Improving Markets Index: Lincoln, NE MSA

NAHB recently unveiled an index that tracks housing markets on the mend, the NAHB/First American Improving Markets Index (IMI).  The IMI is intended to draw attention to the fact that housing markets are local and that there are metropolitan areas where economic recovery is underway.  The index measures three readily available monthly data series that are independently collected and are indicative of improving economic health.  The three are employment, house prices and single family housing permit growth.

For the sixth release 98 markets are currently classified as improving under a conservative examination of local economic and housing market conditions.  Among these areas is the Lincoln, Nebraska metropolitan statistical area (MSA).

The health of the Lincoln housing market is due to its position as a large regional healthcare center, the presence of the University of Nebraska, the booming agricultural sector, and the large Federal Government and state government presence because of its role as the state capital.  According to home builder Jim Christo, President of Christo Design Build, “in addition, the insurance sector is very large with Lincoln Benefit Life, Farmers Mutual and many other firms either headquartered here or with a large presence here.  Also, the steady stream of grandparents moving here to be close to family and to enjoy the many cultural amenities along with many twenty-somethings returning after being away for a several years, have also helped keep home builders active and the economy growing.”  He went on to say that “the Kawasaki plant is very busy and Duncan Aviation, which refurbishes and upgrades business aircraft is hiring and as a result workers are upgrading their skills and that too has caused an up-tick in employment.”     

Comparing educational data from the 2000 Census to the 2009 American Community Survey shows that Lincoln has experienced increasing education levels.  The number of people with a high school diploma or less actually fell from 57,518 to 56,025, a decline of 2.6%.  By contrast, the number of with some college rose by 3% from 38,873 to 40,129 and those individuals with an associate degree skyrocketed by 39% from 14,364 to 19,986.  Similarly, the number of persons with a B.A rose by 23% from 34,615 to 42,657.  Finally, the number with a professional degree jumped 12%, from 17,386 to 19,473. While the educational gains were across the board, the large rises in the number of persons with an associate degree and a B.A. respectively speaks to a workforce that is rapidly increasing its skills.          

According to Jo Lewis, a mortgage loan originator with Liberty First Credit Union and President of the Nebraska Mortgage Association, “Lincoln missed the real estate bubble and thus is not suffering from a bust.  This is because construction here proceeded at a steady pace as lenders refused to loosen lending standards and held true to Midwest values.“   As a result, house prices have held up well over the past few years.  Prices are up 4.2% since the trough in January 2011 and are just 5.0% off their high set in July 2007.      

Improving economic conditions have resulted in payroll employment being down less than 1.0% from its peak in October 2011 and up by 3.2% since the trough in July 2010.  Single family permitting activity is up 1.6% on a seasonally adjusted monthly average basis from the trough set in January 2009.  While new homes are being built in many parts of the Lincoln MSA, activity has been primarily centered in the city of Waverly northeast of Lincoln, in and around the city of Hickman south of Lincoln and the city of Wahoo northwest of Lincoln.

Existing Sales Up, Inventory Down

Existing home sales increased 4.3 percent in January to a seasonally adjusted level of 4.57 million units. That level is 0.7 percent above the January 2011 seasonally adjusted annual rate, and is the third increase over the past four months. The National Association of Realtors (NAR) reported that the seasonally adjusted sales of existing homes (comprised of completed transactions of single-family, townhouses, condominiums and coops) rose in all four regions, and only the West reported a decline, 3.1 percent, from the same period in 2011.  

Single-family home sales increased 3.8 percent in January to a seasonally adjusted annual rate of 4.05 million units and were 2.3 percent above the 3.96 million level in January 2011. Condominium and co-op sales increased 8.3 percent in January to a seasonally adjusted annual rate of 520,000 units, but were down 10.3 percent from the 580,000 pace of January 2011. 

The total housing inventory at the end of January dropped 0.4 percent to 2.31 million existing homes for sale. At the current sales level, this inventory represents a 6.1 month supply, down from a 6.4 month supply in December.  NAR reported that foreclosure sales were moving quickly across most markets. NAR reported 35 percent of sales were distressed sales, defined as foreclosures and short sales sold at deep discounts.

First-time buyers increased their share to 33 percent in January from 31 percent in December, and from 29 percent from the same period a year ago. Investors took 23 percent of sales in January, compared to 21 percent in December and 23 percent during the same period one year ago. All-cash sales remained at 31 percent, compared to 32 percent in January 2011.   

Contract failures, which have been elevated in recent months, remained unchanged again in January as in December when 33 percent of NAR members reported cancellations caused by declined mortgage applications and failures in loan underwriting from the appraised value coming in below the negotiated price. The cancellation rate is much higher than the 9 percent rate reported during January a year ago.

A Look Inside Builders’ Books

If you have ever wondered how much single-family builders are earning these days or how much profit is considered “average” in the industry, then a recently published NAHB study based on a national survey of single-family builders titled “The Cost of Doing Business Study: 2012 Edition” will help provide answers.

On average, single-family builders in fiscal year 2010 made $7.1 million in revenue, had $6.0 million go towards cost of sales, and slightly over $1 million towards operating expenses, which left them with an average net profit of $39,000 (before taxes).  In terms of percentages of revenue, cost of sales represented 84.7% of total revenue, which translates into a gross profit margin of 15.3%.  Operating expenses ate up another 14.7%, leaving builders with a net profit margin of only 0.5%.

The average net profit margin of 0.5% reported by builders in 2010 may be small, but at least it was positive.  The picture was quite different in 2008, when builders reported a negative net profit margin of 3.0%!  In contrast, the average net margin in 2006 stood at 7.7%.

Data also show that builders did some significant belt-tightening around operating expenses.  In fact, these expenses went from representing 17.4% of revenue in 2008, down to 14.7% in 2010.

As far as their balance sheet, builders had an average of $6.2 million in assets in 2010, $4.2 million in liabilities, and $2.0 million in equity.  Only 7.7% of their total assets was held in cash, while 69.7% was held as construction work in progress.

Builders’ balance sheets have shrunk by more than half since 2006, when they reported an average $13.0 million in total assets.  But liabilities have come down by even a bigger margin, going from $9.5 million in 2006 to $4.2 million in 2010.  As a result, on average, builders have seen their current ratio and debt-to-equity ratio improve significantly during this period.

CPI Rises as Core Index and Energy Prices Climb Higher; Real Rents Inch Lower to kick off 2012

The Bureau of Labor Statistics (BLS) reported the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2% on a month-to-month basis during January 2012. Price levels rose across a fairly broad base of categories, as the core, energy and food indexes all registered increases compared to December. If not for the fact that natural gas prices continue to slump due to the abundant supplies created by shale production and above-average winter temperatures, energy prices would be contributing even more to growth in topline CPI as gasoline and crude oil prices have increased strongly in recent weeks.

Core CPI (which excludes energy and food prices) increased 0.2% last month, fueled mostly by large increases in apparel and medical equipment prices. Although core CPI has increased in each of the last 24 months, the overall rate of growth in non-food and non-energy consumer goods has been fairly tame. Indeed, on a year-over-year basis core CPI increased 2.3% in January and has increased at just 1.5% on an average annual basis since January 2009.

The CPI’s measure of housing costs, the shelter index, expanded 0.2% in January, roughly the same rate of month-to-month growth it has registered in each of the last 8 months. On a year-over-year basis, the shelter index increased 2%. With the recent tightening observed in the apartment rental market, rental rates have also been on the rise. NAHB’s measure of real rental rates, which is constructed from the CPI for rent of primary residences and overall CPI, did decline on a monthly basis for the first time since last summer; however, since hitting a cyclical low in mid-2011, the measure for real rents has climbed 2% on an annualized basis and could continue to rise further as apartment demand is expected to strengthen over the course of 2012 thanks to an improving job market.

Producer Prices in January – Watch Gypsum

The Bureau of Labor Statistics (BLS) released the Producer Price Indexes (PPI) for January on Thursday. The index for finished goods rose 0.1 percent in January from December, balancing a 0.4 percent increase in the core index and declines in the food (-0.3 percent) and energy (-0.5 percent) indexes, keeping the overall index in line with its relatively flat trajectory of 2011.

The PPI for residential construction moved up a modest 0.6 percent in January with help from soft lumber prices (0.2% increase), but in spite of large increases in cement (2.8% increase) and gypsum (5.9% increase). As we have noted previously

( http://eyeonhousing.wordpress.com/2011/11/03/sharp-rise-in-gypsum-prices-likely-in-new-year/ ),

in late 2011 gypsum producers informed customers of planned price increases for 2012. Some NAHB members have confirmed the higher prices have taken effect, and the PPI provides additional evidence.

It is possible that the pattern of 2010 and 2011 will be repeated, with increases early in the year reversed over subsequent months, but this is an issue we will continue to watch closely.

 

HOI Indicates Affordability at All-Time High

The National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI) rose to 75.9 during the fourth quarter of 2011,  the highest number recorded in the 20-year history of the index.  The HOI is the percentage of homes sold during the quarter affordable to a median-income family, based on standard underwriting criteria.  An HOI of 75.9 means that 75.9 percent of all new and existing homes sold in the fourth quarter were affordable to families earning the national median income of $64,200. 

New home construction, although improving recently, is still at a historically low level, suggesting that factors such as overly restrictive lending conditions remain a significant obstacle.

Youngstown-Warren-Boardman, OH-PA was the most affordable major housing market in the country during the fourth quarter, with 95.1 percent of all homes sold during the quarter were affordable to households earning the area’s median family income of $54,900.

Markets with Population 500K+ that were Most Affordable in 2011:Q4

  1.       Youngstown-Warren-Boardman, OH-PA

  2.       Lakeland-Winter Haven, FL

  2.       Modesto, CA

  4.       Harrisburg-Carlisle, PA

  5.       Toledo, OH

  6.       Akron, OH

  7.       Warren-Troy-Farmington Hills, MI

  8.       Grand Rapids-Wyoming, MI

  8.       Indianapolis-Carmel, IN

10.       Dayton, OH

For more information on the HOI, including complete history and details for every metro area covered, see www.nahb.org/hoi.

Mortgage Bankers: Delinquencies and Foreclosures Continue to Fall, but a Few Problems Persist

The Mortgage Bankers Association’s National Delinquency Survey showed the delinquency rate on first-lien residential mortgages dropped 41 basis points to 7.58% during the fourth quarter of 2011 (down from 7.99%). While the foreclosure inventory remained elevated from a historical perspective to close out the calendar year, it still registered a modest decline between the third and fourth quarters of 2011, falling 5 basis points to 4.38%. The share of loans entering the foreclosure process during the final three months of the year slipped to 0.99%–marking only the second time in the past four years the foreclosure starts rate fell below 1%.

Jay Brinkmann, MBA’s Chief Economist, discussed some of the observed improvements in mortgage loan performance:

“Mortgage performance continued to improve in the fourth quarter, reflecting the improvement we saw in the job market and broader economy. The total delinquency rate and foreclosure starts rate decreased and are back down to levels from three years ago. A major reason is that the loans that are seriously delinquent are predominantly made up of loans originated prior to 2008 and this pool is steadily growing smaller as a percent of total loans outstanding. In addition, employment is the key driver of mortgage performance and the mortgage delinquency rate is actually falling faster than the unemployment rate is declining,”

A promising piece of data in last quarter’s results was the broad-based geographic improvement in mortgage loan performance. The share of seriously delinquent loans remained unchanged or fell in 25 states, including the hardest-hit areas of California, Florida, Nevada and Arizona. While this represents an improvement, the foreclosure crisis still very much remains concentrated geographically as five states—Florida, California, Illinois, New York and New Jersey—account for more than half of all foreclosures yet only represent less than a third of all serviced loans. By itself, Florida accounts for nearly 25% of the nation’s total foreclosure inventory.

The legal process has had a palpable effect on the level and trajectory of foreclosure activity across states. Indeed, of the top 15 states in terms of the current share of first lien mortgages in foreclosure, 14 use the judicial process to handle foreclosure cases. Furthermore, foreclosure inventory rates in judicial states are roughly four percentage points higher and have seen rates trend appreciably higher while non-judicial process states have experienced modest declines in foreclosure rates during the past two years.

Improving Markets Index: Cincinnati, OH-KY-IN MSA

NAHB recently unveiled an index that tracks housing markets on the mend, the NAHB/First American Improving Markets Index (IMI).  The IMI is intended to draw attention to the fact that housing markets are local and that there are metropolitan areas where economic recovery is underway.  The index measures three readily available monthly data series that are independently collected and are indicative of improving economic health.  The three are employment, house prices and single family housing permit growth.

For the fifth release 76 markets are currently classified as improving under a conservative examination of local economic and housing market conditions.  Among these areas is the Cincinnati, Ohio-Kentucky-Indiana metropolitan statistical area (MSA).

The health of the Cincinnati housing market is due to its well diversified economic base.  Cincinnati possesses a large regional healthcare center, conducts an increasing amount of high-tech manufacturing, benefits from the presence of the University of Cincinnati and a large regional IRS office, and is headquarters to 10 Fortune 500 companies.  According to home builder Bob Schroder, Vice President of Arlinghaus Builders, LLC, “the combination of families relocating here for jobs, pent-up demand from buyers who were on the fence just a few months ago who are suddenly now buying because of a general sense of optimism and a rise in exports, are what is leading the increased traffic we are seeing.”  He went on to say that “lots of small hi-tech employers in robotics and manufacturing are hiring and as a result workers are upgrading their skills and that too has caused an up-tick in employment.”     

Comparing educational data from the 2000 Census to the 2009 American Community Survey shows that Cincinnati has experienced increasing education levels.  The number of people with a high school diploma or less fell from 226,016 to 178,862, a decline of more than 47,000.  By contrast, the number of individuals with a high school diploma increased by 11% from 410,581 to 455,199 and the number of people with some college jumped by 16% from 253,198 to 294,936.  Similarly, those individuals with an associate degree jumped by 28% from 78,221 to 99,835 and the number of individuals with a B.A rose by 25% from 207,222 to 259,686.  Finally, the number with professional degrees skyrocketed by 35%, from 112,247 to 151,167.  Note that the percentage increase in those with a particular degree increases the higher the degree obtained.     

According to Fred Cernetisch, General Manager of Pella Windows and Doors, “house prices are on the upswing because businesses have right-sized themselves.  As a result they are financially more secure, are making profits again and many are planning to add staff to take advantage of business opportunities that present themselves.  In addition there is an increasingly pervasive sense of cautious optimism.“   As a result, house prices have held up well over the past few years.  Prices are up 2.8% since the trough in February 2011 and are just 8.2% off where they were in December 2007.      

Improving economic conditions have resulted in payroll employment being down less than 6.0% from its where it was in December 2007 and up by 2.0% since the trough in December 2010.  Single family permitting activity is up 0.4% on a seasonally adjusted monthly average basis from the trough set in January 2009.  While new homes are being built in many parts of the Cincinnati MSA, activity has been primarily centered in the city of Cincinnati itself and in Boone, Campbell and Kenton counties to the south and Butler, Clermont and Warren counties to the north.

Housing Starts Continue Improvement

January housing starts increased 1.5% to 699,000 on a seasonally-adjusted annual basis. The relatively small month-to-month increase was masked by a substantial revision to November and December estimates. With the revisions, total starts rose to 702,000 in November from a previously reported 685,000. November is the first month above 700,000 since October 2008.
Single-family starts were down 1% on a month-over-month basis but also because December was revised up 9%. Single-family starts broke 500,000 for the first time since the home buyer tax credit was in effect in early 2010. Multifamily starts increased 8.5% to 191,000.
Housing permits also improved modestly across building types but were mixed across regions. Total permits rose in the Northeast and South 4.2% and 10.1% respectively but fell in the Midwest and West 3.7% and 18.2% respectively. The West decline was in multifamily permits.
The improvement in construction and permits aligns with improvements in other housing indicators including the NAHB/Wells Fargo Housing Market Index, which has risen 15 points in five months and the NAHB/First American Improving Markets Index, which has risen from 12 markets to 98 markets in five months.
Indicators outside housing such as employment and consumer confidence have also shown improvement. The consistency of improvement across different measures and within a measure across time is encouraging and supports the expectation for continued modest growth.
But caution remains and one indicator is the number of single-family homes completed, which dropped 14.9% in January to 389,000 on an annual basis from 446,000 in 2011. The drop was consistent across all regions. January experienced better than normal weather in terms of less rain and warmer temperatures so if anything that should have increased the rate of completions. It is possible that builders are waiting to apply the final finishes until a sales contract is signed and the buyer can make those choices.

 

VIDEO: NAHB Chief Economist David Crowe Discussed January 2012 Housing Starts