Forecast & Trends Sept-Oct. 03

Economic Indicators Jump For Joy
With Saddam on the run in Iraq (reportedly in drag, what a warrior, eh?) and his two evil offspring reduced to grease spots by our Special Forces, U.S. consumers are turning their attention to domestic issues and rediscovering the joy of spending on hearth and home.

New home sales in June, for example, broke another historic record. Spurred by the lowest long-term mortgage rates since 1956, sales of new single-family homes rose to a second consecutive record-breaking high during June to a seasonally adjusted annual rate of 1.16 million units. This was 4.7% ahead of the 1.11 million-unit sales pace in May, the Commerce Department reports.

“Mortgage rates hit lower-than-anticipated levels in June, averaging a remarkable 5.23%,â€? says Kent Conine, NAHB president. “For many who had been considering a home purchase, the incentive to lock in those rates was just too great to pass up. Looking ahead, with the economy expected to pick up steam, jobless claims on the decline and home values rising steadily, home builders are reporting increased traffic of prospective buyers and expecting strong sales activity in the next six months.â€?

Record Setting Pace For 2003
For the first half of this year, the average pace of new-home sales was running 11% ahead of the strong pace set in the same period last year. “At this point, it’s nearly certain that we’ll set a another record for new-home sales in 2003,â€? Conine says.

Even with mortgage rates creeping up a bit, they are still quite low by historic standards, he notes, adding that the effects of higher rates should be somewhat muted by the continuing availability of Adjustable Rate Mortgages (ARMs) at exceptionally attractive terms.

Builder inventories of new homes for sale remained at healthy levels in June. While the Commerce Department reported a 1.2% increase to 345,000 units on the market, the majority of that increase was in homes that have not yet been built. Moreover, the months’ supply at the current sales pace fell slightly to just 3.6 months.

All home builders should be rising on the same tide. Sales of new homes rose in every region in June, with the largest increase—more than 32%–reported in the Northeast. Other regions report healthy gains as well, with 9.8% increases in the Midwest and 2.7% in the West. The South, which is the nation’s largest housing market, posted a nearly 1% increase, to a pace of 358,000.
Housing permits, a good sign of current demand, rose by 0.8% in June from May to a rate of 1.82 million units. Permits for single-family homes jumped by 5.3% to a rate of 1.42 million, a record monthly level. However, the number of apartments, condos and other multifamily housing projects dropped 4.3% in June to a rate of 312,000.

NAHB recently increased its forecast for new-home sales for all of 2003 to 985,000 – up 1% percent from last year’s record-breaking 977,000 units—the most in U.S. history.

Other economic indicators in June and July were equally upbeat, suggesting that a slump that has lasted more than two years is finally coming to an end. Led by a big boost in consumer, business and military spending, gross domestic product — the sum of all U.S. production and economic activity — rose at an annual rate of 2.4% during the April-June quarter. That was up a full percentage point from the previous three months and much stronger than economists had estimated. It was the fastest pace since the third quarter of 2002, the Commerce Department says.

In July the number of American workers filing new claims for unemployment benefits dropped by a seasonally adjusted 29,000 to 412,000, a three-week low, the Labor Department said. Although claims remain above 400,000, a level associated with a sluggish jobs market, the bigger-than-expected decline offered hope that the pace of layoffs may be stabilizing.

Consumer spending, which accounts for 70% of U.S. economic activity, jumped at an annual 3.3% rate in the second quarter as well. That was up from 2% in the first quarter and the strongest gain since last year’s third quarter. Consumers boosted purchases of a wide range of goods, from cars to clothing to couches.

June’s housing performance, stronger than the 1.75 million pace that economists were predicting, offered a fresh sign that the housing and residential construction markets continue to serve as one of the national economy’s few pillars of support.

After sale purchases have also proven strong this year. “Don’t forget that every new-home purchase helps stimulate the economy,â€? says Conine.

It’s the law—or should be—that one can’t install an old raggedy couch in a brand new home. That’s why NAHB economic researchers have discovered that during the first 12 months after purchasing a newly built home, owners spend an average of $8,900 to furnish, decorate and improve that home – more than twice what non-movers spend.

Still More Good News
A monthly survey by the NAHB says builders are bullish about sales prospects for July as well as in the next six months.

Low mortgage rates are powering the housing market and keeping home-mortgage refinancing activity brisk. Even though mortgage rates were climbing as this issue went to press, there are signs they may decline again.

Federal Reserve Chairman Alan Greenspan, in appearances on Capitol Hill in late July, says the central bank will keep short-term interest rates low in the months ahead and possibly cut them in an effort to get the economy back to full throttle.

The Fed cut a key short-term rate on June 25 by one-quarter percentage point to 1%, a 45-year low. Economists believe policymakers may cut rates still further, which would likely push new home building still higher.

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