North American Building Material Distribution Association

INDUSTRY NEWS

NAHB's Outlook Shows Solid Growth in Output and Employment With Inflation Under Control

Economic growth has rebounded nicely from the first-quarter lull. However, GDP growth is slackening on a trend basis and the government has revised downward the “speed limit” for the U.S. economy. NAHB’s baseline forecast now shows slightly below-trend GDP growth (through 2009), and there’s no recession in that forecast.

The labor market is losing some forward momentum as GDP growth comes off earlier highs. We expect payroll employment growth to taper down further as GDP growth runs slightly below trend, and the unemployment rate should gravitate upward in the process. Even so, labor market conditions should remain quite solid at the same time that unit labor costs recede – contributing to a reasonably benign inflation environment.

Core consumer price inflation has been receding in recent months, largely because of deceleration in the large imputed homeowners’ equivalent rent component, and core inflation measures have retreated to the upper ends of the Federal Reserve’s apparent tolerance zones. We expect further deceleration during the forecast period, completing our admittedly “Goldilocks” macroeconomic outlook (not too hot, not too cold).

-From NAHB's Eye on the Economy newsletter.

But Turbulent Financial Markets Pose Real Threats to the Economy in the Near Term

Financial market conditions currently pose considerable downside risks to our “Goldilocks” economic outlook. Financial markets turned turbulent in the latter days of July and the first half of August, kicked off by fresh revelations of credit quality problems in U.S. residential mortgage and mortgage-backed securities markets, and the infection quickly spread to a wide range of markets and to other parts of the globe amidst a worldwide flight toward credit quality.

The drive toward quality froze up various securities markets around the world as risk became difficult (or impossible) to price, particularly on mortgage-backed securities without government backing, causing credit demands to shift toward depository institutions. Interbank loan rates shot up in the process, prompting the Federal Reserve and some foreign central banks (including the European Central Bank) to inject large amounts of reserves into banking systems in order to maintain established policy rate targets.

-From NAHB's Eye on the Economy newsletter.

The Interest Rate Structure Reflects Threats to the Economic Expansion and the Flight to Quality

The recent central bank actions successfully restored order to money markets, at least temporarily, and neither the Fed nor the foreign central banks have reduced their policy rate targets. The Federal Reserve actually reaffirmed the 5.25% federal funds rate target at the August 7 FOMC meeting, although the FOMC statement recognized the turmoil in financial markets and moved toward a balanced risk assessment. NAHB’s forecast now shows a quarter-point rate cut at the October 31 FOMC meeting, and an earlier cut is not out of the question.

The stunning flight to quality in financial markets drove Treasury securities rates downward and drove rates on lower-quality debt instruments upward. The net impacts on home mortgage rates differed considerably across market components: rates fell slightly in the FHA/VA/Ginnie Mae market, rose modestly in the prime conventional conforming market (served by Fannie Mae and Freddie Mac) and rose considerably in the nonprime (subprime and Alt-A) and jumbo loan markets. We expect the adjustments to risk spreads to prevail for some time.

-From NAHB's Eye on the Economy newsletter.

Home-Buyer Demand Still Is Trailing Downward as Affordability Remains Depressed

Home-buyer demand has continued to trail downward, and the deterioration of mortgage market conditions has added to the downward momentum. NAHB’s proprietary survey of large home builders shows deterioration of gross and net home sales in July, along with a rise in cancellation rates at the big companies. Furthermore, NAHB’s broad-based single-family Housing Market Index deteriorated further in August and now stands only slightly above the low recorded during the 1990-1991 economic recession.

National house price appreciation has slowed dramatically from the record highs in 2005, increasing numbers of local markets have been recording absolute declines during the past year, and absolute declines now are being recorded at the national level. But the price corrections to date pale in comparison to the earlier accumulation of rapid price increases, and measures of housing affordability still are hanging around the lows of the early 1990s. Although home prices are destined to decline further, prices promise to remain “sticky” on the downside – stretching out the inevitable downward adjustment to sales activity.

-From NAHB's Eye on the Economy newsletter.

Housing Vacancies Are Near Record Highs and Homeownership Is Slipping

Second-quarter data on housing vacancies show that the supply overhang remains quite heavy in both the for-sale and for-rent components of the market. The overhang is particularly heavy in the for-sale market, reflecting large increases in both single-family and multifamily (condo) markets since mid-2005. This overbuilt condition is a legacy of outsized purchases by investors/speculators during the boom period and subsequent unloading of units onto the market as house price prospects have deteriorated.

The U.S. homeownership rate has been eroding for three years and the rentership rate has shown equivalent gains. Persistent affordability problems facing prospective home buyers, combined with relatively friendly conditions in the rental market, will put further downward pressure on the homeownership rate – and a rising wave of mortgage foreclosures will contribute to the own-to-rent dynamic. The homeownership rate is sure to rebound on a longer-term basis, however, and new records will be achieved down the line.

-From NAHB's Eye on the Economy newsletter.

U.S. Green Building Council Hits 10,000 Member Mark Milestone Indicates a Shift in the Green Building Movement

The U.S. Green Building Council (USGBC) today welcomed its 10,000th member company. The achievement marks a turning point in the building design and construction market.

“This achievement is a significant milestone in the growth and development of the green building movement because it demonstrates a broad conviction that our built environment can improve the health of our planet, our economy, and our communities,” said Rick Fedrizzi, President, CEO and Founding Chair of the organization.

“At all levels, our members – their vision for a sustainable built environment, their knowledge of building science and practice, and their commitment to results – are why the green building movement has grown exponentially in the last decade and a half,” said Rick Fedrizzi, President, CEO & Founding Chair. “Thousands of volunteers have contributed tens of thousands of hours to the development of the LEED® green building rating system; chapter leaders all over the country are making transformation happen at the local level; and all of our members are raising the bar for their colleagues throughout the industry.”

Today, the green building industry is worth upwards of $12 billion, whereas a decade ago it was negligible. USGBC was founded in 1993 with a vision of transforming the way buildings and communities are designed, built and operated, enabling an environmentally and socially responsible, healthy, and prosperous environment. That vision is shared by Council members – who are the driving force behind the Council, and of the green building movement including builders, designers, legislators, policy-makers, educators, manufacturers, developers, activists and scientists.

“Our members have joined together through USGBC to transform the way we design, build, and operate the structures in which we live our lives, which gives us a powerful voice to use as we continue to advance our transformation of the built environment,” noted Fedrizzi.

Economic Growth Has Rebounded From the First-Quarter Lull

Growth of real GDP for the first quarter of the year now stands at an annual rate of 0.7 percent, according to the “final” estimate released by the Commerce Department on June 28.

Residential fixed investment contracted at a 15.8 percent rate and subtracted 0.89 percentage point from GDP growth. Large negative contributions also came from net exports and business inventory investment. These drags held overall GDP growth to the slowest pace in more than four years and prompted a lot of speculation about near-term recession in the U.S. economy.

As we suspected, the first-quarter downshift in economic growth was a temporary phenomenon. Rebounds in net exports and business inventory investment, and a smaller drag from residential fixed investment, apparently helped raise GDP growth to about 3 percent in the second quarter (that's our current estimate). Furthermore, we're looking for near-trend growth performance over the balance of the 2007-2008 forecast horizon, and we place the probability of recession in a 20-25 percent range for this period – pretty normal for this stage of an economic expansion.

-From NAHB's Eye on the Economy newsletter.

The Labor Market Still Is Generating Good Job Growth and Low Unemployment

The labor market performed well during the first half of the year despite the first-quarter downshift in GDP growth. Payroll job growth averaged 145,000 per month (with recent revisions), below the average pace in 2006 (189,000) but still quite respectable. The unemployment rate averaged 4.5 percent in the first half of 2007, presumably the low range for this cycle.

NAHB's forecast shows a modest increase in the unemployment rate over the balance of the 2007-2008 forecast horizon, consistent with our projections for household employment and labor force growth. We're also looking for average monthly payroll job gains of around 125,000, equivalent to employment growth of roughly 1 percent on an annualized basis – a sustainable pace at this stage of the economic expansion. [return to top]

-From NAHB's Eye on the Economy newsletter.

Core Inflation Is Gradually Receding, Thanks Largely to Housing

Persistently tight labor market conditions have been putting persistent upward pressures on average hourly earnings, and a cyclical slowdown in productivity growth (output per hour) has contributed to upward pressures on unit labor costs. Despite these pressures, and despite renewed upward pressures on energy prices, measures of core consumer price inflation (excluding food and direct energy) have been remarkably well behaved in recent months. Indeed, the core PCE price index slipped to a year-over-year rate of 1.9 percent in May and the core CPI showed an advance of 2.2 percent for that month – readings that are within the Fed's apparent “comfort zones” for these measures. Furthermore, the core CPI posted another relatively benign year-over-year gain in June (2.2 percent), and the technically superior chain-core CPI trailed down to a 1.8 percent pace.

The recent reductions in core consumer price inflation (both PCE and CPI versions) can be traced largely to slowdowns in growth of residential rents and the large imputed “owners' equivalent rent” components. These slowdowns have been prompted by rising vacancy rates in rental housing, a pattern that's been provoked partly by conversions of condominium developments to rental projects as home buying activity has weakened substantially.

-From NAHB's Eye on the Economy newsletter.

The Fed Holds Steady and Fusses About Inflation Pressures

As expected, the Federal Reserve held monetary policy steady at the June 28 FOMC meeting, maintaining the 5.25 percent federal funds rate target. The FOMC statement referred to “moderate” economic growth in the first half and noted that core inflation had been improving “modestly.” However, the Fed did not declare victory over inflation, pointing out that the high level of resource utilization (i.e., the low unemployment rate) has the potential to sustain inflationary pressures down the line.

NAHB's forecast assumes that the Fed will hold the nominal funds rate steady over the balance of the 2007-2008 forecast horizon, allowing the real funds rate to gravitate upward as core inflation recedes further. Chairman Bernanke's testimony in connection with the Fed's Semiannual Monetary Policy Report to the Congress (delivered July 18 and 19 in the House and Senate) reinforces our expectations regarding our central bank's preoccupation with upside risks to inflation and the prospects for monetary policy management over the short term. [return to top]

-From NAHB's Eye on the Economy newsletter.

Mortgage Credit Standard Tightening May Be Near an End

The worst of the tightening of credit standards for home mortgages resulting from the emergence of problems in the subprime market early this year may be drawing to an end, NAHB Chief Economist David Seiders told reporters in a July 25 teleconference on the mid-year outlook for the housing industry.

Adjustable-rate mortgages have plummeted to about a 10 percent share of the loans being used to purchase homes, down from about 40 percent at the height of the housing boom, he said. And considering the disruption being caused by such nontraditional loans as interest-only and option ARMs, this is “a healthy long-term development” for the marketplace, he said.

After a breakdown of mortgage lending standards in recent years, “maybe the credit pendulum in home mortgage lending has swung back most of the way,” and lending standards aren't likely to be tightened much further, Seiders said. “We've had one heck of a lot of credit standard tightening,” he added, and moving forward “solid” fixed-rate mortgages are likely to be the dominant vehicle for financing home purchases.

While rates on prime conventional fixed-rate mortgages have moved up to some degree over the past couple of months, they remain about where they were a year ago, he said, and are expected to average a relatively affordable 6.7 percent in 2008, not far from their current level. One-year prime ARMs are projected to average about 5.65 percent.

Lowering the Forecast
Nevertheless, he said that “tighter lending standards buyers are facing and rising waves of delinquencies, defaults and foreclosures on loans made in the second half of 2005 and in 2006” have created uncertainty about “where we are going” and have added further to the depth and duration of the current housing downswing.

Seiders is now forecasting 1.42 million housing starts for this year and a small improvement to 1.45 million for 2008, down 9 percent and 15 percent, respectively, from what he was predicting at the end of 2006.

About 25 percent of single-family starts are comprised of homes built on owners' lots, and that has been a relatively stable component of overall production during the downturn, he said. Single-family starts topped out at a seasonally adjusted annual rate of 1.75 million in the first quarter of 2006 and will decline to a low of 1.1 million during this year's fourth quarter, according to NAHB's forecast. That would be its lowest level in 10 years and represent a decline of 37 percent from peak to trough.

Single-family starts have been below their sustainable pace of 1.5 million for a full year, Seiders said, and will not fully return to the level supported by job and population growth until 2010 to 2011.

He noted that, unlike those preceding it, today's housing correction was not precipitated by major increases in interest rates and a weakening national economy, but by accumulated price increases that eventually destroyed affordability. As a result, the industry is going through a “unique experience” and faces “a fairly slow climb out of this hole” because there won't be the “usual propellants” of a surge in job growth or a major fall in interest rates that typically occur when the economy emerges from a recession.

Feeling “profound weakness in the condo market,” multifamily production in the second half of this year is expected to fall 6 percent from the first half, bottoming out at an annual pace of 270,000 units. “It's hard to know how much, but the winds are blowing” in the direction of some firming of rental production in 2008, Seiders said. The condominium share of the multifamily market is heading to 30 percent or even lower, down from 50 percent in early 2006, he said.

Proving its cyclicality and following in the footsteps of the overall housing market, residential remodeling is also losing ground, with some “modest” declines expected in the inflation-adjusted value of total activity this year and in 2008 before positive growth resumes in 2009. The real value of improvements to owner occupied housing is projected to decline by 5 percent to 6 percent this year and in 2008, he said.

Ball Still Rolling Downhill
Seiders said that his views on the state of the housing industry seem to be similar to those of Federal Reserve Chairman Ben Bernanke, who apparently expects several more quarters of contraction before things start looking somewhat better in 2008.

“The ball is still rolling downhill to some degree,” Seiders said. “Affordability conditions are still reflecting the abrupt tightening of mortgage lending standards, and there is a sizable inventory overhang, the kind of dimensions we have never had to deal with before.”

Home prices remain under downward pressure, he noted, and the S&P/ Case-Shiller® repeat sales house price index, a reliable barometer of price movements, has shown a 3 percent price decline from the peak in the fall of last year.

Prices could be headed down a further 5 percent this year, with the cumulative decline averaging as high as 10 percent in 2008, he said. Following “massive increases” in home prices, a process underway even before the boom began in 2003, “we will need something like that to get the markets back in better balance,” Seiders said.

The housing correction process is now “very widespread,” Seiders said. In terms of single-family housing permits from the first five months of 2005 to the first five months of this year, only Mississippi , which is still recovering from Hurricane Katrina; Wyoming and North Dakota have seen small increases. The nation as a whole has been down 31 percent. The worst hit states are Michigan , down 60 percent; Florida , down 57 percent; California , down 45 percent; Minnesota , down 45 percent; and Colorado , down 42 percent.

Next year over this year, single-family starts are forecast to rise by 2 percent nationwide, Seiders said, but 11 states will be flat or experience declines. Florida will see a further 12 percent decline in single-family production in 2008, he said, but Michigan should finally be getting back to positive growth

-From NAHB's Nations Building News.

Builders Abandon Business as Usual to Weather Downturn

A new study by the NAHB Research Center identifies how home builders have been changing their operations to deal with the current downturn in the housing industry and suggests ways that building product manufacturers can help them bolster sales and work down unsold inventories.

Presented on July 13 at the Southeast Building Conference in Orlando , the survey-based study found home builders doing whatever they can to weather a slowdown that because of problems with subprime mortgages began to noticeably worsen early this year just as the market was beginning to show some positive signs.

“Anything manufacturers can do to help builders sell homes is most welcome,” said Ed Hudson, director of the Research Center 's Marketing Research Division.

The custom builders who were among the 320 companies participating in the study were more likely to be looking to manufacturers for enhancing their choice of products and materials in the construction process, while help on sales was more what production builders were looking for, he said.

The results of the polling were weighted according to production volume, so that a builder building 30 homes a year would have three times as much bearing on the results as a builder building 10 homes annually.

Hudson cited Owens Corning's Builder Alliance program as an example of how manufacturers can be effective in working with builders to soften the blow of today's buyer's market.

The program enables builders to associate themselves with Owens Corning products and provides a promotional allowance of 2 percent back on purchases. It also provides additional allowances for materials used in building model homes — including roofing, siding, insulation and acoustical products — and helps prospective home buyers locate builders who are using Owens Corning products.

Owens Corning is a member of the National Council of the Housing Industry — The Supplier 100 of NAHB.

Among the findings from the Research Center :

• Seventy percent of the survey respondents said that referrals from past customers were attracting buyers to their sales office. Also important in increasing sales were making the Web site a better sales tool (cited by 69 percent) listening more to customers (66 percent) and an advertising or public relations campaign (58 percent).
• To help close sales, 44 percent of the builders polled said that they were allowing more modifications to their home plans and 19 percent are planning to do so. Forty-two percent of the builders said they were using more innovative materials to set themselves apart from the competition, and 28 percent are planning to do this. Thirty-seven percent said they were offering more incentives like free upgrades or larger decorating allowances, and 25 percent said they would be doing this. Although offering more home for the same price is viewed as a better strategy than lowering prices, which can create unhappiness and complications among prior customers, 35 percent said they had used lowering prices and 20 percent said they would. Only 22 percent said they had decreased the size of their homes and 16 percent said they were planning to adopt this strategy.
• The benefits most likely to persuade builders to purchase innovative products were: better value (cited by 36 percent), increased curb appeal (36 percent), lower cost (32 percent), a reduction in labor costs (32 percent), a reduction in construction cycle time (32 percent) and higher quality and fewer defects (29 percent). Better value was of greater interest to custom builders and curb appeal was more important to production builders. Custom builders were found to be more open to selecting new products and being innovative.
• Builders were likely to pursue the following in their relationships with their subcontractors: working to reduce waste and improve efficiencies (86 percent), negotiating for better prices (81 percent), improving quality and reliability (73 percent) and seeking better pricing (72 percent). The issue of improving subcontractor performance was most important to builders in the South.
• The methods that builders use to evaluate new and innovative products and materials include: independent testing from the manufacturer (60 percent), evaluating the materials on one house first (60 percent), looking for good product support capabilities from the manufacturer (59 percent) and visiting the job site to see the product in use (57 percent). Production builders were found to be more thorough in their evaluation of new materials and less likely to change what they are already doing.
• The trends most important to builders are: energy efficiency (70 percent), low-maintenance housing (61 percent), designing for aging in place (58 percent) and green building (51 percent). Lower on the list were: zero-energy homes (31 percent), panelized construction (30 percent) and modular construction (24 percent). Although builders are promoting the sustainable aspect of green building, lower energy-efficiency is the actual selling point, and this increases with the age of the home buyer. “The older you get, the more important energy efficiency becomes,” said Hudson , because these buyers have fixed incomes and are able to do less maintenance on their homes. Green building is in greatest demand in the Northeast and least attractive in the South, he said.
• The aspects of green building that are of most importance in builders' purchase decisions are: lowering energy bills (84 percent), making homes a safer place (66 percent), improving indoor air quality (65 percent), improving the environment (57 percent) and reducing water usage (51 percent). In the first tier of green products, Hudson said, are those offering direct, measurable benefits to the occupants over a short timeframe. In the second tier, the product benefits are less easily measured and the timeframe is uncertain. Third-tier products offer indirect benefits to home buyers, such as reducing greenhouse gases, and Hudson said that these are more likely to be accepted by custom builders.

Fed Chairman Addresses the Housing Market, Subprime Lending

On June 5, Federal Reserve Chairman Ben Bernanke addressed via satellite the 2007 International Monetary Conference in Cape Town, South Africa. Bernanke's choice of topics in his address accentuates the importance of the U.S. housing market in the global economy as well as the importance of the subprime mortgage issue in global financial markets.

His comments on the current condition of the U.S. housing market and the near-term housing outlook were a bit more sobering that other recent Fed statements on housing.

Bernanke stressed that the downward adjustment in the housing sector “is still ongoing,” and he allowed as how the contraction in residential construction “now appears likely to remain a drag on economic growth for somewhat longer than previously expected.”

Bernanke pinned large responsibility for the recent weakening of housing demand on the subprime-related turmoil in the mortgage market, and he noted that recent subprime developments “add somewhat to the usual uncertainty in forecasting housing demand.”

He went on to say that the subprime-related problems “will serve to restrain housing demand, although the magnitude of these effects is difficult to quantify.”

We couldn't agree more with that assessment, although we have to go on record with our forecasts.

The subprime-related tightening of mortgage lending standards certainly has pushed large numbers of prospective home buyers back to the sidelines, and the timing of their return to the market is highly uncertain.

There also has been widespread reluctance among consumers who have good access to credit to go ahead with home purchases at a time when affordability remains well below conditions prevailing prior to the 2004 to 2005 housing boom. There are plenty of new and existing homes to pick from and home prices are weakening in many areas.

Consumer perceptions of the direction of home prices are central to the difficult market conditions now encountered by builders.

Projections of rising house prices strengthened demand during the 2004 to 2005 boom, even as rising prices were taking a toll on current affordability conditions, and projections of falling house prices now are weakening demand even as falling prices are supporting current affordability conditions.

Most builders have never had to deal with such a maddening reality before, and the frustration level definitely is mounting, according to our monthly surveys of single-family builders.

NAHB's current forecast shows a slight upturn in sales of new and existing homes by the fourth quarter of this year. The forecast also shows a modest increase in total housing starts by the first quarter of 2008, following a resounding 36% decline from the cyclical peak in the first quarter of 2006.

Our projections for home sales, housing starts, manufactured home shipments and residential remodeling result in stabilization of real Residential Fixed Investment (the housing production component of GDP) by the end of this year and lead to modest positive growth by the first quarter of 2008.

While the projected drag on GDP from RFI now extends throughout 2007, the drag eases off considerably during the second half of this year — allowing GDP growth to approach a sustainable trend pace as 2007 draws to a close.

The projected beginnings of the housing recovery in the early part of 2008 represent small steps back toward our estimate of the demographically based trend of housing production — close to 2 million new housing units per year, including about 1.85 million conventional housing starts. After all, the inventory overhang will be relatively heavy for some time and the swing of the mortgage credit pendulum still will be weighing on effective demand, keeping the initial stages of recovery rather modest.

It's also worth noting that the unique nature of the current boom-bust housing cycle pretty much rules out strong forces that traditionally have lifted housing production briskly out of cyclical troughs.

These forces usually have included large declines in the interest rate structure, including aggressive monetary ease by our central bank, and strong growth in payroll employment as the economy gets into an expansion mode.

We're expecting a supportive interest rate structure and decent job growth this time through, but the absence of the traditional strong growth engines will help keep housing production below the trend level for several years beyond the trough.

In May, NAHB conducted a nationwide survey of single-family builders to track the kinds of incentives being offered to bolster sales and limit cancellations, and we also solicited builders' assessments of the degree of success being achieved.

On the home price front, we found that 52% of builders had reduced prices during the previous month. For those cutting prices, the average reduction was 7% — similar to the magnitudes revealed by a series of surveys conducted by NAHB since mid-2006. Nearly three-fourths of builders said their price cuts were at least somewhat effective in bolstering sales or limiting cancellations.

Nearly three-fourths of builders in our May survey were offering nonprice sales incentives of various types, sometimes in combination with price cuts. The most frequently offered incentives were:

• Include optional items in homes at no cost.
• Pay closing costs for buyers.
• Absorb up-front mortgage finance points.
• Buy down mortgage interest rates.
• Help buyers sell existing homes or offer trade-in programs.

High proportions of builders rated all of these incentives as at least somewhat effective in bolstering sales or limiting cancellations.

A small percentage of builders also said that they had offered to match price reductions on future sales of the same models in the same communities. Despite the logical appeal of this sales incentive, only about half the builders making such an offer said it was an effective measure in dealing with reluctant prospective buyers.

Subprime Mess Threatens Home Sales

April 2, 2007 - The dramatic housing market correction has been a major factor in the evolving macroeconomic picture since early last year - exerting strong drags on growth of both real GDP and payroll employment while putting strong upward pressure on measures of core consumer price inflation through the imputed "owners' equivalent rent" components.

Federal Reserve estimates show that the pronounced slowdown in house price inflation during the past year is taking a toll on household balance sheets. In this regard, holding gains on homes slowed sharply as 2006 drew to a close and losses presumably are not far down the line.

At the same time, maintenance of strong growth in mortgage debt has impinged on home owner equity positions, and the Fed's financial obligations ratios for home owners now are at record highs.

-From NAHB's Nations Building News.

The Fed Changes Its Tune on Housing - Again

As widely expected, the Fed held monetary policy steady at the March 20-21 meeting of the Federal Open Market Committee (FOMC). The FOMC statement recognized recent mixed signals on the economy and noted that "the adjustment in the housing sector is ongoing" - in sharp contrast to the "stabilization" judgment expressed in the Jan. 31 FOMC statement.

While the March statement continued to highlight inflation risks, it's clear that the Fed's confidence in the ongoing economic expansion has eroded and our central bank now apparently views the risks to growth and inflation as essentially balanced.

In this regard, we're still expecting a quarter-point rate cut at mid-year, assuming that core inflation recedes about as expected by the Fed, and more cuts may be in the cards.

Fed Chairman Ben Bernanke testified last week on "The Economic Outlook" before the Joint Economic Committee of the Congress. He noted that "the principal source of the slowdown in economic growth that began last spring has been the substantial correction in the housing market."

Bernanke also said that "the near-term prospects for the housing market remain uncertain," that "developments in subprime mortgage markets raise some additional questions about the housing sector," and that "the correction in the housing market could turn out to be more severe than we currently expect."

Indeed, he fingered housing as the key downside risk to the Fed's forecast of moderate economic growth over coming quarters.

-From NAHB's Nations Building News.

Green Building to Skyrocket by 2010 to Half of New Homes

More than 1,000 housing industry professionals in St. Louis last week to attend the ninth annual NAHB Green Building Conference heard that sustainable building products and techniques are advancing quickly into the mainstream and that NAHB is moving aggressively to bring the movement to national prominence.

Based on a survey of NAHB home builders conducted last year by McGraw-Hill Construction , between 40% and 50% of the homes built in 2010 are expected to be green, containing at least three of five green building elements. That represents a major upsurge of activity in the green market.

Last year, according to McGraw-Hill estimates, an estimated 2% — or $7.4 billion — of the residential construction market was green.

“It is interesting that people are really starting to commit to building green homes, moving away from just adding energy-efficient appliances,” said Harvey M. Bernstein, McGraw-Hill Construction's vice president of industry analytics, alliances and strategic initiatives. “Though it's still a small number, builders are already getting it when it comes to the value of green homes, and it appears home owners are too.”

A new home buyer survey by the company has found a high degree of customer satisfaction with green homes. Sixty-three percent of the green home buyers in the poll said that their green purchases were motivated by the lower operating and maintenance costs that come with energy- and resource-efficient homes.

Eighty-five percent of the green home buyers said they were more satisfied with their new green homes than with their previous, more traditionally built homes.

The public interest in sustainability extends into the existing market, with the survey finding that about 40% of home owners who had recently completed remodeling or renovation work on their properties had used green products or materials.

“We're excited that green home owners are so happy, and that this new research quantifies this customer satisfaction. But we are certainly not surprised,” said Ray Tonjes, chairman of the NAHB Green Building Subcommittee and a home builder in Austin, Texas. “NAHB and its members have been leaders in the voluntary movement to increase the efficiency and quality of homes in America. This suggests we'll maintain our market share and only continue to grow.”

Ninety-two percent of the builder members participating in the McGraw-Hill research said that they are moving toward green building because it's “the right thing to do.”

“NAHB understands the importance of green building and the increasing prominence it plays on the national stage,” said Bob Jones, the association's vice president and secretary. “Yet we are not resting on our laurels. We are committing new resources to green building. It's time to step up and demonstrate what it means to be the leaders in the residential green building marketplace.”

Jones said that he will be overseeing the association's green building efforts and the activities of the NAHB Research Center throughout his five-year tenure as an NAHB Senior Officer, and he noted that the national movement to environmentally-sensitive construction will be hastened by the arrival of the first-ever green building standard now being developed by NAHB and the International Code Council .

“This standard will be based on our Model Green Home Building Guidelines , which is the proven, rigorous yet very flexible document that has allowed builders to create green building programs and — more importantly — build green homes all over the country.”

The NAHB Research Center received more than 270 applications from building industry representatives to sit on the ANSI National Green Building Standard Committee. The membership list has been posted on the green building standard Web page, and the first meeting is set for April 19-20 at the National Housing Center in Washington, D.C.

The standard is on an expedited timetable, with an estimated publication date of early 2008.

“It's time for a standard for green building,” said Jones. “But it needs to be a very special standard. It needs to reflect the architecture, the geography and the weather and temperature patterns of the place where the home will be built. It needs to recognize the wide divergence of consumer tastes, preferences and local conditions. And it needs to avoid costly mandated practices that can cause housing to fly out of the reach of potential home buyers.”

At its winter meeting in Orlando, Fla. in February, the NAHB Board of Directors adopted policy that will give further impetus to green building by encouraging market-driven improvements in new and existing housing that will help reduce greenhouse gasses.

In the process of paving the way for mainstream green building, NAHB will be working to provide voluntary alternatives to the push for green building mandates now occurring around the country.

“Those who want mandates may be well-meaning, but they are misguided,” said Jones. “A mandate based on LEED-H, which is the program that many of these initiatives reference, will not make a home any greener than one built to the NAHB guidelines of other successful green programs that predate our two-year-old guidelines. It will, however, make it less affordable.”

Right now, NAHB staff members are beginning to survey local home builders association leaders on their thoughts on the formation of a national green building program. The board of directors called for a national program in its February resolution.

McGraw Hill research on the size and other characteristics of the green building market also found that:

• New green home owners tend to be affluent and well-educated, in their mid-40s and married, and are also more likely to live in the South or the West. Women are more likely to be green home owners.
• In addition to lower operating and maintenance costs, environmental concerns and their family's health was a significant motivating factor for buying a green home, cited by 50% of the buyers who were surveyed.
• More than 60% of those polled said that consumer awareness, additional costs and the limited availability of homes are obstacles to green homes gaining a bigger market share. However, when looking at the “biggest” obstacles, green home owners view education as the biggest hurdle to overcome.

Full survey results will be published this summer in the next issue of the McGraw Hill “Construction SmartMarket Report” series and will be available at www.builderbooks.com .

-From NAHB's Nations Building News.

Fed Chief Sees Uncertainty in Near-Term Housing Outlook

Mortgage interest rates remained low last week as housing analysts pondered mixed-signals about the direction of the industry and Federal Reserve  Board Chairman Ben S. Bernanke warned the Joint Economic Committee of the Congress of the possibility that problems with subprime loans could make the current market correction worse than expected.

“The near-term prospects for the housing market remain uncertain,” Bernanke testified. “Sales of new and existing homes were about flat, on balance, during the second half of the year. So far this year, sales of existing homes have held up, as have other indicators of demand such as mortgage applications for home purchase, and mortgage rates remain relatively low.”

However, he noted that new-home sales have declined and the slowdown in production has still not worked down the unsold inventory to levels that will support a resurgence in activity.

Existing home sales were up in February to a 6.69 million annual pace, their highest level since last April, but new-home sales faltered during the month, declining to a seasonally adjusted yearly rate of 848,000, which was the lowest point since June 2000.

“Even if the demand for housing falls no further, weakness in residential construction is likely to remain a drag on economic growth for a time as home builders try to reduce their inventories of unsold homes to more normal levels,” Bernanke said.

Turning to the sharply rising delinquencies in recent months on variable-interest-rate loans to subprime borrowers, Bernanke said that the implications are not entirely clear.

“The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes,” he said.

“At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency. We will continue to monitor this situation closely,” Bernanke said.

He also told Congress that it is likely that the U.S. economy will continue to expand at a moderate rate over coming quarters. “As the inventory of unsold new homes is worked off, the drag from residential investment should wane.”

In the results of its Primary Mortgage Market Survey for the week ending on Thursday, March 29, Freddie Mac  reported that the 30-year fixed-rate mortgage had remained unchanged from the prior week, averaging 6.16%, which was down from 6.35% for the same week one year earlier.

One-year Treasury-indexed hybrid adjustable-rate mortgages averaged 5.88%, down from 5.91% during the previous week but up from 5.51% a year earlier.

“Despite concerns about possible spillovers from the troubles in the subprime market, rates on 30-year fixed-rate mortgages remained stable,” said Frank Nothaft, chief economist for Freddie Mac. “The ample liquidity provided by Freddie Mac in the conventional conforming mortgage market has helped keep rates down, supporting affordability and aiding in the ultimate recovery of the housing market.”

Meanwhile, NAHB Chief Economist David Seiders said that “the evolving mess in mortgage markets threatens home sales and housing production” for the balance of this year and possibly into 2008.

“NAHB's forecasts for both home sales and housing production have been trimmed recently, and we now expect single-family housing starts in 2007 to be the lowest since 1997,” Seiders said.

“We're still looking for some recovery in 2008, although our current forecast for housing starts is well below our estimate of the sustainable trend level of production. In these terms, the major ‘correction' process that began in the fall of 2005 will extend at least through 2008.”

-From NAHB's Nations Building News.

Housing's Impact on Jobs Seen Spreading

Falling home prices in some markets and rising defaults on subprime mortgages have raised concerns that housing problems may spread to mainstream lenders, hurt consumer confidence and affect the broader economy. Job cuts in real estate and construction rose in the first two months of the year compared with a year ago, according to the outplacement firm Challenger, Gray & Christmas. U.S. construction companies announced 10,000 job cuts in January and February, more than in all of 2005 and 2006 combined. About 45,000 jobs were lost last month among specialty contractors, according to the Bureau of Labor Statistics, which attributed part of the drop to winter weather. Bernard Markstein, NAHB's director of forecasting, said that layoffs don't immediately follow slumps, since many builders try to hold on to their skilled workers, or shift them to nonresidential sites, where prospects are brighter. The full impact hasn't been seen yet, he said. “We expect further declines in employment within the construction industry because nonresidential construction and remodeling is not going to pick up all of the reduction.” ( www.reuters.com ) Reuters (3.30.07); Nick Zieminski

All-New Wholesale Distribution Industry Trends Report Released

WASHINGTON DC, March 7, 2007 - Today, the NAW Institute for Distribution Excellence and Pembroke Consulting released their flagship industry report titled Facing the Forces of Change ® : Lead the Way in the Supply Chain . The report is available for purchase at www.naw.org/ftf07 or by calling 202.872.0885.

Facing the Forces of Change ® : Lead the Way in the Supply Chain draws upon a broad set of data, including in-depth interviews with senior distribution executives, manufacturers, customers, analysts, professors, and association executives. The report also includes survey data on nearly 1,300 wholesale distribution and manufacturing companies.

“The executives running the best wholesale distribution companies recognize that innovation is the cornerstone of their success,” said Pembroke Consulting President Adam J. Fein , Ph.D., who authored the new report. “Our study outlines strategies and tactics that will help executives lead the way in their industry's supply chain.”

The study examines four key business-to-business trends: private label brands, demand-driven channels, new distribution profit models, and Internet trends for business customers. The new report also includes never-before-published data on industry segmentation, emerging trends affecting the supply chain, sales management, supply chain technology forecasts, and much more.

For the first time in the history of Facing the Forces of Change® , Dr. Fein will also publish a weekly Web log to help executives get the most out of the new report. The Web log will highlight case studies, news stories, and data reports that relate to the new report. The Web log is available at http://www.DistributionTrends.com .

“We encourage wholesaler-distributors, manufacturers, and customer firms to read this report and apply it in their businesses,” said Ron Schreibman, Executive Director of the NAW Institute for Distribution Excellence. “It provides practical insights into key trends impacting the wholesale distribution supply chain and is full of specific action ideas and planning tools that executives can use in their own companies. The new Web log will ensure that the report stays current with industry trends.”

NAW is a federation of more than 100 wholesale distribution line of trade international, national, regional, state, and local associations and thousands of individual firms that collectively total more than 40,000 companies. The role of the NAW Institute for Distribution Excellence is to sponsor and disseminate research and knowledge in strategic management issues affecting the wholesale distribution industry. Visit http://www.nawpubs.org to learn more.

Pembroke Consulting, Inc. provides business and marketing strategy advice to manufacturing, distribution, and technology executives operating in channel-intensive industries. To learn more about the firm and its services, visit http://www.PembrokeConsulting.com .

Editors: Go to http://www.naw.org/tmp/FTF2007_CMYK.jpg to download a high-resolution image of the front cover.

The National Association of Wholesale-Distributors Creates NAW Institute for Distribution Excellence

February 12, 2007 , Washington , DC — At last month's NAW Executive Summit, it was announced that the work of the Distribution Research and Education Foundation (DREF) is now being carried out by a new organization: the NAW Institute for Distribution Excellence .

“The NAW Institute Board of Directors decided to make this name change to more clearly identify our research activities with NAW, which our market research showed as having very high and positive brand awareness among wholesaler-distributors and other interested parties,” said Byron Potter, Chairman of the NAW Institute for Distribution Excellence and President and CEO of Dallas Wholesale Builders Supply Inc. “We've created the NAW Institute to more clearly focus on the intended outcome of our research — excellence in distribution.”

The NAW Institute combines the research-focused work of DREF with the output of the NAW Publishing Program. The result will be a single, focused unit that provides the highest level of industry-wide research and education to complement and supplement the educational efforts of NAW's member associations.

While the name and some of the activities are changing, the mission of the NAW Institute for Distribution Excellence remains unchanged: “To sponsor and disseminate research into strategic management issues affecting the wholesale distribution industry. The NAW Institute for Distribution Excellence aims to help merchant wholesaler-distributors remain the most effective and efficient channel in distribution.”

The first study to be released by the new NAW Institute for Distribution Excellence will be the 8th edition of the landmark trends report Facing the Forces of Change® , which will be available in March. To learn more about this publication and the NAW Institute and its other publications and resources, go to www.nawpubs.org or contact Vicky Walsh at 202.872.0885.

“Our goal in establishing the NAW Institute for Distribution Excellence is to provide a comprehensive and cohesive unit of strategic knowledge for wholesaler-distributors across all lines of trade,” said Ron Schreibman, Executive Director of the NAW Institute for Distribution Excellence. “We're not planning to throw everything away that DREF built. We will retain all of the good work and industry connections that DREF built over four decades and then add to it.”

NAW comprises individual wholesale distribution firms and a federation of national, regional, state, and local associations and their members, which collectively total more than 40,000 companies. NAW represents the $3.6 trillion merchant wholesale distribution industry, which moves to market virtually every kind of product in the U.S. economy and employs 5 million people.

Editors: To download the NAW Institute for Distribution Excellence logo, please contact Vicky Walsh at 202.872.0885 or vwalsh@nawd.org.

December Rise in Home Sales Bodes Well for 2007 Upturn

Heading into 2007, housing demand showed further signs of stabilizing, with sales of new single-family homes rising 4.8% to a seasonally adjusted annual rate of 1.12 million units in December, according to figures released on Jan. 26 by the U.S. Commerce Department.

"The December housing report squares with our most recent builder surveys, which show that traffic of prospective buyers is up and consumers are responding favorably to price adjustments and widespread sales incentives," said NAHB President David Pressly.

On an annual basis, 1.061 million new home sales were registered in 2006. While this represents a 17.3% drop from an all-time high in 2005, the sharpest percentage decline since 1990, the actual sales level was about the same as in 2003, just as the industry was entering into the unsustainable boom of 2004 and 2005.

On a quarterly basis, new home sales posted a rate of 1.061 million in the final quarter of 2006, up from 1.007 million in the third quarter, which was the quarterly low point for the year.

"The stabilization of home sales and housing demand that we are now seeing is the first step required to put the housing market back on track," said NAHB Chief Economist David Seiders. "The second step is to whittle down the inventory overhang, which builders have been doing since July, and the final step will be to bring housing starts back up to sustainable levels. We anticipate that starts will bottom out in the first quarter of this year and that residential construction activity will be moving up by the second half of 2007."

The inventory of new homes for sale hit a 10-month low of 537,000 units in December, which is equivalent to a 5.9-month supply at the current sales price — down from a recent high of 7.2 in July.

On a regional basis, new home sales were up 27.3% in the Northeast, 26.6% in the Midwest and were flat in the South. Sales fell 4.4% in the West.

Seiders noted that unusually warm weather probably boosted sales in the Northeast and Midwest to some extent in December, but that the stabilization pattern evident in the fourth quarter is quite convincing and consistent with other available housing indicators, including NAHB's survey measures.

-From NAHB's Nations Building News.

Housing Production Should Bottom Out Soon

Growth of U.S. economic output (real Gross Domestic Product) has slowed to some degree in recent quarters as the housing production component (residential fixed investment) has contracted substantially.

However, the housing contraction has not generated serious spillover effects in other sectors of the economy (including personal consumption expenditures), and strengthening activity in some sectors, including nonresidential construction and foreign trade, has helped offset the negatives from housing.

As a result, the economy has not skated close to recession and the probability of an economic downturn in 2007 is not high.

Economic resilience also is evident in the labor market. The housing downswing certainly caused job losses in residential construction during most of 2006, and further losses are virtually inevitable during the first half of this year. However, overall job growth was well maintained in 2006 and we’re expecting a solid performance in 2007 as well.

The unemployment rate is likely to gravitate upward from recent expansion lows, but remain in a historically low range.

Core Inflation Has Begun to Recede, Right on Schedule

Key measures of core consumer price inflation (excluding prices of food and energy) firmed up during most of 2006, moving well above the upper bounds of the Federal Reserve’s apparent “tolerance zones.”

This inflation pattern naturally raised concerns about economic “overheating” at our central bank and prompted financial market participants to anticipate some tightening of monetary policy in the near term.

As 2006 drew to a close, core inflation rates began to recede, at least on a year-over-year basis. The core Consumer Price Index slowed systematically during the fourth quarter, receding to a pace only slightly above the upper bound of the Fed’s apparent tolerance zone for this measure.

The evolving slowdown in core inflation actually had been projected by the Federal Reserve, and this pattern is an integral part of NAHB’s forecast for 2007. The recent and projected improvements on the inflation front reflect modest slowdowns in growth of real GDP and employment as well as dissipation of some special factors that elevated core inflation last year.

The Interest Rate Structure Remains Historically Low

The Federal Reserve has held its target for the federal funds rate at 5.25% since mid-2006, a level that’s around a “neutral” monetary policy stance in the prevailing inflation environment.

We expect the Fed to maintain this funds rate target until the late-June meeting of the Federal Open Market Committee (FOMC), and we anticipate a quarter-point rate cut at that time — in order to keep the “real” funds rate from rising as core inflation recedes.

Long-term interest rates have firmed up to some degree in recent weeks as incoming data on the economy have been surprisingly strong.

Even so, long rates remain quite low on a historical basis and significantly below the recent highs in mid-2006. Indeed, the long-term home mortgage rate recently has been hanging around 6.25%, half a percentage point below the mid-2006 level.

Despite the recent firming of long-term rates, the Treasury yield curve still is inverted across much of its range — a pattern that may not be sustainable for much longer. NAHB’s forecast shows an essentially flat Treasury yield curve by late this year, at least out to the 10-year mark, as short rates recede and long rates move up modestly.

Housing Demand Apparently Stabilized Late Last Year

A healthy job market, good growth in household income and a favorable interest rate environment certainly provided support to housing demand in the latter part of 2006. Furthermore, widespread price cuts and deepening nonprice sales incentives (documented by NAHB surveys) gave further support as the year drew to a close.

Seasonal adjustment difficulties generally complicate interpretation of housing market data during the winter months, and this time is no exception. Weather conditions were unusually harsh last October and unusually mild in both November and December. Even so, it appears that housing demand stabilized in fundamental terms toward the end of 2006, and some improvement may now be underway.

The October-November averages for sales of both new and existing single-family homes were up a bit from their third-quarter averages, and new home sales increased in December.

Furthermore, NAHB’s single-family Housing Market Index — incorporating survey readings for current and expected home sales as well as for traffic of prospective buyers — continued to edge up in January. The January HMI came to 35, up from a low of 30 last September. The weekly series by the Mortgage Bankers Association on applications for mortgages to buy homes also supports the proposition that housing demand has stabilized, despite well-known seasonal adjustment issues.

NAHB’s proprietary monthly survey of 30 large home builders — accounting for about one-fourth of the total for-sale new home market — also provides reassuring signals on the demand side of the single-family market during the final months of 2006. These data, seasonally adjusted, show a flattening of gross sales, a falloff in cancellations and a modest improvement in net sales late last year.

Housing Production Should Bottom Out Before Long

Stabilization of housing demand (net sales) is the essential first step toward completion of the dramatic housing “correction” that has followed the unsustainable housing boom of 2004-2005.

The second step is to work down an excessive inventory overhang in markets for both new and existing housing, and the final step is to bring housing starts and residential construction activity back up to sustainable trend levels.

Since housing inventories can’t be moved around, it’s inevitable that housing starts and residential construction will start moving up in some areas while heavy inventories continue to hold down new production in other areas.

Indeed, NAHB’s forecast anticipates an upturn in national housing starts by the second quarter of this year and a turnaround in residential fixed investment by the third quarter despite the persistence of an unusually large national inventory overhang for some time.

NAHB’s forecast depicts a gradual recovery in national housing production through 2008 as inventories are worked down in more and more markets and housing starts approach our estimate of sustainable trend — about 1.85 million units per year.

During the recovery process, residential fixed investment will swing back to a positive contributor in the GDP growth equation long before housing production is back to trend.

NAHB Chief Economist David Seiders analyzes the economy from the point of view of the housing market every other week in the free e-newsletter, “Eye on the Economy.” The preceding is a reissue of his Jan. 24 edition. To subscribe to “Eye on the Economy,” click here.

The U.S. Economy Is Performing Well Despite the Housing Downswing

Growth of U.S. economic output (real Gross Domestic Product) has slowed to some degree in recent quarters as the housing production component (residential fixed investment) has contracted substantially.

However, the housing contraction has not generated serious spillover effects in other sectors of the economy (including personal consumption expenditures), and strengthening activity in some sectors, including nonresidential construction and foreign trade, has helped offset the negatives from housing.

As a result, the economy has not skated close to recession and the probability of an economic downturn in 2007 is not high.

Economic resilience also is evident in the labor market. The housing downswing certainly caused job losses in residential construction during most of 2006, and further losses are virtually inevitable during the first half of this year. However, overall job growth was well maintained in 2006 and we’re expecting a solid performance in 2007 as well.
The unemployment rate is likely to gravitate upward from recent expansion lows, but remain in a historically low range.

-From NAHB's Eye on the Economy newsletter.

Core Inflation Has Begun to Recede, Right on Schedule

Key measures of core consumer price inflation (excluding prices of food and energy) firmed up during most of 2006, moving well above the upper bounds of the Federal Reserve’s apparent “tolerance zones.”

This inflation pattern naturally raised concerns about economic “overheating” at our central bank and prompted financial market participants to anticipate some tightening of monetary policy in the near term.

As 2006 drew to a close, core inflation rates began to recede, at least on a year-over-year basis. The core Consumer Price Index slowed systematically during the fourth quarter, receding to a pace only slightly above the upper bound of the Fed’s apparent tolerance zone for this measure.

The evolving slowdown in core inflation actually had been projected by the Federal Reserve, and this pattern is an integral part of NAHB’s forecast for 2007. The recent and projected improvements on the inflation front reflect modest slowdowns in growth of real GDP and employment as well as dissipation of some special factors that elevated core inflation last year.

-From NAHB's Eye on the Economy newsletter.

The Interest Rate Structure Remains Historically Low

The Federal Reserve has held its target for the federal funds rate at 5.25% since mid-2006, a level that’s around a “neutral” monetary policy stance in the prevailing inflation environment.

We expect the Fed to maintain this funds rate target until the late-June meeting of the Federal Open Market Committee (FOMC), and we anticipate a quarter-point rate cut at that time — in order to keep the “real” funds rate from rising as core inflation recedes.

Long-term interest rates have firmed up to some degree in recent weeks as incoming data on the economy have been surprisingly strong.

Even so, long rates remain quite low on an historical basis and significantly below the recent highs in mid-2006. Indeed, the long-term home mortgage rate recently has been hanging around 6.25%, half a percentage point below the mid-2006 level.

Despite the recent firming of long-term rates, the Treasury yield curve still is inverted across much of its range — a pattern that may not be sustainable for much longer. NAHB’s forecast shows an essentially flat Treasury yield curve by late this year, at least out to the 10-year mark, as short rates recede and long rates move up modestly.

-From NAHB's Eye on the Economy newsletter.

Housing Demand Apparently Stabilized Late Last Year

A healthy job market, good growth in household income and a favorable interest rate environment certainly provided support to housing demand in the latter part of 2006. Furthermore, widespread price cuts and deepening nonprice sales incentives (documented by NAHB surveys) gave further support as the year drew to a close.

Seasonal adjustment difficulties generally complicate interpretation of housing market data during the winter months, and this time is no exception. Weather conditions were unusually harsh last October and unusually mild in both November and December. Even so, it appears that housing demand stabilized in fundamental terms toward the end of 2006, and some improvement may now be underway.

The October-November averages for sales of both new and existing single-family homes were up a bit from their third-quarter averages, and we expect slight increases in December (data to be released later this week).

Furthermore, NAHB’s single-family Housing Market Index — incorporating survey readings for current and expected home sales as well as for traffic of prospective buyers — continued to edge up in January. The January HMI came to 35, up from a low of 30 last September. The weekly series by the Mortgage Bankers Association on applications for mortgages to buy homes also supports the proposition that housing demand has stabilized, despite well-known seasonal adjustment issues.

NAHB’s proprietary monthly survey of 30 large home builders — accounting for about one-fourth of the total for-sale new home market — also provides reassuring signals on the demand side of the single-family market during the final months of 2006. These data, seasonally adjusted, show a flattening of gross sales, a falloff in cancellations, and a modest improvement in net sales late last year.

-From NAHB's Eye on the Economy newsletter.

New Stories Not the Driving Force Behind Home Buying

The nation’s prospective home buyers may derive some of their information on the housing market from the news media, but at the end of the day the things that matter far more when they are deciding whether to make a purchase include the price of the new home, mortgage interest rates and their housing needs, according to a new nationwide survey commissioned by NAHB.

“While the majority of the households we polled indicated that they found the media a reliable source of information on the housing market, what they read in the newspaper, saw on television or heard on the radio was no substitute for actually going out and shopping the market,” said Thomas Riehle, a partner in RT Strategies, which conducted the research for NAHB.

“When people are actually thinking about buying a home, they are driven by the details of how it will impact their family budget and lifestyle and contribute to their long-term wealth, and that gives them a much closer perspective on the market than what can be conveyed in news coverage,” Riehle continued.

When asked to rate the importance of several factors that might affect their decision to buy or not to buy a home, survey respondents put the home’s price at the top of the list, with 80% citing its significance.

That was followed by: the potential for the new home to appreciate in value, 71%; the prospect of selling their current home at a fair price, 70%; the level of mortgage interest rates, 69%; and personal life changes, such as a new job or an addition to the family, 60%. On a list of eight items, news stories on real estate market conditions ranked second from the bottom, with 28% saying that it was an important factor behind their decision to buy.

When further asked about the influence of the news media on their decisions of when to buy a home, only 19% of the respondents said it played an important role; 23% indicated that it had some importance on their decision; and 7% said it played a minor role. A full 48% said it had no influence whatsoever.

Sixty-one percent of the survey participants said that the media is “sometimes trustworthy” as a source of information on the housing market and 5% said that it is “always trustworthy.” Twenty percent and 8%, respectively, said it is “seldom trustworthy” and “never trustworthy.”

“The media provides an important service by giving consumers the big picture of what is occurring in the housing marketplace, even the big picture in their local markets. But despite that, local reporting can't convey the information that consumers consider the most when they are looking for a new home,” said NAHB President David Pressly. “The fact is that even as the national market is slowing down from the unsustainable pace of the past few years, there are sizable numbers of families who need new homes. And with a wide selection of new homes to choose from, with mortgage rates remaining near historic lows and with incomes and jobs continuing to grow, the opportunities are extremely favorable for buyers in today’s marketplace.

Home builders are working down their existing inventory of homes fairly quickly and the current slowdown in production is expected by NAHB economists to have run its course by the middle of 2007. From that point forward, the industry is expecting to see a good balance in the marketplace between supply and demand, setting the stage for a healthy and sustainable trend for housing, supported by a growing U.S. economy.

The NAHB survey of 2,000 households, including more than 1,750 registered voters, was conducted from Oct. 26 to 29.

It's a Great Time to Buy

New materials from NAHB — “It’s a Great Time to Buy”  — provide association members with information that consumers will find helpful in assessing opportunities for purchasing a home in today’s buyer’s market.

Resources in the free, members-only buy-now package include:

• Talking points, Q&As and a sample press release
• Sample op-eds, letter to the editor and newspaper columns
• An economic backgrounder
• Print and radio advertisements
• Public relations advice on getting the message out through the media, events and Web sites
• A home builders association guide on how to make the most of the package
• Sample member communications, including a newsletter article and tips for engaging members in the campaign

As part of the effort, resources have been included that are directly available to consumers at www.nahb.org/timetobuy.

-From NAHB's Nations Building News.

Builders Confidence Buoyed by Stabilizing Shift in Market

Rising affordability, low mortgage rates and other suggesting stabilizing conditions in the nation’s single-family housing market boosted home builder confidence in November as it edged up for the second consecutive month, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The HMI gained two points from the previous month to stand at 33.

“More and more builders are seeing light at the end of the tunnel,” said NAHB President David Pressly. “Our members are telling us that the market is steadying after a significant downward correction. On the demand side, we look for sales to stabilize and gradually move up in the coming months.”

“With home prices leveling off, mortgage interest rates remaining near historic lows, energy prices declining and the economy continuing to generate solid growth in employment and household income, affordability is now on the mend and many consumers recognize that home buying conditions have improved,” said NAHB Chief Economist David Seiders. “Builders are picking up on this change in market momentum.”

Derived from a monthly survey that NAHB has conducted for almost 20 years, the index gauges builders’ perceptions of current single-family home sales, sales expectations for the next six months and traffic from prospective buyers. The scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor.

All three component indexes moved higher in November. Current single-family homes sales registered a 33 on this month’s index, one point higher than the September reading; expected sales rose four points for the second consecutive month to 46; and traffic was up three points to 26.

“Looking ahead, builder outlook is perking up,” said Pressly. “With builders continuing to offer significant sales incentives and affordability on the rise, home shoppers have greater opportunities today than they have had for several years, making this an opportune time to buy.”

Regionally, the HMI rose two points to 37 in the Northeast and two points to 40 in the South. Builder confidence edged down two points to 16 in the Midwest and one point to 34 in the West.

-From NAHB's Nations Building News.

Housing Decline Pushing Down the Price of Lumber

Composite lumber prices have dropped from $380 per thousand board feet on Jan. 6, 2006 to $274 per thousand board feet on Nov. 8. The price this time last year was $350, according to NAHB. Prices of drywall and concrete have remained steady, in part due to energy costs, but plastic insulation and other building products have also declined in price. Chris Cromyak, manager of The Lumber Yard in Reading, Pa., said that while big purchases from larger builders and developers are off, smaller contractor purchases remain steady. “Those guys always seem to have something going on,” he said. Reading area builders are expecting the market to remain flat through next spring or summer.

-From NAHB's Nations Building News.

Third-Quarter Economic Growth Revised Upward Despite a Weaker Housing Component

Growth of real gross domestic product (GDP) for the third quarter of this year has been revised upward by the Commerce Department — to a 2.2% pace from 1.6% in the “advance” estimate. The revised growth rate still qualifies as a sub-par performance, and a similar reading is in the cards for the final quarter of 2006 ― we’re estimating 2.4%.

The housing production component (Residential Fixed Investment) was the weakest part of the revised third-quarter GDP report, contracting at an 18% annual rate and lopping off 1.16 percentage points from the overall GDP growth rate.

Another sizeable contraction in RFI is in the cards for the fourth quarter of this year, but the drag on economic growth should ease off during the early part of next year and housing should provide positive contributions to growth beyond mid-year.

-From NAHB's Eye on the Economy newsletter.

Financial Markets Provide a Favorable Environment for Housing Going Forward

The convincing slowdown in economic growth has encouraged the Federal Reserve to hold short-term interest rates steady since mid-year, despite elevated readings on core consumer price inflation.

Recent statements from Fed representatives, including Fed Chairman Ben Bernanke, strongly suggest that monetary policy will be held steady at the next meeting of the Federal Open Market Committee (Dec. 12). NAHB’s forecast assumes that the Fed will maintain the current federal funds rate target (5.25%) through the first half of next year before implementing a bit of monetary ease.

Long-term interest rates have receded as the economy has slowed and probabilities of near-term Fed tightening have been marked down. Indeed, the long-term home mortgage rate recently slipped below 6.2%, the same as at the beginning of this year and not far above the cyclical low at mid-2005. NAHB’s forecast shows only slight upward pressure on long-term rates during the coming year.

-From NAHB's Eye on the Economy newsletter.

Home Sales Are Stabilizing Following a Substantial Correction

Sales of new and existing homes (including condo units) soared to unsustainable heights during 2005, and substantial downward corrections have been recorded since then. However, recent data strongly suggest that the downswing in sales hit bottom recently, at least for single-family homes, and we are now expecting sales to show some improvement by the first quarter of 2007.

Sales of new single-family homes slipped a bit in October (preliminary estimate) although the pace was equivalent to the average for the third quarter — suggesting that the abrupt downshift from the mid-2005 record is now behind us. Sales of existing single-family homes actually edged up in October and stood a bit above the third-quarter average, while sales of existing condo units continued downward in October.

NAHB’s single-family Housing Market Index bottomed out in September and recorded slight increase in both October and November — primarily reflecting a pickup in builders’ sales expectations. Furthermore, applications for mortgages to buy homes (Mortgage Bankers Association series) have been essentially stable since July following a major downshift during the previous year.

-From NAHB's Eye on the Economy newsletter.

Inventory and Price Trends Prompt Builders to Cut Back New Production

The pronounced fall-off in buyer demand, the large buildup of unsold inventory and the weakness of home prices have prompted builders to not only intensity sales efforts, but also to cut back on starts of new units and acquisition of new building permits.

Total housing starts fell by nearly 15% in October, reflecting large cutbacks in both single-family and multifamily markets, and permit issuance was off substantially as well. Indeed, single-family starts and permits were both down by 32% from a year earlier.

We expect housing starts to continue downward into the early part of 2007, despite an earlier stabilization of sales, as builders continue to work down unsold inventory.

We are now expecting starts to begin inching upward in the second quarter of next year, and that turnaround should relieve the drag on GDP from Residential Fixed Investment by the second half of 2007 — pretty much in line with the Fed’s expectations.

-From NAHB's Eye on the Economy newsletter.

Mortgage Rates Nudge Down Housing Affordability

Despite no change in the median price of all homes sold, housing became a bit less affordable during this year’s second quarter because of a slight uptick in the average mortgage interest rate, according to the latest NAHB/Wells Fargo Housing Opportunity Index (HOI), which was released on Aug. 23.

Meanwhile, the index showed that Indianapolis has been the most affordable major U.S. housing market for four quarters running.

“The second-quarter HOI reading indicates that 40.6% of new and existing homes that were sold during the second quarter were affordable to families earning the national median income of $59,600,” said NAHB President David Pressly. “This is just below 41.3% in the first quarter and the decline in affordability was caused by the somewhat higher mortgage rates that prevailed in the April to June period.”

The national weighted interest rate on fixed-rate and adjustable-rate mortgages — a key component in calculating the HOI — was 6.65% in the second quarter, up from 6.39% in the first three months of the year.

In Indianapolis, 87.4% of homes sold in the second quarter were affordable to families earning the area’s median household income of $65,100. The median sales price of all homes sold in Indianapolis during that time was $120,000, which was up from $113,000 in the previous quarter, but was the same as the sales price for the final quarter of 2005.

Following Indianapolis, the most affordable major metros were: Detroit-Livonia-Dearborn, Mich.; Grand Rapids-Wyoming, Mich.; Buffalo-Niagara Falls, N.Y.; and Youngstown-Warren-Boardman, Ohio-Pa., in that order.

The five most affordable smaller metro markets during the second quarter were: Springfield, Ohio and four Michigan locations: Bay City, Lansing-East Lansing, Saginaw-Saginaw Township North and Battle Creek.

In Los Angeles-Long Beach-Glendale, Calif. — the nation’s least-affordable major housing market for the seventh consecutive quarter — just under 2% of the homes sold during the second quarter were affordable to those earning the area’s median family income of $56,200. The median sales price of the homes sold was $521,000.

The next least affordable major metros were: Santa Ana-Anaheim-Irvine, Calif.; San Diego-Carlsbad-San Marcos, Calif.; New York-White Plains-Wayne, N.Y.-N.J.; and Stockton, Calif., in that order.

The five least affordable metro areas with populations below 500,000 were all located in California: Salinas, Merced, Modesto, Santa Cruz-Watsonville and Santa Barbara-Santa Maria.

For more details on the index, click here.

-From NAHB's Nations Building News.

New Single-Family Home Sales Down, Inventory Up in July

The pace of new single-family home sales dipped 4.3% in July to a seasonally adjusted annual rate of 1.072 million units, the U.S. Commerce Department reported last Thursday, 21.6% below the record monthly high set last July and leaving sales for this year’s first seven months 14.2% below where they were for the same period of 2005.

“The slowdown in demand has been on our builders’ radar screens since the middle of last year,” said NAHB President David Pressly. “Builders have been offering sales incentives and slowing their production as demand cools and inventories rise, and our surveys suggest that the downward correction in sales from last year’s record pace still is underway.”

“The current downswing in home sales reflects both falling affordability and a pullout by investors/speculators that were a major factor behind the unsustainable pace of new home sales last year,” said NAHB Chief Economist David Seiders. “We’ve seen an inevitable mid-cycle correction of housing market activity from the records posted last year.”

Sales for July were down 21.3% in the Midwest and 8.0% in the South but up 1.8% in the Northeast and 11.7% in the West. On a year-to-date basis, however, all four regions were substantially below sales rates last year.

The inventory of new homes for sale rose to 568,000 units at the end of July, a 6.5-months supply at the current sales pace.

Completed homes for sale represented 24% of the inventory; those still under construction accounted for a 57% share of the inventory; and permitted units not yet started were 18%. Completed homes for sale were on the market for a median 3.8 months in July, up slightly from 3.7 months a year earlier.

“With respect to the housing market outlook, we’re counting on solid demographic foundations, forward economic momentum, a favorable interest-rate structure and aggressive builder sales incentives to limit the depth and duration of the current downswing in new homes sales,” Seiders said. “We expect the market to bottom out during the first half of next year and then move to a solid, sustainable trend.”

-From NAHB's Nations Building News.

The Economy Is on the ‘Soft’ Side, But Forward Momentum Has Been Maintained

The “advance” GDP report for the second quarter of this year showed a convincing downshift in economic growth, to a below-trend 2.5% pace. That estimate is likely to be revised upward to some degree when the “preliminary” estimate is released on Aug. 30, although the second-quarter performance still will qualify as sub par.

Furthermore, GDP growth is likely to remain below trend in the second half of the year, largely because of absolute declines in the housing production component of the economy.

The slowdown in GDP growth naturally has provoked a slowdown in payroll employment growth and an uptick in the unemployment rate (data through July), and weekly data on unemployment insurance claims point toward rather sluggish job growth in August as well. Residential construction employment actually has been falling in absolute terms since a cyclical peak in February, and further declines are inevitable in the months ahead.

Although growth of economic output and employment have slowed from above-trend rates recorded earlier in the expansion, forward momentum still seems solid and outright declines in GDP or employment are distant prospects. Indeed, the current slowdown process is essential to maintenance of solid economic growth with low inflation down the line.

-From NAHB's Eye on the Economy newsletter.

Core Inflation Still Is on the High Side, But Some Improvement Should Be in the Cards

Core price inflation has remained on the high side despite the evolving slowdown in the economy. The core consumer price index (CPI) posted a one-month annualized gain of 2.4% in July, slower than during the four previous months, although the year-over-year gain edged up to 2.7%.

The housing component once again put substantial upward pressure on the core CPI, driven largely by the imputed “owners’ equivalent rent” calculation that added about 0.4% to the core inflation rate. Everything considered, the July reading on core CPI inflation was reassuring to both the Federal Reserve and financial markets.

The evolving slowdowns in growth of GDP and employment should take some strength out of core inflation down the line, particularly as generation of slack in labor markets takes some strength out of unit labor costs. Furthermore, the impact of record-high energy costs on core inflation will wane as long as the energy prices don’t keep ratcheting upward.

NAHB’s forecast shows some deceleration of core inflation later this year and in 2007, consistent with the mid-July projections by members of the Federal Open Market Committee (FOMC) that were contained in the Fed’s mid-July semiannual Monetary Policy Report to the Congress.

-From NAHB's Eye on the Economy newsletter.

Long-Term Interest Rates Have Fallen Substantially From Mid-Year Highs

The obvious economic slowdown, the convincing nature of Bernanke’s mid-July testimony, the FOMC’s policy decision and statement on Aug. 8 and the recent good news on core inflation have provoked a stunning rally in the fixed-income markets. As a result, longer-term Treasury yields have fallen substantially from their recent highs at mid-year, and those declines have provoked similar declines in long-term mortgage rates.

The bond market rally has produced another significant inversion of the Treasury yield curve (out to 10 years), and that may not be a sustainable relationship.

NAHB’s forecast currently shows a modest firming up of long-term yields (and a flattening of the yield curve) by later this year, with a modest decline in the entire yield structure by late next year. Stay tuned.

-From NAHB's Eye on the Economy newsletter.

The Housing Downswing Continues Despite a Decent Economic/Financial Picture

The recent slowdowns in economic growth and job formation and the (net) increase in mortgage rates during the past year certainly are negatives for the housing sector, although the economic/financial picture still looks reasonably bright. But we’re also coming off a virtual frenzy in housing markets last year, an episode that involved extraordinarily heavy buying by investors/speculators that drove sales, production and price appreciation into unsustainable territory.

The highs in home sales and price appreciation were hit around mid-2005, and substantial declines have been recorded since then (through July). Housing starts and building permit issuance have come down substantially in the process, particularly in single-family and condo markets. (Rental housing is firming up at this time.)

The biggest declines in market volume have been occurring in areas that were the hottest last year — California, Florida, Arizona, Nevada, Hawaii, Virginia, Maryland and Washington, D.C. — and we’re also seeing sizeable declines in Michigan where fundamental economic conditions are in serious decline.

So far, the metro areas showing year-over-year price erosion are heavily concentrated in the weak Great Lakes area of the Midwest region, not in the formerly overheated markets where sales volume is coming down the most.

-From NAHB's Eye on the Economy newsletter.

The Housing Sector Will Not Drag the Economy Into Recession

The persistent erosion of housing market activity has already converted housing from a powerful engine of economic growth into a significant drag on the U.S. economy. In fact, memories of past housing downswings have prompted some analysts to conclude that housing will be dragging the overall economy into recession by next year.

We continue to view the ongoing housing downswing as an inevitable mid-cycle correction from unsustainable levels of activity in both 2004 and 2005, and we expect the housing downswing to bottom-out by early next year.

Our forecast shows contraction in the housing production component of GDP (residential fixed investment) from the final quarter of 2005 through the first quarter of 2007.

The housing downswing is a major factor in our projection of below-trend growth of GDP and employment through the first half of 2007, and that slowdown helps contain those critical core inflation numbers (aside from the perverse impulse from the imputed “owners’ equivalent rent” component that promises to move upward with market rents). But the housing downswing is part-and-parcel of a mid-cycle sectoral rotation that also includes upswings in other parts of the economy — particularly in nonresidential fixed investment (capital equipment and software as well as structures) and exports.

-From NAHB's Eye on the Economy newsletter.

Harvard Predicts Continuing House Price Appreciation

Rising interest rates and cooling demand from speculators are bringing the nation’s housing boom to an end, but there are scant signs of any bust on the horizon, according to this year’s “State of the Nation’s Housing” report from the Joint Center for Housing Studies of Harvard University.

And on the heels of a five-year stretch of unprecedented home price appreciation, the report finds, prices are likely to continue going up, just not at a torrid pace, which will continue to draw healthy numbers of new home buyers to the marketplace.

Looking at another potential trouble spot — the growing popularity of exotic new mortgage instruments designed to enable buyers to squeeze into increasingly expensive housing with lower monthly payments — the report finds that when the payments on these loans do rise, the majority of borrowers won’t find themselves in dire financial straits.

While all bets are off if the economy should suddenly stall out and start losing jobs or if heavy overbuilding occurred, neither of these preconditions for a housing bust is in evidence, according to the Joint Center, and the industry slowdown now in play appears headed for a soft landing.

Cooling Investor Demand

“The greatest threat to housing markets is a precipitous drop in house prices,” the report says. “Fortunately, sharp declines of 5% or more seldom occur in the absence of severe overbuilding, dramatic employment losses or a combination of the two.”

Rising mortgage interest rates are responsible for much of the blame for the current slowdown in sales. From January of 2005 to January of this year, there was a 1.56 percentage-point increase in adjustable mortgage rates and a 0.44% increase in fixed mortgage rates, which has helped push up inventories of both new and existing homes for sale. Even so, as of this March, the supply had yet to reach the six-month level that defines a buyer’s market, although there was a 6.9-month supply of condominiums.

A rise in the number of homes for sale and the amount of time it takes to sell them should cool investor demand, the study says, with repercussions for the disposition of the homes they recently bought.

The investment share of home loans climbed into the 9%-10% range in 2004 and 2005, compared to 6%-7% for the 1999-2003 period. In most of the top 50 metro markets for investors and second home buyers, the investor share more than doubled between 2000 and 2005, according to the report. Among the markets with the highest share of investors are several metros in Florida and California, as well as Boise, Idaho; Phoenix; and Las Vegas.

If the departure of investors from the housing market does materialize — a process that already appears to be starting — “it will be at least a year before it is clear how quickly these investment properties can be sold to owners who intend to use them as primary or second homes,” the Joint Center says. “In the hottest markets, the overhang of investor properties may be absorbed rapidly if housing production continues to fall. The recent sharp increase in vacant single-family homes for rent suggests, however, that this process will not be smooth.”

Milder Price Corrections Than in the Past

There is also likely to be a bit of a wait for nominal price declines to materialize: “When and if house prices do fall, the so-called bubble is more likely to deflate slowly rather than burst suddenly. History suggests that appreciation eases for a year or two before prices come down in nominal terms. While dips of a few percentage points are common, nominal house prices rarely drop by 10% or more.”

Declines of 5% or more in nominal house prices have occurred at least once over the past 30 years in roughly half of the nation’s largest 75 metro areas, almost always because of significant job losses or overbuilding. “In terms of magnitude, price declines associated with episodes of major job losses alone average 4.5%, while those occurring in and around periods of overbuilding alone average 8.3%.”

The Harvard study points out that the amount and duration of joblessness were less in the 2001 downturn than in previous recessions, and that building activity since has been much less intense than in periods prior to drops in housing prices.

“In metros experiencing major house price declines in the past, three-year average development levels exceed the 20-year median by about 74%,” the study says. “In 2001-2004, development in these same metros was only 10% above normal. These signs of moderation provide good reason to believe that the next house price correction will be milder than in the past.”

Mortgage Innovations

The study notes that even with the national homeownership rate nudging down a tenth of a percent last year, it increased in the West and Northeast, where home price appreciation has been the strongest. About 1 million home owners were added in 2005, and for many of them, mortgage innovations such as low-downpayment, hybrid-adjustable and interest-only loans helped blunt the impact of higher home prices and interest rates.

Interest-only loans went from obscurity two years ago to an estimated 20% of the dollar volume of all loans and 37% of all adjustable-rate loans originated in 2005, according to Harvard. Payment option loans — which let borrowers make minimum payments that are lower than the interest due on the loan and roll the balance into the amount owned — accounted for nearly 10% of last year’s loan originations. About 3 million borrowers have interest-only adjustables and 1 million have payment-option first mortgages.

While monthly payments can be driven up sharply at the end of the agreed-upon period, “most interest-only loans extend for at least five years, leaving ample time to move, refinance or incomes to grow before principal payments start coming due,” said Nicolas P. Retsinas, director of the Joint Center.

Home owners who fi