Economics Indicators

Homebuilding: Economic Indicator & Forecast

The U. S. economy generally performed well for the first half of 2007 as measured by key economic indicators, such as: the gross domestic product, unemployment, consumer confidence and spending, retail sales, inflation, and personal income. The Gross Domestic Product has expanded about the same average rate as the second half of 2006; however the pace has been uneven. The housing activity declined further in the second quarter of 2007 in response to the continued softness in home sales and still elevated inventories of unsold new homes (Federal Reserve). Businesses added jobs at a rate of 2-1/4%, with unemployment remaining at 4-1/2 percent. Consumer confidence rebounded in August 2007 as gasoline prices receded, resulting in an increase in consumer spending. Retail sales have seen a slight reduction mainly due to the decline in home sales. The inflation rate has picked up mainly due to energy and food prices, but continues to be relatively low. Lastly, the personal income economic indicator reports that the U.S. Personal Income has increased by 0.4%.

Many economists believe that the United States economic activity appears poised to expand at a moderate rate in the second half of 2007, and should strengthen gradually in 2008. However, the housing industry will continue to challenge many consumers and the economy in general. The purpose of this paper is to provide final recommendations and strategic initiatives and illustrate an in-depth analysis of each of the key economic indicators and how the forecasts will impact the housing industry.

Consumer Confidence and Spending

The consumer confidence index is determined by the level of confidence consumers have based on pre-determined economic questions. The Consumer's Confidence Index is computed each month, based on a surveying 5,000 households. The Rasmussen Consumer Index is derived from nightly telephone surveys of 500 adults and reported on a three-day rolling average basis. Both indexes provide how consumers feel relative to current versus expected business conditions, current employment situation, and total family income.

Consumer confidence rebounded in August rising to a five-month high at 112.6 as receding gasoline prices and a mostly solid employment climate made people feel better about the economy's prospects and their own financial situation (Aversa, 2007). Gasoline prices nationwide continued to ease in early August, falling to $2.84 a galloon according to the Energy Department (Energy, 2007). The improved attitudes come even with the enduring turmoil spell with Wall Street. Economist Richard Yamarone from Argus Research Corp states, "Consumers seem to be fairly upbeat, it looks like they are ignoring the warnings of Wall Street" (Aversa).

Another gauge of consumer's confidence in the economy is his or her attitude and the comfort level in making major purchases. The United States Department of Labor, Bureau of Labor Statistics conducts a consumer expenditure survey that measures the spending habits of U.S. consumers and includes data on their expenditures, income, and characteristics (BLS, 2007). The Consumer Expenditure Report is compiled on an annual basis and the latest report published in February 2007 for consumer expenditures in 2005. The February 2007 report shows that the average consumer spent $46,409, on average in 2005, which is a 6.9-percent increase over the previous year (BLS).

Today in the United States many homeowners are using their homes to pay off debts and cash out equity in their homes. When the housing market was on an increase this was a good idea. The problem is that now the housing market is not inflating and is, rather, at a stand still. Economists are seeing that trend come to an end due to the value of homes slipping. This spells trouble for the outlook they have for the housing market. Consumer spending forecasts look dim for the housing markets. Home owner's took advantage of the market a few years back, but are now seeing an increase in interest rates and not so good a return on the equity. One article said "There's a payment shock that some of these people are just being devastated with," said Marcell. "A payment that was $1,500 is now $2,500. And that's the impact that we're concerned with. A lot of these people were not told what could happen when the adjustment periods come about." (MSNBC, 2007) The housing market needs to find better ways to draw in new home buyers and consumer spending may start on a rise again. Overall the housing market shows little if any increase for future forecasts, mostly due to the inability to afford anything else. Another problem that needs to be addressed is the credit of individual home buyers facing these rising home loans. When they are no longer able to make a payment for their mortgage, foreclosures begin to happen and bills stop being paid. This leads to a negative credit score. A recommendation would be for new types of fixed rate mortgages to be offered to people at a slightly higher rate to get back on their feet. More foreclosures are occurring due to rising interest rates and home mortgages that become too large for average America to pay on a monthly basis. These home buyers should have investigated more when cashing out the equity and changing to an adjustable rate mortgage. Mortgage companies should look at ways to foreshadow the market indicators for what mortgages will be on a worst case and best case scenario for each new client. By doing so they could see if the individual would be able to survive with either mortgage cost.

Retail Sales

Retail Sales are the backbone of our economy and sales data that is released monthly by the Census Bureau measures the merchandise sold by companies. The data includes all retail operations in the nation through a sampling method, from major retail stores to local stores. The Retail Sales Data measures the amount of goods being sold each month in the United States and is a measurement of the health of the general economy.

Retail sales in the Home Building Market have fluctuated tremendously over the years and are currently on a decline. As presented in the graphs below, one can see that residential investment has declined over the years and there is no indication on when the spending will increase. In the Recession graph, one can see that the major drop in retail sales was in the years of the recessions, which also indicate that when income decreases, spending also decreases.

Residential