Commercial PropertyBuilders Confidence Index Sinks
Amid rising interest rates, gas prices, and foreclosures, builders of new homes are losing confidence that the housing market will improve before 2008.
According to the National Association of Home Builders" NAHB/Wells Fargo builder confidence survey, builders are the most pessimistic they"ve been in their outlook for home building in 16 years. The index is below half of what it was two years ago, and fell two more points in June to 28 -- the lowest since February 1991 following the savings and loan crisis.
NAHB chief economist David Seiders says in his bi-monthly Seiders Report released June 18, 2007, "Long-term interest rates have moved up considerably during the past month, despite the good news on core inflation as well as benign inflation expectations in the private sector, and the Treasury yield curve now has a convincing upward slope across its entire range. Long rates have risen as U.S. and global economies have strengthened, as the prospects for easing of monetary policy by the Federal Reserve and foreign central banks have been marked down, and as lengthening of expected durations of mortgage securities have prompted sales of Treasury bonds by portfolio managers."
Translation: mortgage interest rates probably won"t go back down. At least not without a recession, which the economy came close to doing in the first quarter of 2007. Since then growth has sped up enough to convince most economists that the Federal Reserve won"t cut short-term interest rates any time soon.
The main reason is productivity. Overall unemployment has held steady at about 4.5 percent and average hourly earnings are rising which reduces productivity. Wage gains ignite inflation, which the Federal Reserve is preoccupied with keeping under control.
Core inflation, excluding food and energy, has been receding, with the Personal Consumption Expenditure Index dropping 2 percent over 2006, year-to-year.
Less building is impacting the gross domestic product by about 0.9 percentage points.
Meanwhile, rising bond yields and rising mortgage interest rates pose "yet another financing challenge to the struggling housing market -- on top of the tightening of mortgage lending standards that"s been provoked by the meltdown of the subprime mortgage market, says Seiders. "NAHB"s monthly surveys of single-family builders continue to show serious adverse impacts of tighter lending standards on new home sales and sales cancellations. As a result, many builders have recently marked down their plans for housing starts in the second half of the year."
NAHB"s propriety survey of 30 large companies shows net sales for May (seasonally adjusted) at the lowest level since late 2001 as well as cancellation rates that have moved back toward recent highs, says Seiders. That means that pricing will continue to pressured downward and builders will intensify their use of non-price incentives to bolster sales and limit cancellations. "Builders generally report at least some success on these fronts, although many prospective buyers obviously are reluctant to go ahead with home purchases in a deteriorating price environment," he says.
On the cautiously optimistic side, Seiders says, "The market value of household real estate and owners" equity in household real estate grew at modest rates in the first quarter, according to Federal Reserve estimates, although the gains most likely were overstated. Furthermore, there"s a rising tide of vacant housing units on the market, mortgage delinquencies and foreclosures are on the rise, and owners" equity in real estate is likely to weaken during the balance of the year as house prices continue to adjust. Even so, we"re not expecting serious "spillover" effects from weakening housing equity on consumer spending in 2007 or 2008, a judgment that"s consistent with Federal Reserve expectations."
Seiders also notes that Fed Chairman Bernanke delivered two addresses on the subprime mortgage topic during the past month, tracing the development of the crisis and discussing the implications for the housing market and the overall economy. "While owning up to a good deal of uncertainty about the depth and duration of subprime-related impacts on housing market activity, the Chairman expressed confidence in fundamental economic factors that "should ultimately support the demand for housing" -- without suggesting a time frame for this ultimate outcome,"
said Seiders.
For these reasons, the NAHB housing outlook for the remainder of 2007 and 2008 will be trimmed. "We now expect total housing starts to flatten out at a 1.37 million annual rate late this year," says Seiders, "a level that"s 36 percent below the quarterly peak early last year. The projected contraction in residential fixed investment now extends through the fourth quarter of the year."
The 2007 State of the Nation"s Housing report, released by Harvard"s Joint Center for Housing Studies on June 11, Seiders also notes that the "average annual demand for new housing units (including manufactured homes) at 1.95 million for the 2005-2014 period -- close to NAHB"s most recent long-term forecast -- is well above the average for the previous 10-year period. "That means we"re looking for a major recovery process beyond the projected trough late this year (1.46 million units), although the climb back to trend figures to be a multi-year march," he says.