• Houston Update (September 22, 2006)
• Houston Update (March 9, 2007)
• Commentary (August 25, 2005)
• Commentary (September 4, 2005)
• Commentary (December 23, 2005)
• Commentary (January 18, 2006)
• Commentary (June 7, 2006)
• Commentary (February 7, 2006)
• Excerpts from Spring 2006 Real Estate Symposium
• Selected Local Economic Indicators from DATABook Houston

• Economic Indicators
• Employment
• Price Data
• Diversification Data

3/09/07 - U.S. Economy Maintains Slower, But Steady Growth

The U.S. economy continues to grow at a moderated pace, similar to the levels throughout most of the second half of 2006. This Friday the Department of Labor reported job gains in February of 97,000 non-farm jobs, following gains in December and January of approximately 226,000 and 146,000 jobs. Actually, the December growth in employment was a bit too much of a good thing. Job growth in excess of 150,000 jobs per month on a consistent basis would almost certainly prompt the FED to consider raising interest rates some more. Job growth between 100,000 to 150,000 jobs should be healthy enough to keep the economic expansion growing without generating more wage-push inflation which is hovering very close to the upper limits of the FED’s tolerance level right now at an annualized rate of nearly 5.0%.

The consumer also continues to hold up better than expected, though February numbers will come in relatively weak. The IRF has been forecasting for nearly a year that the nation would experience “stop ‘n go” consumer spending and February will prove to be one of the quiet, lethargic months. Still, there is no sign of a more permanent and worrisome slowdown in consumer spending. This too should help the nation avoid a recession later this year.

On the negative side, there continue to be signs of unwanted increases in business inventories which are likely to dampen new orders, especially for big ticket items. Furthermore, the unraveling of subprime mortgage abuses are now extending their toll beyond the poor consumer to the lending institutions that got conned into purchasing the risky paper. We haven’t heard the last of the nation’s subprime mortgage problems which may yet approach levels reminiscent of the S&L scandals of the early 1990s. At minimum, homebuilders will be faced with growing competition from foreclosure sales and greater difficulty for potential home buyers in getting “cheap” financing for new home purchases.

On the international scene, the U.S. mercantile trade deficit continued to narrow as U.S. exports hit an all-time high. This phenomenon can be attributable to a weak dollar and a shrinking federal budget deficit which requires U.S. borrowing from abroad. If the nation continues to reduce the federal budget deficit and if consumers start saving again, the trade deficit will narrow further. International stocks, which cratered last week, seem to have stabilized for now, though the international stock market correction may not yet be over. Asian markets have once again gotten ahead of themselves (so have the Latin markets) and their dependence on a slowing U.S. economy will continue to act as a welcome drag upon excessive Asian speculation.

2/02/07 - News Flash - The End of the Housing Market’s Correction is Not Yet In Sight.

Sales of existing homes ended the year down 8.4 percent about as expected, while the median price of an existing home sold in 2006 rose only 1.1 percent. Even those gains were primarily restricted to the first half of the year as prices actually declined after mid summer.

At the same time new home sales fell to 1.06 million units, down 17.3 percent from the all-time high of 1.28 million units set in 2005. While such a decline looks foreboding on the surface, it should be remembered that total sales last year were still in line with the healthy level of activity during the good years of the 1990s. The median price of a new home sold in 2006 was up by 1.8 percent from 2005, much lower than the 9%+ increase last year. However, new home prices are still out of the reach for a majority of Americans today, especially in light of higher interest rates. Thus, builders are going to continue to see a smaller market for new homes and potential buyers that are much more price conscious.

So far there is no reason to believe the housing market has bottomed. One reason is that while the U.S. job market hasn’t tanked, it continues to show weakness. The number of Americans filing applications for unemployment benefits continues to hover just above 300,000 per week reflecting attempts by corporate America to boost the bottom line. In addition, there was a greater than normal shedding of seasonal workers by retail businesses after Christmas. Still, job growth of a little over 100,000 new jobs per month is strong enough to keep the economy on track for a soft landing. This is both good news and bad news for the housing market. It means that personal income will continue to grow in the national economy aiding the housing market, but that the likelihood of interest rate reductions by the FED in 2007 has significantly diminished.

Indeed, the housing market has been getting no help from the financial markets recently. Rates on 30-year mortgages edged up to an average of 6.25 percent. Rates on 15-year, fixed-rate mortgages were 5.98 percent and one-year ARM rates stood at 5.49 percent. A year ago, rates on 30-year mortgages stood at 6.12 percent, while 15-year mortgages were at 5.70 percent, and one-year ARMs were at 5.20 percent. Recent weakness in bonds, pushing long-term interest rates up, is likely to make mortgage money even more expensive over the next 6 months. While the FED kept short-term interest rates steady once again at the end of January, they gave every indication that any reduction in interest rates this year is unlikely. Thus, last fall’s strength in bonds, driven by a hope for lower rates in 2007, has all but dissipated.