There may be a light at the end of the tunnel, but even if sales are turning around, the worst is yet to come, say Global Insight analysts Patrick Newport and Margaret Rolley. The Mortgage Bankers Association’s Market Composite Index,
which measures applications volume, rose 11.5 percent for the week ending Dec. 8 and was up 16.5 percent from a year ago.
The purchases index, which excludes financing, rose 8.7 percent for the week and is now down just 3 percent from a year ago. Moreover, inventories of both existing and new homes are no longer rising, and existing home sales have not budged in three months.
While that may indicate that demand is starting to stabilize, “Housing will be a bigger drag on growth in the fourth quarter than it was in the third,” they say. “It will also take a huge bite out of growth in the first quarter of 2007. After that, however, the bite from housing will get progressively smaller.”
Demand is starting to stabilize because interest rates and home prices have dropped. Since the end of June, the 30-year fixed mortgage rate that the MBA tracks has fallen 84 basis points, to 6.02 percent (in the week ended Dec. 8). The National Association of Realtors (NAR) reported that the median price of an existing home dropped 3.4 percent between October 2005 and October 2006 – and that likely understates the actual drop since it doesn’t account for incentives such as cash rebates or seller-paid closing costs.
“Unfortunately, housing starts and permits are still falling,” they note. “Until inventories are drawn down – and stronger sales will help do this – starts will continue to fall. This means that spending on residential construction will also continue to drop.” Census Bureau data indicates that October spending on single-family construction fell 3.9 percent. Newport and Rolley say declines in November and December could be even larger.
“Our view is that one should expect residential construction to take about 1.4 percentage points off GDP growth in both the fourth quarter of 2006 and the first of 2007. Afterward, the bites will get progressively smaller.”
The number to watch: single-family housing permits, which will be released Dec. 19. “This number matters more for the outlook than the housing starts number, because it is a much more accurate estimate (housing starts bounce around from month to month due to unusual weather and measurement errors),” they explain. “Permits have dropped over nine straight months and we expect another 3 percent drop for November. A positive number would be an early Christmas present. A drop much larger than 3 percent will indicate that our near-term housing forecast is still too optimistic.”