Eye on the Economy: Housing Starts Fall Back on Volatile Multifamily Data

The pace of total housing construction fell back in April due to a large swing in the rate of multifamily development. From the March annualized rate of 1 million starts, April saw a drop to an 853,000 annualized pace.

Single-family construction declined only a small amount, however, with starts down from a 623,000 rate in March to 610,000 in April. NAHB expects single-family production to continue to make steady gains over the next two years, rising to more than 1 million units annually.

For multifamily, the starts rate fell significantly from an unsustainably high level of 398,000 in March to 243,000 in April. Neither number is representative of the underlying trend, however. Since December, the average starts rate for multifamily has been 321,000. Multifamily housing starts are likely to exhibit continued volatility as the sector finds a sustainable annual level of production between 350,000 and 400,000. Continued growth in rent should support this trend. For example, April Consumer Price Index data indicate that real rents have now risen for three consecutive months.

Home builder confidence is rising once again after three months of decline. The May NAHB/Wells Fargo Housing Market Index rose three points to 44 from a downwardly revised April level of 41. All three components increased: current sales increased four points to 48, expected sales increased one point to 53, a seven-year high, and traffic increased three points to 33. 

One factor that held back builder confidence at the start of 2013 was rising building material prices. New data suggest that it is possible that this upward pressure on prices may be ending. While the monthly Producer Price Indexes (PPI) for framing lumber and OSB increased from March to April, 3.2% and 6.5% respectively, weekly data from Random Lengths indicate April may be the beginning of a reversal of the steep increases that have accompanied the housing market recovery. Such easing, if confirmed, will be reflected in May PPI data.

Other data indicate also offer good news and confidence with respect to the long-run increasing trend for housing starts. Nationwide housing affordability held near historic highs in the first quarter of 2013, according to the NAHB/Wells Fargo Housing Opportunity Index (HOI). The index came in at 73.7%, down slightly from 74.9% in the final quarter of 2012.

The HOI is the share of new and existing homes sold in a quarter affordable to a family earning the median income. An HOI of 73.7 means that 73.7% of all homes sold in the first three months of 2013 were affordable to families earning the national median income ($64,400).

In the first quarter of 2013, NAHB’s 55+ single-family Housing Market Index increased 19 points on a year-over-year basis to 46, which is the highest first-quarter number recorded since its inception in 2008 and sixth consecutive quarter of year-over-year improvements. The index is up on increases in consumer demand for homes and communities designed to address the specific needs of mature home buyers. 

The overall foreclosure situation continues to improve, per data from the Mortgage Bankers Association. The seasonally adjusted mortgage delinquency rate increased 16 basis points over the first quarter of 2013. Even with this quarterly increase, the current share of mortgages at some stage of delinquency still ranks as the second-lowest reading since 2008.

Foreclosure starts remained unchanged at 0.7% of all first-lien mortgages during the first quarter of 2013. A total of 15 states registered a quarter-to-quarter drop in new foreclosure activity, but the overall downward trend in foreclosure starts remains in place as 45 states saw a year-over-year decline.

The foreclosure inventory continues to shrink across much of the nation. During the first quarter, 3.55% of all loans were at some stage of foreclosure, a 19 basis point drop from the last three months of 2012 and an 84 basis point decline compared to the same period a year ago. This metric now stands at its lowest point since the end of 2008.

Against this broader housing market backdrop, new and existing home sales continue to improve. New home sales rose in April to a seasonally adjusted rate of 454,000, up 2.3% from the March pace. The sales level of January and April are the two highest months of new home sales since 2008. Completed, ready-to-occupy inventory fell to 39,000, matching a post-Great Recession low. As a result, the median price for new homes reached a record high ($271,600). However, this mark is as much due to the mix of buyers (more at the high end) as it is a function of improving housing markets. 

Similar to the new home market, existing home sales posted a small increase in April. According to the National Association of Realtors (NAR), total existing home sales increased slightly in April to a 4.97 million annual rate, up 9.7% as measured on a year-over-year basis.

At the end of April, total housing inventory increased 11.9% from the previous month to 2.16 million existing homes for sale. At the current sales rate, the April 2013 inventory represents a 5.2-month supply compared to a 4.7-month supply in March, and a 6.6-month supply of homes a year ago.

Rising housing inventory is consistent with rising prices. The median sales price for existing homes of all types in April was $192,800, up from $183,900 in March, and up 11% from $173,700 during the same period a year ago. NAR reported that April represented the 14th consecutive monthly year-over-year price increase.

However, a concern regarding the improvement in the housing market is the degree to which it is dependent on non-traditional buyers. In April, all-cash sales were 32% of transactions and. investors accounted for 19%. However, first-time buyers accounted for 29% of April sales, down from historic norms of around 40%.

New Home Sales in April – Steady Progress

Newly constructed single family homes sold at a seasonally adjusted annual rate of 454,000 in April, as reported in the joint release of the US Census Bureau and the US Department of Housing and Urban Development. This is a 2.3% increase from the upwardly revised pace in March and represents steady progress as the housing market recovers from the post-boom crash.

With the inventory of new homes for sale at historic lows, buyers bid up prices as demand outpaces supply at this stage of the recovery. The median sales price rose to $271,600 with 155,000 units available for sale nationally (not seasonally adjusted). Excluding units under construction and including only completed houses, ready to be occupied, the available supply is 39,000 units.

Razor thin inventories are a reflection of builder caution in the market place as well as the headwinds restraining a more robust housing recovery. Access to credit for both builders and home buyers remains a challenge, while builders struggle with shortages of available lots and skilled labor, as well as rising building materials prices.

The increase in the median price of new construction represents some welcome relief for builders who have endured the sharp declines in house prices combined with sharp increases in some of their input materials costs.

Despite the progress reflected in today’s report the housing market recovery is still only half complete. We expect the pace of sales to continue to improve through 2013 and 2014 as the housing market returns to normal with sales nearly twice today’s pace.

 

Existing Sales and Prices Increase

Existing home sales increased 0.6% in April from an upwardly revised level in March, and were up 9.7% from the same period a year ago. The National Association of Realtors (NAR) reported that April 2013 total existing home sales were at a seasonally adjusted rate of 4.97 million units combined for single-family homes, townhomes, condominiums and co-ops. That compares to 4.94 million units in March, and 4.53 million units during the same period a year ago. All regions were up from a year ago, ranging from 14.9% in the South to 4.3% in the West. For the current month, the only decrease was 3.4% in the Midwest.

The April 2013 level of single-family existing sales increased 1.2% from March to a seasonally adjusted 4.38 million sales, and was up 9.0 % from the same month a year ago. Seasonally adjusted condominium and co-op sales decreased 3.3% from March to a seasonally adjusted 590,000 units in April, but were up 15.7% from the same period a year ago.

The total housing inventory at the end of April increased 11.9% from the previous month to 2.16 million existing homes for sale. At the current sales rate, the April 2013 inventory represents a 5.2-month supply compared to a 4.7-month supply in March, and a 6.6-month supply of homes a year ago. The April inventory of condominiums/co-ops increased to a 4.9-month supply from a 4.8-month supply in March, but was down from a 7.5-month supply a year ago. NAR reported that listed inventory is 13.6% below the same period a year ago, and that listed inventory is most restricted in lower price ranges. NAR also reported that the April median time on market for all homes was 46 days, down from 62 days in March and 83 days during the same month a year ago.

Some 18% of April 2013 sales were distressed, defined as foreclosures and short sales sold at deep discounts. This level was down from 21% in March and 28% during the same month a year ago.

The median sales price for existing homes of all types in April 2013 was $192,800, up from $183,900 in March, and up 11.0% from $173,700 during the same period a year ago. NAR reported that April represented the fourteenth consecutive monthly year-over-year price increase. The median condominium/co-op price increased from $180,000 in March to $189,500 in April, and was up 11.3% from $170,200 a year ago.

In April 2013, all cash sales were 32% of transactions compared to 30% in March, and 29% in April 2012. Investors accounted for 19% of April 2013 home sales, unchanged from March and down slightly from 20 % in April 2013. First-time buyers accounted for 29% of April 2013 sales, down from 30% in March and down from 35% during the same period a year ago.

NAR reported that buyer traffic is up 31% from a year ago, but sales are only up about 10%, despite noting that April existing sales reached the highest level since November 2009 when the market was responding to the home buyer tax credit. Potential buyers continue to face higher prices. Those same increasing prices will induce more households to place their homes on the market, and will eventually dampen the enthusiasm of investors and cash buyers.

The modest increase in April existing home sales was consistent with the 1.5% increase in the March 2013 Pending Home Sales Index.

Rental Price Growth Continues to Exceed Overall Inflation

The Bureau of Labor Statistics reported that its measure of consumer prices declined in April. According to the Consumer Price Index – Urban Consumer (CPI), prices faced by consumers declined by 0.4% on a month-over-month seasonally adjusted basis. This is the second consecutive monthly decline for the index. In March, consumer prices fell by 0.2%. Consumer prices have experienced three episodes of month-over-month declines in the past 6 months and 5 instances of monthly declines over the past twelve months. Over the past year, consumer prices have risen by 1.1% on a not seasonally adjusted basis.

As Chart 1 illustrates, the decline in consumer prices largely reflects falling energy prices. In April, energy prices declined by 4.3% on a month-over-month seasonally adjusted basis after falling by 2.6% in March. Gasoline prices were largely responsible for the decline in energy prices, falling by 8.1% in April. Over the past twelve months energy prices have declined by 4.3%. Meanwhile, food prices, which also display higher than average volatility, rose by 0.2% in April after remaining flat in March. Core CPI, which excludes both food and energy prices, rose by 0.1% in April, mimicking its growth rate in March. Over the past twelve months, core prices have risen by 1.7% on a not seasonally adjusted basis.

NAHB constructs a real rental price index by deflating the price index for rent by the index for overall inflation. This measure indicates whether inflation in rents is faster or slower than general inflation, excluding more volatile food and energy prices, and provides some insight into the supply and demand conditions for rental housing. When rents are rising faster (slower) than general inflation the real rent index rises (declines). Alternatively, the real rental price index also conveys information about the importance of the rental prices faced by consumers relative to their other expenditures and sheds some light on the relative importance of household expenditure items. In this way, an increase (decrease) in the real rent index also indicates that rental prices are a growing (shrinking) share of the overall expenditures made by consumers.

Computationally, the real rental price index and the relative weight calculation are closely related. As Chart 2 illustrates, the real rental price index and the relative weight of rental prices within core CPI follow a very similar trend. The relative weight measure is first calculated using not seasonally adjusted data and overall CPI in order to ensure proper measurement. Then core CPI is substituted for overall CPI and finally the not seasonally adjusted data is converted to its seasonally adjusted counterpart. In April, rental price inflation, 0.2%, exceeded core inflation, 0.1%. As a result, real rental prices faced by consumers increased. This is the third consecutive month that real rental prices have increased. Similarly, seasonally adjusted rental prices as a share of consumers’ overall expenditures also rose for the third consecutive month.

Housing Starts – What March Giveth, April Taketh Away – All Multifamily

Today’s report on housing starts for April from the Census Bureau and HUD shows a fall back from the revised March annual pace of 1.0 million units to 853 thousand. Most of the decline is attributable to a correction in the multifamily sector. Single family starts dipped to an annual pace of 610 thousand in April from 623 thousand in March, but multifamily starts plunged from a pace of 398 thousand in March to 243 thousand in April.

Multifamily starts traditionally are more volatile than single family and the swings in the last several months are a perfect example. The average pace of multifamily starts has been 321 thousand since December, but that average is based on the pace of starts jumping up 97 thousand units in December from November’s pace before falling back 79 thousand units in January. February and March accelerated the pace by 114 thousand units, so the correction to the pace this month is no surprise.

Overall, today’s report is less exciting than it may appear, single family remains on track while multifamily continues to thrill. The pace of single family construction has risen steadily since late 2011 while the pace of multifamily surged in late 2012. We expect single family production to continue to make steady gains over the next two years on its way to a more normal level of production surpassing one million units annually. Multifamily housing starts are likely to exhibit continued volatility as it finds its sustainable level of production between 350 thousand and 400 thousand units annually.

 

Producer Prices in April – Builders May Get Relief on Wood Products Prices

The Bureau of Labor Statistics (BLS) released the Producer Price Indexes (PPI) for April. Overall, producer prices declined for a second month based on continuing declines in energy prices, but the sharp price increases for the building materials framing lumber and OSB may be nearing an end.

The PPI for finished goods declined 0.7% in April from March (seasonally adjusted) driven by a 2.5% decline in energy prices. Core prices (excluding food and energy) continued their modest pace, rising 0.1% in April. Declining food prices also contributed to the decline in overall producer prices.

The monthly PPIs for framing lumber and OSB increased from March to April, 3.2% and 6.5% respectively, but weekly price data from Random Lengths indicate that turning points during April may be the beginning of a reversal of the steep increases that have accompanied the housing market recovery. If sustained these declines should appear in the June release of the May data.

Indexing both the PPI and the Random Lengths framing lumber price to January 1995 shows that they move together closely, reflecting the same price dynamics, with the weekly data from Random Lengths showing a larger amplitude in the changes. Based on monthly prices the PPI indicates a 67% increase from the 2009 trough to April; the weekly data show a trough to April increase of 124% in lumber prices.

Price increases for OSB are even more dramatic. According to the PPI data OSB prices have increased 151% since bottoming out in the housing bust; the weekly Random Lengths data show a 206% increase.

A break in prices would be a welcome relief for builders. With house prices less than 10% above their housing bust lows, the impact of these rising input costs has presented a significant challenge for builders during the recovery.

 

Home Builder Confidence Up

Builders expressed renewed confidence in May after a three month drop in the NAHB/Wells Fargo Housing Market Index.  The May index rose three points to 44 from a downwardly revised April level of 41.  All three components increased: current sales increased four points to 48, expected sales increased one point to 53, a seven year high, and traffic increased three points to 33.  Except for future expectations, the main index and the other two components remain below their peaks in December and January.

Builders report buyers are more aggressive in the market now as house prices continue to rise consistently while interest rates and the inventory of existing homes for sale remain low.  In a few markets, builders report healthy competition that has allowed them to raise prices. 

Many builders are reporting increased material costs and the producer price indexes for lumber, plywood, gypsum and oriented strand board (OSB) have shown significant increases in the past year.  Gypsum is at 94% of its peak during the boom; softwood lumber is at 93% of its cyclic peak and concrete is at 99% of its peak while housing starts are at 46% of their peak.

Builders’ confidence has not returned to the peak in December and January as the headwinds of rising material prices, scarce labor and land and tight credit conditions continue but increased demand has offset some of those hurdles and caused builders to become more optimistic than they were in April.  NAHB expects the housing market to continue its current rate of improvement and end the year at just over 1 million starts.