Most economists point to the decline in housing as a key factor behind the slowing in the U.S. economy over the past year. Many also state that the economy will not have a full recovery until housing strengthens.  What is the current status of the housing sector? This article focuses on the single-family portion of housing.  Unfortunately, the latest numbers paint a gloomy picture, suggesting that housing likely has not hit bottom and that it will be some time before there is full recovery.

The overall numbers – housing starts at 17-year low

Earlier this week, the latest housing starts number for July fell back 11.0 percent to an annualized pace of 0.965 million units. This is the lowest pace since early 1991. Single-family starts dropped 2.9 percent to a 0.641 million unit pace. Overall and single-family starts are down on a year-ago pace of 29.6 percent and 39.2 percent, respectively.

The starts data clearly show a dreary downslide for the housing sector.

Housing’s impact on construction spending and employment

The decline in housing has had a major impact on the economy – with two notable areas being construction spending and employment. Residential construction outlays in June were down 26.7 percent on a year-ago basis. Residential construction outlays are key source data for the residential investment component in real GDP.  According to the Commerce Department, the decline in housing construction has subtracted from GDP growth the last ten quarters. The subtraction to second quarter real GDP was 0.62 percentage points and in the first quarter, 1.12 percentage points.

Housing can have a large impact on employment through indirect effects. Declines in housing-related income mean less support for other sectors (multiplier effects). But just the direct effect on construction employment has been huge over the last two years. The number of residential construction jobs recently peaked in April 2006 at 1.021 million and has fallen by 176,000 to 0.845 million as of July 2008.

Home inventories suggest no rebound in construction for some time

When will housing construction and employment rebound? A key factor that will determine the timing of a rebound will be when there is a need for new construction. Currently, there is a huge overhang of inventories of unsold homes – both for new homes and existing homes.  According to the Commerce Department, there was a 10.0 month supply of unsold newly built homes as of June. A key reason for this is that the sales pace has fallen dramatically as lending standards have tightened and consumers have become more cautious with the economy slowing. The June sales pace of 530 thousand units annualized is the slowest pace since 1991. The inventory glut is just as gloomy for existing home sales with June’s unsold inventories at 11.1 months supply. Until sales pick up, supply is going to have a hard time coming down enough for builders to be motivated to boost building activity.

No pickup in sales in sight

The latest survey from the National Association of Home Builders (NAHB) gave a bleak picture for the home sales outlook. The NAHB produces a housing market index based on a survey in which respondents from this organization are asked to rate the general economy and housing market conditions. The housing market index is a weighted average of separate diffusion indexes: present sales of new homes, sale of new homes expected in the next six months, and traffic of prospective buyers in new homes. The latest numbers for August showed the overall housing market index at a record low. Traffic of prospective buyers in new homes was particularly weak.

No help from mortgage rates

With the economy weak, one would think that mortgage rates would be easing, helping potential buyers qualify and afford more housing. Unfortunately, the subprime crisis and a weak dollar have scared many investors away from the mortgage sector. In fact, flight to quality and high inflation numbers have boosted conventional, fixed rate mortgage rates back up to a monthly average of 6.43 percent as of July. More recent quotes put conventional mortgage rates at roughly the same level.  Essentially, the mortgage market is not helping to get housing out of the doldrums with tighter credit standards and higher rates.

Depressed housing prices help sales but hurt refinancing

The anemic real estate market has led to a major softening in home prices. There are a number of measures of home prices but one that has gained market attention is the Case-Shiller home price index. This index comes in several versions, including a composite of 10 major cities across the U.S.  According to this index home prices on average are down 16.9 percent on a year-on-year basis for May. Lower home prices may made purchases more affordable but they also reflect a weak market. Some markets are weaker than others.  According to Standard & Poor’s (which publishes these price data), “Regional patterns stand out: the Sunbelt — led by Miami, Tampa, Phoenix, Las Vegas, San Diego and Los Angeles — saw the biggest booms and now see the largest declines.”

Delinquency and foreclosure rates point to further glut

A weak economy, higher interest rates, and heavy consumer debt have led to deterioration in the ability of homeowners to pay their mortgages. According to the Federal Reserve, delinquency rates have risen sharply over the past three years – jumping from a recent low of 1.40 percent in the first quarter of 2005 to 3.64 percent in the first quarter of this year.

The Mortgage Bankers Association has been publishing some especially scary numbers on foreclosures. The percentage of mortgages starting the foreclosure process has risen from roughly 0.4 percent in late 2006 to about 1.0 percent in early 2008. Part of the reason for the jump in foreclosures is because home prices have weakened considerably in some housing markets. When a homeowner with an adjustable rate mortgage (ARM) needs to refinance (when the ARM adjusts up), the borrower cannot get a loan if the value of the house has fallen below the loan amount. This has largely occurred for subprime ARM loans and for loans with low or no down payment. The fallout from the increased foreclosure rate is that more houses are being put back onto the market as some homeowners are forced to walk away. The higher foreclosure rate is delaying the housing recovery.

The bottom line

The housing sector remains at the lowest pace of activity in many years. Fundamentals are not good for a recovery for many months. This will constrain overall economic growth and have serious spillover effects on consumer spending and manufacturing.  As long as housing is weak, consumer and builder purchases of household appliances, carpeting, and furnishings will be soft. Companies that produce these goods are likely to have sluggish revenues for some time.