Reporting Focus from the June 2006 Edition of the SGS Newsletter


The housing market has been slowing since late 2005, although such is not obvious in all reporting. The housing starts series appears to be near generating a recession signal. While the residential investment component of the GDP shows ongoing solid growth as of first-quarter 2006, home sales data show the downturn already is underway.



Due to the volatility in reported monthly housing activity, all the monthly data shown above are smoothed using a three-month moving average and shown in terms of year-to-year change. Since the residential investment growth is adjusted for inflation, its patterns should be comparable to those of the growth in housing units used in the other charts.
Usually, the growth trends in housing starts tend to lead the other housing numbers by six months or so, but the recent housing bubble — fueled by Mr. Greenspan’s artificially depressed mortgage rates — has been unusual. The housing downturn in the last recession was small, and housing strength of the last several years — including related consumer ability to borrow against homeowner equity — has been a basic prop to recent economic activity.
Annual changes in mortgage rates have roughly an 80% negative correlation with annual growth home sales. Higher interest rates translate into softer sales. Interest rates have been rising and still have a long way to go.
As discussed in an earlier newsletter, we use housing starts as a leading indicator to the industry and the economy, instead of building permits, due to changes made in recent years to building permits reporting methodology that are irreconcilable with historical reporting.
Actual home sales, however, seem to be leading housing starts this time around, as developers respond to slowing demand. Existing home sales, which outnumber new homes sales by roughly 6.8 million to 1.2 million per year, began slowing in January 2005. New home sales growth began turning down in August 2005, and housing starts began slowing in November 2005. All three series now are down year-to-year, and the annual contraction in housing starts, on a three-month moving average basis, should exceed 10% by June, signaling a recession.
By a bit of "luck" for the Administration, annual growth in the residential investment component of GDP has held in positive territory through the first-quarter.