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Why isn't housing recovering?

Perspective: Real estate's May report card

By John Burns

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Editor's note: Wayne Yamano is vice president at John Burns Real Estate Consulting. This item is republished with permission of John Burns Real Estate Consulting.

For nearly two years, corporate profits have been surging, gross domestic product has been growing, and the majority of the key indicators we track have been moving in the right direction. Yet, home sales have remained in the dumps.

corporate profits


The indicators that hit closest to home (pun intended) are the ones that housing needs the most. These are the day-to-day realities that keep us feeling glum:

Job growth is slow

  • Job growth is back, but it has lagged corporate profits as corporations find ways to do more with less. Worker productivity has increased eight of the last nine quarters, which is great for companies but not so great for the unemployed.
  • Even with recent job growth, we still have 7 million fewer people employed today than at the peak in 2008, and the unemployment rate remains high at 9 percent officially, but a whopping total of 15.9 percent are underemployed or have given up their search.

We're in a "wage-less" recovery

  • The median income has grown marginally in the last two quarters, but that still leaves us 6 percent below where we were in 2008.
  • Inflation has been squeezing our bottom line since late last year, with gas prices up 38 percent from one year ago (according to AAA).

Home values are declining ... again

  • Home prices are 31 percent below their peak in 2006 and are heading lower in many ZIP codes, which is the result of having 23 percent of all mortgages valued at more than the house value.

This all contributes to the lack of consumer confidence, especially when it comes to buying a house. While confidence has improved, a confidence level of 65 is 30 points below its 44-year historical average.

The good news is that confidence is on an upward trajectory. Although we believe that the road to recovery will be long, we are excited that the fundamentals for recovery are moving in the right direction.


  • We collect a complete history on 70-plus variables and forecast the important ones by forecasting each metropolitan statistical area (MSA) and rolling it up.
  • In this monthly report, we publish the current stats along with the historical minimums, maximums and averages as a service to the industry.
  • Each indicator is graded based on a bell curve where an "A" is its historical best, a "C" is its historical average, and an "F" is its historical worst. The grades are designed to provide a simple tool for decision-makers to scan the data.
  • Each of the eight categories has a grade that is nothing more than the average of the grades under it.

Economic growth: C-

Trends were mixed this month, as several key metrics ticked up while others ticked down, resulting in an unchanged grade of C- for overall economic growth.

The employment market improved once again this month, and year-over-year employment growth has now been positive for eight consecutive months. Payrolls expanded by 244,000, the largest gain since May 2010. In addition, the average length of unemployment decreased to 38.3 weeks, and the labor force percentage of those unemployed over 27 weeks fell to 3.8 percent.

That said, the unemployment rate rose slightly from 8.8 percent to 9 percent. Retail sales declined this month, while real GDP for first-quarter 2011 came in at 1.8 percent, significantly lower than the 3.1 percent growth rate experienced in fourth-quarter 2010. The rate of inflation (both full and core) continues to increase, maintaining its steady upward trend that began in spring and summer 2010.

Leading indicators: C

The leading indicators for the economy are mixed this month, with our overall grade for this subsection of indicators remaining at a C.

The ECRI Leading Index continues to rise on a year-over-year basis, now up for the fifth consecutive month. In addition, access to credit continued to improve in second-quarter 2011, as a net total of -16 percent of large and medium firms reported tougher standards for receiving loans, which is an improvement from almost +84 percent reporting tougher standards in fourth-quarter 2008.

Among small firms, loan standards also improved as a net total of -14 percent experienced tougher standards, an improvement from nearly 75 percent reporting tougher standards in fourth-quarter 2008. Other leading indicators such as the Small Business Optimism index and ISM Manufacturing/Non-Manufacturing Business Activity indices declined versus last month.

Stocks had a stellar month for the four major indices we track, with month-to-month gains ranging from +2.6 percent for the Wilshire 5000 to +3.7 percent for the Dow Jones. The indices have all improved significantly from one year ago, climbing between 14.9 percent (S&P 500) and 16.8 percent (NASDAQ) year-over-year.

The S&P Homebuilding Index also improved this month, rising 4.1 percent month-to-month, though still down -16 percent year-over-year. Corporate bond spreads widened slightly this month to 175 basis points, while 10-year and two-year Treasury rates rose for the month. Oil prices continued to rise, marking the second consecutive month of $100+ oil.

Affordability: D+

Affordability has rarely been better for entry-level buyers, and rarely worse for move-up and move-down buyers, who need to extract equity from their existing home. As such, we continue to grade our overall affordability indicator at a D+.

Mortgage rates remain near historical lows, and home prices have dropped from unrealistic boom levels to entirely sustainable levels, with some markets like Las Vegas well into "overcorrection" territory. Our housing-cost-to-income ratio remains low, now at 23 percent, and our JBREC Affordability Index stands at a remarkable 0.1, which is near the best possible rating for affordability.

The median home price-to-income ratio has risen slightly to 2.9, which is less than the long-term historical norm and near a level conducive to market health.

Affordability continues to be bolstered by historically low mortgage rates. The 30-year fixed mortgage rate is currently at 4.78 percent and adjustable mortgage rates are at 3.15 percent, both down from last month. The Fed's overnight lending target rate remained at a range of 0 percent to 0.25 percent, which is the lowest level on record.

The share of adjustable-rate mortgage applications is currently at 6.7 percent, which is still far below the peak level of 35 percent of total applications in early 2005. While its growth rate is still low, household income has recovered gradually from its bottom in late 2009, rising 1.2 percent year-over-year in first-quarter 2011.

Consumer behavior: D+

Consumer behavior improved slightly this month, with several metrics rising. The Consumer Confidence Index, Consumer Sentiment Index, and Consumer Comfort Index all increased this month. However, due to rising inflation and a marginal increase in the unemployment rate, the misery index (unemployment + inflation) worsened this month.

Existing-home market: D+

The existing-home market continues to remain weak, with most indicators still grading at poor levels. According to the National Association of REALTORS®, seasonally adjusted annual resale activity fell to 5.05 million homes and median resale prices decreased month-to-month, and are down 13 percent year-over-year.

The S&P/Case-Shiller 10 and 20 market composite indices also fell this month, while existing home inventory rose and months of supply fell. The homeownership rate fell in first-quarter 2011 to its lowest level since fourth-quarter 1998. While still low compared to its historical average, the Pending Home Sales Index increased this month.

New-home market: D+

The new-home market worsened this month, as our overall grade dropped from a C- to a D+.

While new-home sales increased to 300,000 units on an annualized basis, rolling 12-month sales decreased to 305,000 transactions, which is a historical low that dates back to 1963 when the Census Bureau began tracking this data point. It should be noted, however, that the sample size used by the Census Bureau to calculate new-home sales is extremely small and the confidence interval consequently large.

The median single-family new home price increased to $213,800 this month and is currently down 4.9 percent year-over-year. The months-of-unsold-homes metric decreased to 7.3 months. Builder confidence worsened this month as the Housing Market Index dropped from 17 to 16, still far below its historical average of 50.

Repairs and remodeling: D+

Aside from residential investment, all indicators improved this month for residential repairs and remodeling. Homeowner improvement activity has actually returned to positive territory for the past four quarters, climbing 7.1 percent year-over-year.

The Remodeling Market Index (current) also rose in first-quarter 2011, increasing from 43.3 to 46.1, just below its historical average of 46.4. In addition, the Remodeling Market Index (future expectations) rose from 39.7 in fourth-quarter 2010 to 46.8 in first-quarter 2011. The Remodeling Market Index (future expectations) has now crossed above its historical average.

Residential investment as a percentage of GDP declined to 2.2 percent this quarter (new historical low), and also fell on an absolute level.

Housing supply: F

Housing supply indicators are once again poor this month, with all except one indicator grading at an F. Single-family permits decreased to 394,000 units, and single-family starts fell to 385,000 units. Both of these activity levels remain low by historical standards. Both new housing units completed and manufactured housing placements increased this month.

Vacancy rates in the U.S. have improved in recent quarters, but the majority of the U.S. remains oversupplied compared to history, with only three states undersupplied, all with small populations. The homeowner vacancy rate decreased this quarter to 2.6 percent.

Copyright 2011 John Burns