Housing Market Summary: May not be in a Depression but this is still depressing

The housing market is barely breathing with housing starts and new one family houses sold at all time lows:

The S&P/Case-Shiller Index shows a dramatic decline in home prices nationwide:

 I could not resist throwing Detroit and Cleveland on there.  It is going to be a long time before the consumer comes back in Detroit and Cleveland.  Nationwide home prices seem to be stabilizing at a level not seen since 2003.  The de-leveraging consumers that believe their home prices won't fall any further may start to feel financially healthier.  Although I don't imagine the de-leveraging ending anytime soon. 

Relationships Don't Last Forever: A Story of Divorce

Economist's View recently pointed out the relationship between capacity utilization and unemployment.  This graph shows the relationship of capacity utilization vs. unemployment:

An increase in  capacity utilization is usually immediately followed by a decrease in unemployment.  Economist's View makes the claim that :

"That is, in past recessions an upturn in capacity utilization was matched by an upturn in employment, there was no delay in the relationship, but in recent recessions there has been about a half year delay before unemployment reacts to changes in capacity utilization (or perhaps even a bit longer)."

We can definitely see this delay in the 2001 recession.  Notice how capacity utilization turns up and unemployment is initially very slow to drop.  The argument is being made that we are going to see the same thing this time around, where capacity utilization rates improve but unemployment won't drop for at least half a year.

A look at housing starts vs. unemployment:

Residential investment usually pick up at the end of a recession but not this time because of excess housing inventory.  There are too many existing properties for sale so we are not going to see strong housing starts data for a while.  This may lead to a slow decline in the unemployment rate as a growing housing sector usually creates jobs.

Calculated Risk explains the following:

"Usually housing starts and residential construction employment lead the economy out of a recession, but not this time because of the huge overhang of existing housing units. After rebounding a little in early '09, housing starts have mostly moved sideways"

Housing Starts Data: Not A Surprise

For X.U. Economics blog readers the drop in housing starts does not come as a surprise but is still discouraging.  Yesterday we looked at the Housing Market Index which warned us that this would happen.  Housing Starts and Building Permits data essentially just records the number of new homes being built and permits being issued for future construction.

When browsing over the data it is important to note the performance of "single-family housing start" as opposed to "multi-family starts." This is because single-family home building is based on consumer confidence and demand, while construction for multi-unit apartments can be subject to speculation and changes in the tax code.  The most recent release indicates only 468,000 single-family housing starts in May as compared to the slight pick-up of 565,000 found in April's release ( Current New Residential Construction Press Release).

 One possible explanation is the disappearance of the home-buyers tax credit and with it a vanishing act by demand.  Another reasonable explanation is that growing families are looking to rent as opposed to purchasing a new home- especially with job stability being a hard thing to count on.  Whatever the reason may be the drop in single family housing starts is not a good sign for those betting on a V-shaped recovery.

A look at Building Permits:
We have to keep close tabs on building permits because they are the precursor to housing starts.  Although the issuance of a housing permit does not necessarily result in new construction, as you can see the two series do move together over time. 
For other reactions to the housing start data.

Today's Housing Market Index (HMI): An Ominous Precursor to Tomorrow's Housing Starts

Today we are looking at the National Association of Home Builders/Wells Fargo Housing Market Index.  This index is of interest because of its timeliness (released the same month it reports on) and ability to foreshadow other important housing indicators (like the Census Bureau's next day release of housings starts).  It also has a proven track record of being a decent leading indicator of future home sales.  How does one go about interpreting this index? Any index number above 50 is interpreted as "there are more builders who view conditions as good than there are builders who view conditions as poor." Any number below 50 and we have more builders viewing conditions as poor than those who see conditions as good.

There are three main components to the Housing Market Index (HMI):
 ( Table 3. NAHB/Wells Fargo National HMI Components History)

1) Single-Family Sales: Present
This section usually does a better job of predicting housing starts in the short term (next couple months) than the official HMI.  This index number is back down to 17 in June after hitting 23 in May, this verifies that the housing industry is still getting pounded.  This also reflects that the small glimmer of hope that the home buyer tax credit brought is now gone.

2) Single-Family Sales: Next 6 Months
This reflects future expectations of single-family home sales over the next 6 months given current assumptions on economic growth and interest rates.  The next six months looks bleak as well as we see a downward movement in the index from 27 in May to 23 in June.  

3) Traffic of Prospective Buyers
This number gauges the number of buyers walking onto new home sites. With this index reading of 14 housing conditions will be mute for sometime to come.

By looking at today's HMI we can get a feel for what the Census Bureau's housing starts will look like.
The Census Bureau will release housing start data tomorrow at 8:30 a.m.  The feeling I get (based off of todays HMI) is that the housing start numbers will be really weak.