Reporting/Market Focus from the November 2007 Edition of the SGS Newsletter.

When broad U.S. housing data were last featured in the Reporting/Market Focus (June 2006 SGS), we noted that the housing starts series was "near generating a recession signal," although the downturn increasingly was evident in the home sales numbers. Subsequently, all the major housing indicators have signaled recession, with the level of the government’s real (inflation-adjusted) residential investment series (a GDP account) turning down as of first-quarter 2006, as the result of a benchmark revision.

It is important to keep in mind that the current recession already was unfolding before the housing numbers began their terrible tumble, and that the housing problems were in play well before the leveraged junk mortgages brought the solvency of the banking/financial system into question. Accordingly, the current financial system disarray did not trigger the recession, it only exacerbated the circumstance.

As can be noted in a number of graphs that follow, the currently reported annual performance of housing starts, home sales and residential investment are rivaling but not yet exceeding the downturn seen in the early 1990s. There are indications, however, the current circumstance may come to rival the downturn of the early 1980s — often considered the worst economic contraction of the post-World War II era — or worse. Consider the expectations of U.S. home builders.

Of interest is the housing market index (HMI), published by the National Association of Home Builders and Wells Fargo. The index is like the purchasing managers survey, in that it is a diffusion index, where a reading of 50 or above indicates as positive housing market climate, as viewed by home builders. The readings for the HMI and its three sub-components, as of November 2007 were: the HMI at 19, current sales at 18, future sales (next six months) at 15, traffic of prospective buyers at 17. The November HMI held even with the October reading, which was lowest since the official beginning of the monthly series in 1985.

As shown in the preceding HMI graph, however, the Department of Housing and Urban Development (HUD) publishes the HMI or its components back to 1979 on an annual basis. SGS has estimated the HMI for 1979 to 1984, based on the weighting of the components series in the early series, and has estimated 2007 based on the 11 months reported so far for the year. Indeed, all the measures for 2007 appear to be headed for their lowest readings since before the early 1990s recession, which means builders are looking at the weakest environment they have seen since the early 1980s double-dip recession.

Due to a certain amount of random volatility in the housing numbers, the graphs of the monthly series are shown with data smoothed on a three-month moving-average basis. The pattern in each of these charts is consistent; the extent of the current reported downturn in housing is about as bad as it got in the 1990s recession. There is nothing in hand, however, to suggest the weak housing environment has run its course.

Indeed, with the problems surrounding adjustable rate mortgages (ARM), foreclosures and bank solvency still are unfolding, the current circumstance not only likely will degrade to an early 1980s environment as suggested by the home builders’ outlook, but also the potential exists for something worse, a 1930s-style depression in housing activity. A look at these graphs again in six months may tell the story.