
Consumer income, % change y/y (U.S. Commerce Dept.)	-1.9	3.7	May	4.4	Low	Rising
Consumer real income, % change y/y (U.S. Commerce Dept.)	4.0	3.6	May	4.6	Low	Rising
Employment change, 000s (U.S. Labor Dept.)	-515	433	Jun	-125	Low	Rising
Household net worth, % change y/y (FRB)	-21.6	2.1	Q1	13.0	Low	Rising
30-Year fixed mortgage rate, % level (Freddie Mac)	5.22	4.75	Jul 15th 10	4.57	Low	Falling
1-Year ARM mortgage rate, % level (Freddie Mac)	4.82	3.82	Jul 15th 10	3.74	Low	Falling
Consumer confidence index (The Conference Board)	49.3	62.7	Jun	52.1	Low	Falling
Housing market index (NAHB/ Well Fargo)	17	16	Jul	14	Low	Falling
Homes under construction, 000s (U.S. Census Bureau)	650	486	May	475	Low	Steady
New home inventory, number-of-months supply (U.S. Census Bureau)	9.5	5.8	May	8.5	Low	Rising
Existing home inventory, number-of-months supply (NAR)	9.4	8.3	Jun	8.9	High	Rising
Residential Remodeling
Existing home sales, 000s (NAR)	4,890	5,660	Jun	5,370	Low	Falling
Building supply store sales, seasonally adj. $ millions (U.S. Census Bureau)	22,686	23,522	Jun	23,292	Average	Steady
Wood product shipments, seasonally adj. $ millions (U.S. Census Bureau)	6,592	7,279	May	7,217	Low	Rising
Remodeling contractor hours worked, % change y/y (U.S. Labor Dept.)	-15.0	-6.4	May	-8.3	Low	Falling
Mortgage refinancing applications, index (Mortgage Banking Association)	2,116	3,209	Jul 16th 10	4,162	Low	Rising
Abbreviations: y/y = year over year; ARM = adjustable-rate mortgage; NAR = National Association of Realtors; FRB = Federal Reserve Board; NAHB = National Association of Home Builders Table: Reed Construction Data and Reed Construction Data - CanaData