New Homes Sales (Measure of Housing Activity) Web: Monthly revisions which can cover the preceding three months, so look at 3-4 months of data to decipher trend More timely measure of housing market conditions than existing home sales because the sale is recorded when initial contract is signed. New home sales make up approximately 15% of the residential real estate market. An increase in new home sales is often followed a couple months later by an increase in existing home sales. Good indicator of future economic activity because new homes generate lots of investment, jobs, spending, production. Any discernible change in trend sales can act as an early warning indicator that the economy is slowing down or speeding up. Watch new home sales as a signal for an economic turning point. Consumers buy new homes when they are content with their income, job security and economic outlook. Housing Cycle - Falling new home sales => banks restrict construction loans => builders’ capital shortage => falling residential investment => falling demand for building supplies, appliances and construction workers => economic slowdown =>  mortgage rates =>  housing demand => bank loan officers begin lending again => construction picks up => economic multiplier effect throughout economy. Inventory to Sale (I/S) Ratio: good predictor of future home construction. If I/S falls below 4 expect an increase in construction. If I/S rises above 6 months, this will foreshadows a drop in new home construction Market Analysis: Bonds: If New Home Sales  & Y > Y Pot =>   P/P =>  D Bonds =>  i Bonds Stocks: If New Home Sales  =>   Y/Y =>  profits =>  P Stocks Dollar: If New Home Sales  =>   Y/Y =>  i Bonds =>  dollar (historically, however, there has been little correlation between new home sales and a change in the dollar’s value)

The Circular Flow Diagram

Housing Starts & Building Permits (Measure of Current and Future Housing Construction) Web: Housing starts has revisiosn for preceding 2 months, permits for preceding one month. Seasonal adjustment changes made in April for past 2 years. Housing starts and permits are very effective and reliable leading indicators of future economic activity. Both are useful forecasting tools. Census Bureau surveys builders in 19,000 localities across the county during the first 2 weeks of each month. Housing starts are seasonally adjusted but extreme weather conditions can make data extremely volatile. So monitor data over 3-4 month period to detect underlying trend. Housing starts are a function of interest rates, real personal income growth, consumer confidence, and tax legislation (builder tax breaks, mortgage interest payment deductions) Housing is a very interest rate sensitive market.  interest rates =>  housing demand =>  housing starts  interest rates =>  builders demand for construction loans Housing has a large “multiplier effect” on the economy and is a major swing industry.  housing construction =>  many other sectors ( steel, wood, electricity, glass, plastic, wiring, piping, concrete). House ground breaking to completion typically takes 6 months. A vibrant home selling market =>  sales of furniture, carpets, home electronics and appliances. 3 Housing Starts Categories: Single Family homes – 75% of total home building (reliable economic indicator) 2-4 unit apartments – 5% of market (townhouse or small condos) > 5 unit structures – 25% of residential housing starts (apartment buildings) 50 unit apartment = 50 starts Housing starts > 2 million may lead to shortages of supplies and skilled workers Housing starts between million indicates healthy home construction industry Housing starts < 1 million leads to an economic slowdown Housing permits – Builders in most U.S. localities must file a permit and receive authorization in advance of construction. Permits lead housing starts by 1-3 months and is one of the 10 components of the Index of Leading Economic Indicators Market Analysis: Bonds: If housing starts  & Y > Y Pot =>   P/P =>  D Bonds =>  i Bonds Stocks: If housing starts  =>   Y/Y =>  profits =>  P Stocks Dollar: Housing starts  =>   Y/Y =>  profits and i Bonds =>  dollar

7 $53 Trillion unfunded liabilities Bank stock purchases (TARP) Stimulus plan Mortgage bailout plan Income-support programs Recession-induced falling revenues CBO's Baseline Budget Projection