Wednesday, February 07, 2007

Constructing Capitulation: December 2006

December showed further evidence that the nations housing market is experiencing continued weakness.

Construction spending was again down significantly declining 12.52% as compared to December 2005.

Single family construction spending was down a more dramatic 22.0% reflecting the significant drop off in demand for new construction homes as well as home rehabilitation.

The following charts show changes to construction spending (click for larger version):

Additionally, the first preliminary Q4 2006 GDP report showed a continued and substantial decline to residential fixed investment.

It’s important to note that although the overall 3.5% increase in GDP was a fairly strong showing, the substantial decline to residential fixed investment still managed to shave 1.16% from its bottom line.

Furthermore, non-residential investment is now declining showing a comparatively small decline of 0.4%, the first decline since Q1 2003.

Also, it seems that the preliminary GDP report may have captured some anomalies that may either be short lived or very well be revised away in subsequent releases.

The current report showed an unusually large 6.9% increase to non-durable goods as well as an 11.9% increase in national defense spending.

Additionally, there was a strong increase to net exports of goods and services and strong decrease to net imports, both working to boost overall GDP.

The following is chart shows real residential fixed investment versus overall GDP since Q1 2003 (click for larger version).

With their latest rate announcement, the Federal Reserve revised their statement on housing indicating that there may be “.. some tentative signs of stabilization have appeared in the housing market”.

This may be taken as a significant change in sentiment considering that just last month they were indicating that they had seen “substantial cooling in the housing market”. On the other had it could be that they are simply acknowledging some recent indicators like mortgage purchase applications.

The National Association of Realtors (NAR) released their “Pending Home Sales” report last week showing that, on a year-over-year basis, home sales were down nationally and in every reported region.

On a seasonally adjusted month-to-month basis there has been an increase from the lows set between September and November but each regions values are still well below their peak values and not enough data exists to yet declare that a bottom has been reached.

This is especially true for the Northeast region where the index has been below 2001 levels since June 2006.

David Lereah, Chief Economist of NAR had the following to say:

“Some of the monthly gain may be weather related, but it appears buyers are becoming more comfortable, sensing the timing is good and that their local market has bottomed out,… I expect modest sales gains throughout the year, with what I believe are sustainable levels of activity. 2007 promises to be the fourth best year on record.”

The following shows a short (top chart) and long (bottom chart) term view of the NAR Pending Home Sales Index with data complete to November 2006: