December's housing data is a mixed bag – total starts down by 2.5% (m/m), single family homes down by 3.3%, and permits down by 3.9%. However, completions were up by 5.6% (m/m) and existing home sales were up by 14.7% from November's data. First time buyers still at 32%, well below the more typical 40% and household formation remains below trend as well. Multi family housing still strong with 34% of total and rents still increasing, thereby further strengthening the importance of multi family construction.

With the real unemployment rate in the U.S. at 10.3% (16 million individuals unemployed, stopped locking, or work part-time) and household income growth nonexistent or negative, it's hard to envision a scenario where the U.S. housing market returns to "normal" anytime soon. A strengthening Dollar and slowing economies in China, Europe, and many other countries around the globe, numerous negative macro-factors endangering a robust housing recovery exist:

1) A constrained quantity of well-paying jobs being created;
2) a tepid economy;
3) declining real median annual household incomes;
4) strict home loan lending standards – though loosening with new programs; and
5) slowing world economy; and
6) global uncertainty

Housing comments – December 2015 data

  • December totals were down 2.5% ( to 1.149 million, annual rate) - SF at 768,000, down 3.3% (SAAR) – MF still 34% of total
  • Multi family still the driver – rental prices still increasing – single family sales remain relatively low and this has big impact on wood product prices.
  • Economic issues - slowing world economy (China GDP slowest in past 8 years). China slowdown plus currency devaluation will drive commodity prices lower, and rekindle deflation concerns around the world.
  • Increasing geopolitical risk and continued domestic/Washington gridlock - causes uncertainty which leads to less investment which leads to slower productivity growth, and ultimately to slower GDP growth and lower standard of living.
  • Job market is improving, albeit slowly, and wage gains remain weak. The real unemployment rate remains high at 10.3%. This equates to about 16 million people who are either unemployed, stopped looking,or are working part time because they can’t find full time jobs. This “slack” in the job market will keep wage gains modest for some time.
  • Income growth in U.S. remains pathetic – latest Census report shows real incomes fell again in 2014. This suggests to me that housing will remain sub par for some time – many 1st time buyers just can’t enter the market.
  • World GDP growth outlook is shaky at best – main problem today is the slowdown in China which has been the major economic engine over the past 8 years. European growth is expected to be relatively weak while back here in USA, growth will probably remain below par (~ 2%) for some time.

The Fed raised interest rates – finally - in December. And, they said further increases will probably be gradual in 2016 and beyond. However, with current problems with falling oil prices and world stock markets, I expect the FED will delay any further rate hikes for several months at least. Plus, there is no sign of inflation, anywhere, except equity markets.

Here are some thoughts:

The dollar will continue to strengthen, and commodity prices will fall further as most are priced in US dollars. World demand is relatively weak with problems in China expected to worsen. Europe remains weak, and the commodity currency countries (e.g., Canada, Australia, ..) will face even more economic headwinds. As far as housing goes, modestly higher rates should not hurt housing too much. As we have discussed many times before, income and job growth is the key to any substantial housing recovery. On that score, income growth is non existent (real dollars) for past 25 years, and the job market still has problems. Thirty percent of jobs created in past 8 years have been part time with few if any benefits. Furthermore, credit remains tough for many potential first time buyers. Big problem today is lack of confidence by our business leaders – e.g., spending on stock buybacks has increased 200% since 2009 - i.e., they are not investing for the future.


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