Surveys of builders conducted by the NAHB in November and December reveal seriously weakening patterns of market activity that are bound to extend into 2009. These patterns, along with signals from builders that the key housing stimulus measure enacted last year is providing precious little benefit, further emphasize the urgent need for new federal policy supports for the beleaguered housing sector.
From the Field
In November, the NAHB surveyed more than 400 single-family builders about their plans for the first half of 2009 and their assessments of the key problems facing the housing market. With respect to building plans, the survey results implied a downshift of roughly 17 percent in single-family starts from the second half of 2008 to the first half of 2009, close to the rate of contraction shown in the NAHB’s current forecast.
When asked about key problems and issues currently facing the housing industry, 98 percent of respondents to our November survey cited consumer concern about the economy, nearly double the frequency found earlier in 2008. Nine-tenths of builders also cited the inability of prospective buyers to sell their existing homes, and an equal proportion cited negative media reports about housing. Three-fourths of respondents cited tight mortgage lending standards in November, up from only one-fourth recorded in similar surveys conducted during the first quarter of 2008.
We followed-up on home mortgage issues in our December survey of builders, asking about the impacts of tighter lending standards on recent home sales as well as the impact of higher foreclosure rates on builder sales volume during the preceding month. Sixty-five percent of respondents said that tighter mortgage lending standards had forced down sales volume during the past month, the highest frequency of the year. Fifty-five percent of builders said higher foreclosure rates had disadvantaged their sales during the past month, also the highest frequency of the year.
Builders continue to battle back against weakening demand conditions, but it’s clearly an uphill fight. Our December survey showed that a record 72 percent of builders were cutting prices, and the frequencies of major nonprice incentives also climbed to record highs. In order of importance, the nonprice incentives ranked as follows: include optional items in homes at no cost (69 percent); pay closing costs or fees (60 percent); and absorb financing points for buyers (43 percent).
However, when asked about the success of these incentives, only 13 percent of builders said their price cuts were “very effective” in bolstering sales or limiting sales cancellations, and the various nonprice incentives got even lower scores.
The Federal Reserve is quickly running out of ammo on the monetary policy front. The Fed still can unleash its liquidity policy arrows to improve the functioning of financial markets and to influence rates paid by the private sector on certain types of credit at various maturities. The Fed has already been able to reduce conventional home mortgage rates by committing to buy large amounts of government-sponsored enterprise (GSE) debt and mortgage-backed securities, and the Fed could decide to exert more downward pressure in 2009.
Even if the Fed pursues such efforts on the mortgage rate front and even if the Treasury gets into that game, Congress and the administration will need to take strong steps to help spur home buying in the near term. In the NAHB’s December survey, no builder felt that the temporary $7,500 refundable but repayable tax credit for first-time buyers that was enacted last July would have a significant impact on home sales.
A much stronger tax credit is needed to spur home sales in the seriously deteriorating economic environment, and the fiscal stimulus package now under development in Washington should include a sizeable credit that’s available to all home buyers in 2009 and that doesn’t have to be paid back to the Treasury. Policymakers also should maintain the current FHA/GSE loan size limits beyond their scheduled expiration at the end of 2008.