Housing Market & the Economy

Yesterday, we noted how the unusually warm January weather (amongst other factors) played a large role in the US Retail Sales. Today, we look at Housing — the potential impact of weather there.

Recall back in August 2005, we noted that Housing had begun to cool. The 1st of our 5 factors was an uptick in the Housing Inventory.

The unseasonably mild weather last month — it was  the warmest January on record in the United States — likely boosted January’s housing starts above normal (we’ll get a New Home Starts report today). That will only add to the growing inventory of new homes, on top of similar increases of existing homes for sale.

Anecdotal evidence should always be put into context, and never relied on exclusively to draw economic conclusions. But I cannot help but be struck by the overwhelming number of "For Sale" signs (three on my block alone) and the ubiquity of weekend "Open House" signs (complete with balloons) all over my corner of suburbia.

Rex Nutting observes that we’ve already seen the impact the of January’s warm weather on other seasonally adjusted data:

• Employment in the residential construction industries increased 0.8%, while total hours worked in construction increased 2.2%;

• Retail sales jumped 2.3% in January, including a 3.4% increase in sales at building materials, hardware and gardening stores;

• Utility output plunged 10.2% in January, the largest monthly decline on record.

He expects more of the same for the Housing Starts.

But Supply is only half of the equation. With inventories of new homes rising, and lots of existing home inventory on the market, Nick Godt asks "How about demand?"

"On Tuesday, star homebuilder KB Home warned of an increase in the number of canceled home orders and of a drop in new-home sales in the first two months of the year. Likewise, Toll Brothers last week warned that new orders for homes had dropped by 21% in the first quarter so far.

And the mood remains gloomy in the industry. On Wednesday, the National Association of Home Builders (NAHB) said its housing market index remained at a two-year low of 57 in February. Both the NAHB’s buyers traffic index and its future expectations index dropped by a point."

So Real Estate is cooling. What’s the big deal? Its been above trend for so long, a reversion back to the mean is expected, right?.

Um, not quite: The issue going forward will be the loss of the prime economic engine in this post bubble, stimulus dirven economy.

Back in May of last year, we brought to your attention the news that Half of New Jobs Are Real Estate Related. Now, we see early signs of what will happen as we slide down the other side of that mountain:

"Washington Mutual Inc., the largest U.S. savings and loan, said Wednesday that it was laying off 2,500 support employees in its mortgage unit.

The Seattle, Washington-based company said it was also reducing the number of mortgage processing offices to 16 from 26 and sending some of the work to “lower cost domestic and offshore locations.”

That’s just one part of the Real Estate complex. How hard will the slowing RE market impact real estate brokers, contractors, durable goods, related retailers (Home Depot, Lowes, Bed Bath and Beyond) ?

We’ve beaten the RE as the key to the economy drum for so long, that we forget many people only wised up to this recently. As far back as December 2004, we observed that Housing was the economy’s biggest driver. As is often the case with a secular trend shift, it has gone on longer and stronger than most expected.

I expect by the 3rd Q of this year, we will see a very significant impact of slowing real estate more fully felt by in the macro economy. More so than the new Fed Chief envisions. If I’m right, his job is going to get a whole lot more difficult by then . . .

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UPDATE February 16, 2006 9:49am

New Housing Starts surge 14.5%:

"The Commerce Department said Thursday that housing starts increased 14.5% to a seasonally adjusted 2.276 million annual rate. The double-digit increase carried starts to their highest mark since March 1973, when groundbreakings reached 2.365 million. December starts were revised to show a decline of 6.9% to 1.988 million; originally, starts were seen dropping 8.9%. (emphasis added)

But January’s huge gain was expected to be more of a blip caused by unusually mild weather. The U.S. had its warmest January on record, with an average temperature of 39.5 degrees, 8.5 degrees above the 1895-2005 mean of 31, according to the National Oceanic and Atmospheric Administration.

Indeed, starts rose most strongly in the regions which are typically the coldest in January, soaring 23.7% in the Midwest and 29.2% in the Northeast. Starts jumped 16.9% in the West, while the South posted a more subdued 8.7% gain."

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UPDATE February 18, 2006 5:49pm

Jeff Matthews points out that KB Homes is seeing a surge in order cancellations amidst a cooling real estate market.

Not coincidentally, I get an email from David, who thinks that all these Housing starts are a way builders lock in extra dollars as these order cancellations surge:

"Everyone is citing warm weather as the reason for the January jump in housing starts. Based on my daughter’s  experience buying a house from a major builder in 2005, I have a slightly more cynical interpretation. She was  required to put down about 1% ($5000) when she initially signed and reserved her place in the que. When the house was "started" she had to put up another 6% ($30,000). (I believe this is a fairly standard payment schedule).

Is it possible that the builders are racing to increase the walk-away price for the buyers currently in their build queues?"

More than possible: In fact, quite likely . . .

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Sources:
Hot month, hot home building 
By Rex Nutting, MarketWatch
Last Update: 6:20 PM ET Feb 15, 2006
http://tinyurl.com/anqbp

Shelter Glut Could Prove to Be Bubble’s Demise
Nick Godt
The Street.com, 2/15/2006 5:14 PM EST
http://www.thestreet.com/markets/marketfeatures/10268762.html

Washington Mutual to Cut 2,500 Jobs
THE ASSOCIATED PRESS, February 16, 2006
http://msnbc.msn.com/id/11373553/

Unusually Mild January Gets Hammers Swinging
Housing Starts Soared 14.5% Last Month As Record Warmth Helped Spur Building
WALL STREET JOURNAL, February 16, 2006 9:27 a.m.
http://online.wsj.com/article/SB114009575924475818.html

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