Housing Market Continues To Struggle

As we begin the fourth quarter of 2007, the housing market continues to cast a troubling shadow over the economic outlook. Even though builders have been giving huge discounts, sales of new homes in August fell to their lowest level in seven years. New home sales dropped 8.3% in August from July, and year over year from August 2006 to August 2007, new home sales dropped a staggering 45% from 11,000 sold in August 2006 to 6,000 sold in August 2007. To see how this is affecting builders, KB Home, a Los Angeles builder, reported a loss of $35.6 million for the quarter ending August 31, 2007 as compared to a $153.2 million net profit a year earlier. Jeffrey Mezger, KB’s president said “We see no signs that the housing market is stabilizing and believe it will be some time before a recovery begins”.

Another troubling sign with the housing market is the declining value of homes, which will be sure to affect consumer spending. Standard & Poor’s Case-Shiller Home Price index, which measures home prices in 20 major cities, showed prices down 3.9% in July from a year ago, which was faster than June’s 3.4% drop. Just as sales of new homes were down in August, sales of existing homes were down 4.3% from July, and the time needed to sell houses on the market has increased to 10 months, which is the highest in 20 years.

Even though employment in the construction, real estate, mortgage and financial services industries is taking a hit due to the housing downturn, overall unemployment has actually shown a drop in claims. Despite an anticipated wave of layoffs expected in the mortgage sector alone, initial claims for unemployment fell 15,000 in the latest report by the Labor Department, the second weekly decline in a row and the lowest level since May. According to David Resler, chief economist at Nomura Securities, “The jobless report helps bolster forecasts that the housing slump may brake growth, but the economy will not degenerate into a full-fledged recession”.

The government also reported in the last week of September that the nation’s gross domestic product expanded by 3.8% in the April to June quarter, and this was a bit less than the estimated 4% economists had expected. With the difficulties the economy faced in August and September, many economists expect the GDP to have slowed to 2% in the third quarter. With growth slowing, hopefully the Fed has bought some time to alleviate the credit crunch with its half a point rate reduction, which may allow for an orderly decline in housing prices and sales, as opposed to a free fall. Even though housing prices are expected to continue to fall by some estimates through 2008, and possibly until 2010, an easing as opposed to a rout is always less troubling.

John Kaighn

Jersey Benefits Advisors

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