Categories are graded from A thru F:
Economic Growth: C- (June 2011: D+)
The U.S. economic recovery remains sluggish. Real GDP grew at a 1.3% pace in 2Q11, following downwardly revised growth of 0.4% in 1Q11; far below the 1.9% rate of expansion previously estimated for last quarter. We now have positive Y/Y employment growth for eleven consecutive months, with payrolls expanding by 117,000 in July, up from 46,000 in June, and the unemployment rate dropping from 9.2% to 9.1%. Initial jobless claims fell to 400,000 in July. Government payrolls decreased by 37,000 in July, the ninth straight sequential drop.
The average length of unemployment increased to 40.4 weeks (new record high), and the labor force percentage of those unemployed over 27 weeks dipped slightly from 4.1% to 4.0%. On a positive note, retail sales continue to improve, with Y/Y growth at 8.5%.
Leading Indicators: C- (June 2011: C)
Leading indicators for the economy are mixed this month, with our overall grade for this subsection of indicators dropping from a C in June to C- in July. Many of the leading indicators we analyze have been trending down over the past several months, returning to levels not seen since mid-2009, a time when the U.S. economy was still in the midst of the Great Recession. For example, the ISM Purchasing Managers Index has fallen two consecutive months, dropping to 50.9 (just above the expansion threshold value), a level not seen since July 2009. In addition, the Vistage CEO Confidence Index fell in 2Q11, crossing into negative Y/Y territory for the first time since 2Q09. Corporate profit growth was revised down from last quarter, rising at an 8.8% Y/Y clip in 1Q11, the weakest annual growth rate since Q309. Other leading indicators such as the ECRI Leading Index were relatively flat versus last month.
Stocks were down across the board in July for the four major indices we track, with sequential losses ranging from -2.1% for the NASDAQ to -3.7% for the Wilshire 5000. That said, the indices have all improved from one year ago, climbing between +16% (Dow Jones) and +22% (NASDAQ). The S&P Homebuilding Index fell sharply again in July, dropping 5% sequentially, now up a marginal 1.2% Y/Y. Corporate bond spreads narrowed slightly this month to 196 bps, while 10-year (2.97%) and 2-year (0.41%) Treasury rates were flat to marginally down for the month. Oil prices rose 0.9% sequentially in July to $97.
Affordability: C (June 2011: C+)
Due to a rise in the median home price over the last few months, our overall affordability indicator worsened from a C+ to C this month. As the cost of owning a home has come down in recent years, conversely the cost of renting has increased; resulting in a narrow rent gap for the 81 markets we aggregate. Our housing-cost-to-income ratio remains low, now at 25.5%, and our JBREC Affordability Index stands at 1.7, with zero being the best possible rating for affordability. Affordability continues to be bolstered by historically low mortgage rates. The 30-year fixed mortgage rate is currently at 4.55% and adjustable mortgage rates are at 2.95%. The median home price to income ratio is 3.3, which is slightly above the long-term historical norm and near a level conducive to market health. After increasing every quarter from 1Q09 through 2Q10, owner equity declined for the third consecutive quarter in 1Q11; a reflection of the continued downward pressure on home prices.
Consumer Behavior: D+ (June 2011: D+)
Consumer behavior was mixed this month, with several metrics rising and others falling, resulting in an unchanged overall grade of D+. Consumer debt continues to decline, as evidenced by the Financial Obligation Ratio (FOR), which is a relation of debt payments to disposable personal income. At 16.4% of income, this ratio is at its lowest level since 1994. The percentage of consumer credit accounts entering default also improved this month, as evidenced by the S&P/Experian U.S. Consumer Credit Default Indices. Credit default indices for all major accounts (first mortgages, second mortgages, automobile loans, bank cards) have all improved over the last year. Both Consumer Comfort and Consumer Sentiment decreased in July, while Consumer Confidence ticked up. Due to rising inflation and a still elevated unemployment rate, the misery index (unemployment + inflation) worsened this month, increasing to 12.8%; significantly higher than its historical average of 9.46% that dates back to 1948.
Existing Home Market: D+ (June 2011: D+)
The existing home market continues to remain weak, with most indicators worsening this month. Homeownership fell to 65.9% in 2Q11, down from 66.4% in 1Q11, which is the lowest level since 1Q98. The seasonally adjusted annual resale activity dropped to 4.77 million homes in June, with median resale prices up a modest 0.6% Y/Y. ” The S&P/Case-Shiller 10 and 20 market composite indices fell again this month, and have now declined -3.6% and -4.5%, respectively over the last 12-months. Both existing home inventory and months of supply rose in June, while the Purchase Mortgage Application Index rose marginally through July.
New Home Market: C- (June 2011: D+)
The new home market improved this month, due in large part to continued declines in new home supply. The median single-family new home price rose to $235,200 this month, and is up 7.2% Y/Y, but that is a shift in what is selling and not a true price increase. Our overall grade for the new home market is a C-, up from a D+ last month. The Housing Market Index stayed flat at 15, still far below its historical average of 49. Rolling 12-month sales rose slightly to 299K transactions, while new home sales decreased to 312K units on an annualized basis. Months of unsold new homes dropped this month, currently at 6.3 months versus 6.4 months in June. New home inventory (NSA), declined to 165K in June, hitting a new all-time low.
Housing Supply: F (June 2011: F)
While some housing supply indicators improved from last month, only multifamily starts (D-) and excess vacancy (D) is not an F. Single-family permits decreased to 404,000 units (SA), and single-family starts decreased to 425,000 units (SA). Multifamily permits continue to rise, now up 34% Y/Y, while multifamily starts are up 100% Y/Y. New housing units completed is at 636,000 (SA) this month, while manufactured housing placements fell to zero (SA). The homeowner vacancy rate decreased this quarter to 2.5%.
Repairs and Remodeling: D+ (June 2011: D+)
Indicators for residential repairs and remodeling were mixed this month. Homeowner improvement activity increased in 2Q11, climbing at a 1.3% Y/Y clip. Residential investment as a percentage of GDP increased slightly to 2.2% this quarter, rising $4.4 billion on an absolute level. The Remodeling Market Index (current) fell in 2Q11, dropping from 46.1 to 44.8, below its historical average of 46.4. The Remodeling Market Index (future expectations) fell from 46.8 in 1Q11 to 43 in 2Q11. The Remodeling market Index (future expectations) is now below its historical average.