Resale real estate market outshines economy

Perspective: Housing scores high on report card
Wednesday, May 11, 2005

By John Burns
Inman News



John Burns, Real Estate Consulting

The 18 percent drop in housing starts was the big story in March, but it was just a random occurrence, likely due to poor weather. Starts for the first quarter were up 6 percent over the previous quarter, due to 20-year-high numbers in January and February. Since 2000, housing starts have been more volatile than the more reliable figure of building permits.

The housing market remains the bright spot in a lackluster U.S. economy.

Our grading system of the economy and the housing market is a "bell curve" model, with statistics at an all-time high receiving an "A," statistics near the long-term average receiving a "C," and the worst times ever receiving an "F." In this grading system, it is OK to be a "C" student.

Here is our current report card:

Economic Growth: C

The economy continues to perform at its "average" pace. Employers have added 2.13 million new jobs over the last year, a growth rate of 1.6 percent. Inflation inched up to 2.3 percent over last year, which is still well below its long-term average of 4.2 percent.

Leading Indicators: C

The leading indicator index is down 0.5 percent on an annualized basis over the last six months. The Leading Indicators predict economic expansion in the near-term, but more slowly than its long-term average rate.

Mortgage Rates: A-

The fixed mortgage rate reversed the previous month's increase by dropping 26 basis points to 5.78 percent. The one-year adjustable mortgage rate fell 12 basis points to 4.21 percent.

Consumer Behavior: C+

Consumer confidence fell for the third straight month in April, dropping below 100 for the first time since November 2004. Consumers remain positive about the current employment situation, but six-month expectations fell to 87.2, the lowest since July 2003.

Existing-Home Market: A-

The existing-home market remains strong. March sales of existing homes increased from February's revised pace to a 6.89 million annual sales rate. The inventory of existing homes decreased to 3.6 months, nearing its all-time low.

New Home Market: B+

March new-home sales rose 12 percent from a revised February rate, to a record 1.4-million-unit annual rate. This represents the largest monthly gain in more than 12 years and beat the previous record of 1.3 million in October. New-home sales were strong across most U.S. regions, led by the Midwest where they increased 22 percent. Sales rose 14 percent in the South and 10 percent in the West, but decreased 9 percent in the Northeast.

Housing Supply: B-

Housing starts fell 18 percent to 1.84 million in March from a revised 2.23 million in February, still above the historical average. Three of the four regions in the country recorded double-digit declines. The 6.26 million starts in the first three months of the year were the highest since the second quarter of 1978. Single-family starts were down 14 percent in March, but permit activity – which we believe makes for a more accurate measurement of housing activity – fell only 5 percent for single-family construction.

John Burns is the founder of Real Estate Consulting in Irvine, Calif., which monitors changes in real estate market conditions and provides consulting services, including strategic planning, market research and financial analysis.