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 Opportunity 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.

Housing Affordability Holding Strong in Early 2013

Nationwide housing affordability held near historic highs in the first quarter of 2013, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI), at 73.7 percent, down slightly from 74.9 percent 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 percent of all homes sold in the first three months of 2013 were affordable to families earning the national median income ($64,400).

This was the third consecutive quarter in which Ogden-Clearfield hit the top of the affordability chart for major markets. There, 93.4 percent of all new and existing homes sold in this year’s first quarter were affordable to families earning the area’s median income of $70,800 – essentially unchanged from the 93.7 percent of homes affordable to median-income earners at year-end 2012.

Among smaller housing markets, Mansfield, Ohio, claimed the “most affordable” title this time around, with 97.5 percent of homes sold in the first quarter being affordable to those earning the median income of $54,600.

This was the second consecutive quarter in which the San Francisco-San Mateo-Redwood City, Calif. metro area hit the bottom of the affordability chart for major markets. There, just 28.9 percent of homes sold in the first quarter were affordable to families earning the area’s median income of $102,000.

The least affordable small housing market in the first quarter was Santa Cruz-Watsonville, Calif., where 37.1 percent of all new and existing homes sold were affordable to those earning the area’s median family income of $73,800.

Confidence in the 55+ Housing Market Shows Strong Growth

In the first quarter of 2013, the National Association of Home Builders’ 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 the inception of the index in 2008 and sixth consecutive quarter of year over year improvements.

The index is up on increases in consumer demand for homes and communities that are designed to address the specific needs of mature homebuyers. 

There are separate 55+ HMIs for two segments of the 55+ housing market: single-family homes and multifamily condominiums. Each 55+ HMI measures builder sentiment based on a survey that asks if current sales, prospective buyer traffic and anticipated six-month sales for that market are good, fair or poor (high, average or low for traffic). An index number below 50 indicates that more builders view conditions as poor than good.

All of the components of the 55+ single-family HMI showed significant growth from a year ago: present sales climbed 19 points to 46, expected sales for the next six months increased 21 points to 53 and traffic of prospective buyers rose 15 points to 41.

 The 55+ multifamily condo HMI posted a substantial gain of 23 points to 38, which is the highest first-quarter reading since the inception of the index. All 55+ multifamily condo HMI components increased compared to a year ago as present sales rose 23 points to 37, expected sales for the next six months climbed 23 points to 43 and traffic of prospective buyers rose 23 points to 38.

The 55+ multifamily rental indices also showed strong gains in the first quarter as present production increased 12 points to 43, expected future production rose 13 points to 48, current demand for existing units climbed 14 points to 56 and future demand increased 13 points to 58.

The strong year over year increase in confidence reported by builders for the 55+ market is consistent with year over year increases in other segments of the home building industry. While demand for new 55+ housing has improved due to a reduced inventory of homes on the market and low interest rates, builders’ ability to respond to the demand is being limited by a shortage of labor with basic construction skills and rising prices for some building materials.

Delinquencies Rise in First Quarter, but Foreclosure Starts Hold Steady

The seasonally adjusted mortgage delinquency rate increased 16 basis points over the first quarter of 2013, increasing to 7.25%. Even with this quarterly increase, the current share of mortgage loans at some stage of delinquency still ranks as the second-lowest reading since 2008. In addition, the overall increase in delinquencies was driven by a sizable jump in the 30-day past due category and a slight uptick in mortgages 60 days past due. The 90+ day delinquency bucket edged lower to 2.88%, and is now at nearly a five-year low.

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. Also, the state-by-state variation for foreclosures started is at its smallest since mid-2007.

Florida remains at the heart of the nation’s ongoing foreclosure troubles, ending the first quarter with the highest foreclosure starts rate (1.13%) and accounting for 11.6% of all foreclosures started nationally. Georgia, Mississippi and Illinois all posted foreclosure start rates at or above 1% in the first three months of 2013, but combined these three states accounted for only a slightly larger share of the national total than Florida.

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.

Foreclosure inventories fell in 40 states versus last quarter and 45 states have seen their inventories shrink in the past year. Once again, Florida is at the epicenter, containing more than 23% of the nation’s total inventory of foreclosed loans and just 7.3% of all loans. Combined with the remaining top 5 (New York, New Jersey, Illinois and California), these states accounted for 51.6% of the nation’s total number of loans in foreclosure, yet represented just 32.1% of all serviced loans.

New York’s high national share of inventories is likely a product of the state’s slow judicial process in handling foreclosure cases and recent moratoriums on new foreclosure activity. New Jersey and Illinois continue to struggle with disproportionately large shares of foreclosure inventories relative to loans and also have high foreclosure starts rates. By comparison, California’s foreclosure situation has improved significantly and only ranks among the top 5 due to the fact that it is a state with a very large number of mortgages—it accounts for 13.1% of all mortgages, but only 6.4% of the loans in foreclosure. In addition, the state’s foreclosure starts rate has declined steadily since the third quarter of 2011 and has come in below the national average in each of the past four quarters.