Mark Thoma notes that the most recent FOMC statement has changed from declaring growth is “likely to moderate” to “Recent indicators suggest that economic growth is moderating”. The first stages of the long-anticipated cooling of the housing market certainly appear to be here now.
The above graph, taken from Calculated Risk, shows that, for each of the first five months of 2006, the number of new home sales (seasonally unadjusted) has been at or below the value of the corresponding months of both 2004 and 2005.
The inventory of unsold new homes has shot up in response. The graph at the right shows the Census data on months’ supply of new homes, calculated by dividing the number of new homes available for sale by the current monthly sales figures, with recessions indicated by shaded areas. Although this ratio has been declining slightly from its February peak, throughout 2006 we have seen more than a 5-month inventory of unsold homes, which is the highest this series has been since 1997.
It’s unclear how alarmed one should be by that fact, since housing did not play a prominent role in the 2001 recession. A six-month inventory is still below the peak reached in the 1994-95 slowdown, which is perhaps the Fed’s model for hoping to achieve a “soft landing”– just enough of a slowdown to keep inflation under control, without causing a recession. On the other hand, it may be that improvements in information and marketing technology would lead us to expect a lower inventory-sales ratio today than was common in the 1980s. In the absence of such an interpretation, the natural conclusion based on the above two figures would be that we’re indeed seeing no more than a “gradual cooling” as advertised.
The Big Picture notes that the stock market may be anticipating significantly more than this ahead, with the valuations of stocks of homebuilders such as Centex having lost about a third of their value in the last six months.
I’m also a little troubled by the pace at which house prices rose during 2005 despite rising interest rates. The June report of the Office of Federal Housing Enterprise Oversight claimed that the average U.S. home prices in 2006:Q1 were 12.5% higher than they had been in 2005:Q1. The state-by-state breakdown is as follows:
In the first quarter of 2006, we saw the rate of price increase moderate slightly from its 2005 pace, though prices still rose rather than fell in almost all states, and the annual rate of increase remained at a double-digit pace throughout the west.
That last fact is a bit disconcerting to those of us who attributed the rapid house price increases of recent years to the low level of interest rates interacting with regional growth and limited local supply. If interest rates were the key driver, I would have expected to see the rapid price appreciation stop by 2006:Q1. And if real estate was overpriced in 2005, there is that much more that needs to be unwound now. Granted, price is a lagging indicator, and there is first an increase in the length of time houses stay on the market before one sees prices start to fall. But the OFHEO statistics suggest to me that a recognition that the heady days of rapid real estate appreciation are now over had yet to sink in as of the first quarter of this year.
That troubles me, because it raises the possibility that, when the recognition does sink in, the current “gradual cooling” could quickly turn into something more impressive.