Berson's Weekly Commentary
Economic Commentary
December 5, 2005
What might the housing market look like if investor and second home demand moves back to more normal levels?
In last week's Economic Commentary, we provided an estimate of how much lower home sales would have been if the surge in investor and second home buying over the past couple of years hadn't occurred -- with the actual share climbing to just over 20 percent in the most recent quarter. We found that sales would have been 5.7-7.3 percent lower than they actually were. While interesting, a more pertinent question is what will home sales be going forward if the investor and second home share of activity declines to a more "normal" level?
As in last week's Commentary, we have two definitions of normal: 10 percent (which assumes no change from the 2002 level) and 13 percent (which assumes continued growth at the more measured pace of 1995-2002). In the most recent period of declining investor/second home activity (1990-91), this drop occurred fairly quickly -- so we make the assumption that the potential decline in this cycle is completed within one year. As a result, the investor and second home share drops to either 10 or 13 percent by the end of 2006. We estimate (based on actual data through October) that total home sales in 2005 will be a record 8.26 million units. With the investor/second home share dropping to 10 percent by the end of next year, total home sales would decline to 6.67 million units in 2007 -- down by 19.2 percent. Alternatively, with the investor/second home share falling to 13 percent, total home sales would slip to 6.86 million units in 2007 -- down by 16.9 percent.
But what do we compare these declines to? Our baseline forecast has home sales falling to 7.40 million units in 2007, a decline of 10.4 percent. But a significant portion of this drop stems from the assumption that a large portion of the unsustainable rise in investor/second home demand comes out of the market over the next year. Alternatively, we could compare the figures in the two scenarios with another scenario: our projection for home sales if the investor share remained close to its recent elevated level. In that case, home sales would fall to 7.53 million units in 2007. If the investor/second home share fell to 10 percent, then home sales would decline by an additional 86,000 units from the 7.53 million-unit figure. And if the investor share declined to 13 percent, home sales would fall by an additional 67,000 units from that 7.53 million-unit figure.
The table below summarizes our results for the change in home sales, both prospectively (with a return to 10-13 percent investor/second home share) and retrospectively (if the investor/second home share had remained at 10-13 percent). Even without the boost to the market from the unprecedented rise in this share, home sales would have risen to record levels in the past couple of years -- although the level of sales would have been much lower. And if the share should return quickly to more normal levels, total home sales will decline fairly sharply -- but the level of sales in 2007 would still be the fourth highest ever, boosted by still strong-job and income growth, historically low mortgage rates, and positive demographics.
Home Sales (PDF)
This will be a much smaller week for economic data, spread fairly equally across each of the days.
On Monday, the Institute for Supply Management's (ISM) non-manufacturing survey index is expected to be little changed at around 60.0 in November -- a level suggesting strong activity in the services sectors of the economy.
On Tuesday, factory orders are projected to increase by 1.3 percent in October, with the key data on non-defense capital goods orders and shipments both up strongly -- based in part on the already reported durable goods data.
Also on Tuesday, productivity growth in the non-farm sector should be revised up to around 4.6 percent for the third quarter -- with unit labor cost growth reduced to a drop of 1.0 percent.
On Wednesday, consumer credit outstanding is expected to rise by $5.8 billion in October -- after essentially no growth in the previous month.
On Thursday, initial unemployment claims are expected to edge down to around 315,000 for the week ending December 3rd -- continuing a downward trend caused by a stronger job market.
On Friday, wholesale inventories are projected to rise by 0.4 percent in October -- a modest slowdown from the prior month, but with the inventory-sales ratio continuing to decline.
Finally, on Friday, the University of Michigan's Index of Consumer Sentiment should show a rise to around 85.0 for the entire month of November (up from a mid-month reading of 81.6) -- as the job market continues to expand and oil prices decline.
David W. Berson
Molly Boesel
Fannie Mae Economics
Last Revised: December 5, 2005
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