HOUSING AND THE CONSUMER

Housing Continues At Risk
"On a year-over-year basis home prices have now increased for the fourth straight month, following more than three years of declines. Home prices trough ed a year ago and have increases by 4.6% since then. In a few regions, home prices are increasing fairly quickly. Even in those areas where housing boomed the most, the rate of home prices decline has slowed significantly," according to Steve Wood, chief economist at Insight Economics LLC.

Factors that Wood says place housing at risk of another dip;

.Unemployment remaining high;
.Mortgage delinquencies still climbing;
.Mortgage rate resets on Alt-A and Option ARM loans due to take place over the next year.

Consumers Are Worried
Consumer Confidence Index fell by 3.9 points in July to 50.4% compared with market expectations for a somewhat smaller decline to 51.0%.

Two components of the Index; Present situation and Expectations both fell by 0.7% and 6.1 points, respectively.
"Consumer assessments of the economy collapsed between October 2008 and February 2009 to their lowest level in 41 years that data have been collected. Between February through May 2009, confidence improved Moderately but it has only been inching higher(on a trend basis) since then and the level of confidence is still subdued... Confidence is still deeply mired in recessionary territory," says Wood.
Wood believed much of the weakness is due to:
. High Unemployment;
.Soft housing prices;
.Rising foreclosures;
.Tight credit standards and;
.High gasoline prices.
"Although the economy is growing again, consumer attitudes are lagging behind broader economic development."

WHAT'S NEXT FOR HOUSING?

It has been 5 years since US housing peaked and in the pursuant years we have endured the most severe market adjustments.
The current weakness in housing is viewed as a payback from stimulus-induced high. Many economist project that housing will stabilize once the correction has been made.
Housing Related Jobs- Housing Related employment and construction have taken their hits and are less vulnerable. At its housing and construction accounted for 7% of all us jobs; not it accounts for 5%. preceding the boom, residential construction approached 5% of GDP and today it accounts for 2%. A rebound in the greater labor market is needed to sustain a durable rebound.
New Inventory- Home builders have been keeping construction below sales, Thus containing inventories. In May when new home sales fell to a record low, Inventories decline further.
Home Prices- Most analysts predict house prices will slide a little further before they reverse.However, declines of another 5% do not compare with 28% plunge over the past few years.
Households wealth- Nearing The bottom of the housing market also means that the associated wealth loss has also been essentially absorbed.
Threats to economic and housing market recovery:
Shadow inventory- Banks Lenders and investors continue to hold substantial "shadow" inventories of these properties are offered could further prolong a soft market.
Interest Rates-
These are in the hands of the fed and their ability to borrow on the global market. Rates are directly tied to the confidence in the US's ability to repay its National Debt will weight heavily on our cost of borrowing and availability of credit. A sharp pullback from risk in the credit markets could drive rates up and damnen housing.

FIVE FACTER TO HEAL THE HOUSING MARKET

It takes little logic to conclude that the Home buyer Tax Credit incentive is borrowing buyers from the future. Many of these buyers would have been in a position to purchase in the months ahead, given continued low interest rate and buyer-friendly home prices; this is reflected recent home sales and mortgage application reports. For this to reverse five things need to happen:
1. Interest rate must remain low.
2. Private-sector wages will need to rise, enabling the current employed to better qualify for mortgages.
3. New jobs must to be created in the private-sector to bring new households into the home buying ranks.
4. The consumer savings needs to increase thus creating the down payment and closing costs for home purchases.
5. Consumer Spending must increase.
Recovery of the housing industry and the greater economy is dependent on job and wage growth in the private sector. to date the economic recovery efforts have been spent on public spending projects and government employment. they have not stimulated creation of non government jobs as most businesses are cautiously on a hiring hold. Currently. around 10 million people are claiming unemployment.

THE NOT-SO-CLEAR CRYSTAL BALL

Home prices will rise about 12% in the five year ending December 31,2014, according to the consensus of 92 economists and other housing prognosticators recently surveyed by MacroMarkets LLC. The survey used the S&P/Case-Shiller national index as the measure. At the end of 2009 the index was down nearly 28% from its peak.
Robert Shiller, the Yale University professor who won the ire of many Realtors when he went against convention, warning of a bust during the housing boom. Mr shiller co-founded the consulting Firm MicroMarket LLC.
The predictions among the 92 participants swing the full spectrum of economic option . Joseph LaVorgan of Deutsche Bank projects home prices rising 37% by the end of 2014 while others including Anthony Sander of George Mason University and Gary Shilling of A. Gary Shilling & Co..see declines of nearly 18%, that is a 55 point spread.
Mr. Shiller,who did not participate in the survey, Forecasts home prices to rise by 12% over the next 5 years.
- Forces that will influence the direction of housing prices include these economic considerations:
- The post-tax credit environment;
-working through the nearly 4.5 million distressed residences, and;
-The Feds Budget deficit going forward.
The latter has international implications as the European Union rustles with the credit woes of Greece Portugal, Ireland and others.
Who would have figured that Greece could effect the value of US homes? But, in this global economic environment you know that the US is being called upon to help bail out governments that have not disciplined their own economics. The more the US Treasury is called on, the more taxing it will be on the US economy and its taxpayers. The greater the economic drag, the greater its impact on housing.

SIGNS OF A SOLID ECONOMIC RECOVERY

What is the economic news indicating?
HOUSING STARTS-UP
April housing starts beat market expectations, rising 5.8%. The greatest increase was in single family starts with a moderate decline in multi-family starts.
RETAIL SALES-UP
Us retail sales ROSE in may for the seventh month in a row and beat market expectations. the prior two months gains were revised higher. This is the sixth straight year-on-year gain and is, following a 14 year-on-year decline. Core Retail Sales excluding and including gasoline rose. on one side consumers are deleveraging their credit cards while they increase spending despite high unemployment. sluggish income growth, and relatively tight credit.
CONSUMER SENTIMENT- UP
Consumer Sentiment also rose as did Current Conditions and Consumer Expectations. On a trend basis, sentiment has been improving since March 2009. Consumers continue to worry about weak labor markets, high foreclosures,expensive energy and tight credit conditions.

CHANGING DEMOGRAPHIC TRENDS

Early this year the Urban Land Institute predicted two major changes in the US housing market. Home appreciation will slow considerable to about 1 to 2% annually. Four months into the year house prices show 0.3% annual growth.

-The current US home ownership rate, then at 67% which is down from a record height of 69%, will fall further to about 62%, Four months into the year home ownership rate has held steady at 67.1%.

The report also cited four demographic trends that will have major impact on housing.

Aging Baby boomers(ages 55 to years old):
a) They will continue to work, and;
b) Many stay in their home until values recover;
c) Those able to move will choose mixed-age living environments that cater to their lifestyle;
d) Convenient suburban center will also be a choice.

Younger baby boomers(47 to 54 years old):
a) They are entering their prime earning years but;
b) Lack home equity;
c) this will likely curb prospects for second homes.

Generation Y: About 85M strong):
a) They opt for interested in home ownership than their parents at the same age;
b) "They will be renters by necessity or choice for years ahead." Says the report.

Immigrants-legal $ illegal (about 40M strong):
a) They opt for multi-generational households;
b) When they can afford, larger homes in neighborhoods with a sense of community.

Note: Not mentioned in the report is the generation X, those born from 1964 to late 1970. In France this group is labeled translates as "Generation Whatever." This generation is not to be forgotten has been quite counter to baby boomers and bring a very unique prospective on home ownership and communication.