U.S. Housing Market: Looking Up, But For How Long?

Most housing metrics improved in March. In the activity category, only single-family starts and total completions declined; actually, total completions retreated because of a 22 percent drop-off in multi-family units. Absolute numbers of unsold new homes nudged lower, but existing-home inventory grew slightly. Months of inventory declined overall, however. The median price of existing homes rose (by 3.7 percent) despite the influx, while the median new home price fell by 3.4 percent.

At 626,000 units SAAR, total starts are at their highest level since November 2008. They are also 1.6 percent (±15.2 percent) above February’s activity, and 30.7 percent above the nadir seen in April 2009. Even so, activity remains nearly 73 percent below the January 2006 peak, and more than 58 percent below the historical average start rate of 1.51 million. Although recovering, starts remain below the bottoms seen during all previous housing downturns since 1959.

New-home sales, which had been dwindling since mid-year 2009, caught a major updraft when “surging” 26.9 percent (to 411,000 SAAR) in March. Because the standard error around the total sales estimate is 21.1 percent, the Census Bureau is 90 percent certain sales actually increased in March. While that 26.9 percent increase in sales appears quite impressive, it is so only because the absolute change came off such a small base (324,000 in February – a far cry from the peak of 1.4 million in July 2005).

Home resales also rose (6.8 percent) in March, to 5.35 million SAAR. Sales were 16.1 percent above year-earlier levels, but 26.2 percent below the September 2005 peak. Most analysts attributed the bump in new and existing home sales to the first of two impending federal tax credit deadlines. In order to qualify for the credit, a buyer must sign a sales contract before April 30, and close before June 30. New-home sales are recorded when a contract is signed, not when closing occurs; hence, April's sales figures are likely to be the last to show any impact from the subsidy. "We expect a further sharp rise in April sales then a sharp, though temporary, drop in May," wrote Ian Shepherdson, chief domestic economist for High Frequency Economics. "After that, much depends on whether Congress extends the tax break; we expect it will."

Builders appear to agree with Shepardson’s outlook, as permits continued to climb – in both absolute and year-over-year percentage terms – in March. Progress will almost certainly be painfully slow, however, because foreclosures will continue to clog the market. Nearly 2.8 million foreclosures were initiated in 2009 and that figure is likely to climb in 2010, according to Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program. There were more than 932,000 foreclosure filings in 1Q2010 alone, an annualized pace of more than 3.7 million foreclosures.

Forest products manufacturers could get some additional help from renovation and remodeling activity. The Leading Indicator of Remodeling Activity, compiled by the Remodeling Futures Program at the Joint Center for Housing Studies (JCHS) of Harvard University, suggests annual spending may accelerate by nearly five percent in 2010. “The gradual recovery in the broader economy should encourage more remodeling spending by homeowners,” said Nicolas Retsinas, JCHS director. “This year could produce the first annual spending increase for the industry since 2006.”