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.

Non-revolving Credit Continues Growing, but Revolving Credit Declines

The total amount of consumer credit outstanding expanded for the 19^th consecutive month, but growth in March occurred at a slower rate than in previous months. According to the Federal Reserve Board, consumer credit outstanding grew at a seasonally adjusted annual rate of 3.5% in March to $2.8 trillion. In February, consumer credit rose by 8.0% and by 5.5% in January. Over the first quarter of 2013, consumer credit rose by a seasonally adjusted annual rate of 5.7%. This rate of growth was slightly lower than then 6.5% growth rate measured in the fourth quarter of 2012, but higher than the 4.9% rate of growth observed in the third quarter of 2012.

The March increase in consumer credit outstanding reflected a 5.9% rise in non-revolving credit. Non-revolving consumer credit outstanding rose to seasonally adjusted $2.0 trillion. Non-revolving credit is largely composed of automobile loans and student loans, but also includes secured or unsecured loans for manufactured housing, boats trailers, and vacations. In February, non-revolving credit outstanding grew by 11.3% and in January it rose by 6.9%. Over the first quarter of 2013, non-revolving credit rose by a seasonally adjusted annual rate of 8.1%. The first quarter growth rate was slightly lower than then 9.3% growth observed in fourth quarter of 2012, but higher than 6.9% growth rate that occurred in the third quarter of 2012.

The expansion in non-revolving consumer credit that was recorded in March was partly offset by a decline in revolving credit. Revolving credit is largely composed of credit cards. In March, revolving credit declined by a seasonally adjusted annual rate of 2.4% to $0.8 trillion. This is the first monthly decline in revolving credit outstanding since December 2012. Following a month-over-month decline in December 2012, revolving credit grew by 2.3% in January and by 0.6% in February. Over the first quarter of 2013, revolving credit outstanding rose by a seasonally adjusted annual rate of 0.2%, below the 0.3% growth rate that recorded in the fourth quarter of 2012 and the 0.4% growth rate that took place in the third quarter of 2012.

Do It Yourself or Hire a Professional?

To celebrate National Home Remodeling Month in May, the National Association of Home Builders (NAHB) Remodelers recommends that home owners consider the safety risks, time delays and hidden costs before attempting do-it-yourself (DIY) home improvements.

According to the 2011 American Housing Survey (AHS) from the HUD/Census Bureau, home owner do-it-yourself (DIY) projects accounted for 37 percent of all home remodeling projects performed nationwide from 2010-2011 but only 18 percent of all remodeling spending. DIY home improvement projects tend to be smaller, require less technical training and expertise and cost less, with 50 percent of home owners spending less than $950 on these projects. At the same time the median spending on professional remodeling projects is close to $4,000.

One of the most expensive remodeling projects is a kitchen addition, with half of these projects costing more than $27,000. Very few homeowners attempt or manage to add a kitchen on their own. The AHS data show that more than 80 percent of kitchen additions are done professionally.  Replacing roofing is also largely outsourced to professional remodelers, 82 percent of these projects are completed by professionals. Home owners also tend to hire professionals when it comes to home improvement projects that require technical training and, often, a professional license.  Close to 90 percent of all remodeling projects that involve adding or replacing HVAC system are done professionally. Almost two thirds of projects that replace internal water pipes, electrical system, major equipment and appliances are completed by professionals. Not only that home owners might not have the right tools and knowledge to complete these projects, but many warranties become void by improper installation.

Home owners are more adventurous and successful in finishing smaller projects. About half of all plumbing fixtures replacements are completed with no professional help. More than half of all bedroom and recreation room renovations are completed by home owners as well. These tend to be smaller projects, with half of them costing less than $1,500 and $1,600, respectively. Professional bedroom and recreation room renovations are bigger in scope with median spending of $5,000 and close to $7,000, respectively.

For additional tips and considerations before taking on a DIY home remodel read the National Association of Home Builders (NAHB) Remodelers press release

Mortgage Lending Expected to Rise, but Risks Remain

The Federal Reserve Board released the latest results from the Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS). Responses to the April survey indicate that mortgage lending is expected to rise over the coming year, but certain risks could derail its recovery.

In each survey iteration, the SLOOS asks senior bank officers to assess their business and consumer lending activity, providing information on the change in both their bank’s lending standards and in demand for various bank products. In addition to these routine questions, the SLOOS will also include a set of special questions that address developments in banking practices of timely interest.

In its most recent installment, the SLOOS included a special question that asked domestic banks to assess the likely change in certain types of residential real estate assets such as loans, agency mortgage-backed securities (MBS), and private-label MBS. On net, senior bank officers expected their banks holdings of total residential real estate assets to rise in the coming year, reflecting an expansion in their holdings of residential real estate loans. According to Chart 1, a net of 18% of bank respondents expect their bank’s holdings of total residential real estate assets to increase in the coming year, 38% expect their holdings of total residential real estate assets to rise while 20% expect their bank’s holdings to decline over the coming year. The remaining 42% did not expect their holdings of total residential real estate assets to change over the coming year. A net of 27% of respondents expect their bank’s holdings of residential real estate loans to rise while on net, bank officers expect their bank’s holdings of MBS, agency and private label, to decline.

A special question also asked senior bank officers to assess the change over the past year in factors affecting mortgage lending. According to Chart 2, mortgage lending has become relatively more profitable for banks over the past year, but certain risks have also increased. On net, 40% of bank respondents said that risk-adjusted profitability of mortgage lending relative to other possible uses of funds had increased. However, 39% of senior bank respondents on net mentioned that GSE putback risk, which is the forced repurchase of mortgages sold to GSEs, had also risen. A net of 27% of senior bank officers thought that guarantee fees charged by GSEs, fees charged to lenders for bundling, servicing, selling and reporting MBS to investors, had increased over the past year. Meanwhile a net of 12% of bank officers said that investor appetite for private-label securitizations had increased over the past year and a net of 17% of senior bank officers agreed that balance sheet capacity had increased over the past year.

The ultimate impact of each individual factor on mortgage lending activity depends not only on its change over the past year, but also on its relative importance. In response to a special question asking bank officers to describe the importance of these same factors for mortgage lending, profitability and GSE putback risk, two mortgage lending factors that the largest share of bank respondents said had increased the most over the past year were also the two most important factors restraining mortgage lending. The results show that 78% of bank officers cited profitability as an important factor restraining mortgage lending and 74% of bank respondents cited GSE putback risk as “important”.

Although Chart 2 shows a relatively sizeable net share of bank officers cited guarantee fees, a high volume of applications that exceeds processing capacity, and servicing costs upon borrower delinquency as having increased in the past year, these factors are near the bottom in terms of their importance for mortgage lending as shown in Chart 3. Conversely, while a relatively smaller net share of bank respondents cited the economic and housing outlook, mortgage insurance, and investors’ appetite for private-label securitizations as having increased over the past year, these factors are relatively more important to mortgage lending than guarantee fees charged by GSEs, a high volume of applications, and servicing costs upon borrower delinquency.

Measures of Consumer Confidence Mixed

Measures of consumer confidence were mixed in April. According to Thomson Reuters and the University of Michigan, the Consumer Sentiment Index fell by 2.8% on a monthly seasonally adjusted basis to 76.4. The final reading of consumer sentiment was revised up from the preliminary reading of 72.3 that was released earlier in the month. Conversely, the Conference Board reported that its Consumer Confidence Index rose by 10.1% on a monthly seasonally adjusted basis in April to 68.1. Also, the original March reading, 59.7, was revised up to 61.9. Consumer confidence regained all of the ground that it lost in March. However, over the past twelve months, consumer confidence is lower by 0.8%.

Consumer sentiment and consumer confidence, measures of consumers view of the economy, have diverged in three of the past four months but, as Chart 1 above illustrates, these two measures of consumer confidence have tracked each other over a longer period of time. Despite displaying a similar long-run trend, the Conference Board’s Consumer Confidence Index displays greater volatility. Between 1996 and 2000 growth in the Conference Board’s measure exceeded growth in the University of Michigan and Thomson Reuters’ measure. A similar pattern occurred between 2006 and 2008. Between 2008 and 2009, the Conference Board’s measure of consumer confidence fell more than the Consumer Sentiment Index.

Both measures of consumer confidence reflect consumers’ assessment of their present situation and their expectations for the future. The Conference Board captures these two viewpoints with its Consumer Confidence Index – Present Situation and its Consumer Confidence Index – Expectations. The University of Michigan and Thomson Reuters separates the information in its headline index with its Consumer Sentiment Index – Current Conditions and its Consumer Sentiment Index – Expected Conditions. The source of the increased volatility displayed by the Conference Board’s Consumer Confidence Index is in its measure of consumers’ assessment of their present situation. Chart 2 illustrates that the Consumer Confidence Index – Present Situation tends to exceed the Consumer Sentiment Index – Current Conditions during upswings and it falls below the Consumer Sentiment Index – Current Conditions during downturns. Meanwhile, Chart 3 shows that Consumer Confidence Index – Expectations and the Consumer Sentiment Index – Expected Conditions track each other closely.

The dissimilarity in the trend of the two sub-indexes measuring consumers’ present situation likely reflects the different focus of the underlying question topics. Conversely, the topics addressed by the two indexes measuring consumers’ expectations capture similar information. The Consumer Confidence Index – Expectations asks survey respondents about their view of business conditions, employment and total family income over the next six months while the University of Michigan and Thomson Reuters’ Consumer Sentiment Index –Expected Conditions asks its survey respondents about their financial condition one year from now and business conditions both one year and five years from now. On the other hand, the Consumer Confidence Index – Present Situation asks consumers about their view of present-day business and employment conditions while the Consumer Sentiment Index – Current Conditions focuses its questions on consumers’ personal financial situation today relative to a year prior and on consumers’ attitudes towards purchasing durable goods.

House Price Growth Is Accelerating

Standard and Poor’s reported that house prices rose in February. According to the most recent release, the S&P/Case-Shiller Home Price Index – 20 City Composite grew by 9.3% on a year-over-year not seasonally adjusted basis. Following 20 consecutive months of year-over-year declines, house prices registered their ninth consecutive year-over-year increase in February.

Year-over-year house price growth has been generally widespread. As Chart 1 illustrates, house prices have risen on a not seasonally adjusted twelve month basis in each city tracked by the 20-City Composite Index. House prices in Phoenix experienced the largest price increase. In February 2013, Phoenix house prices rose by 23.0%, the sixth consecutive month that house prices have experienced a year-over-year increase greater than 20.0%. Meanwhile, New York City, which rose by 1.9%, experienced the smallest year-over-year growth in not seasonally adjusted house prices among this group. However, as Chart 2 illustrates, while the upward trend in Phoenix and New York house prices during the boom years were roughly similar, house prices in Phoenix experienced a more severe downturn than house prices in New York. As a result, the higher growth rate recently seen in Phoenix house prices reflects their greater distance from normality.

According to the April press release, the not seasonally adjusted 10- and 20-City Composite Indexes are “the leading measure of U.S. home prices”. Between January 2013 and February 2013, the rate of growth in the 20-City Composite Index increased from 8.1% to 9.3%. This acceleration partially reflects an increase in house prices between these two months. However, it largely reflects the house price declines that were still taking place one year ago. Between January 2013 and February 2013, house prices rose by 0.3% on a not seasonally adjusted basis. Meanwhile, between January 2012 and February 2012, house prices fell by 0.8%. As Chart 3 illustrates, the recent rise in house prices is being compared to a period of house price declines. As a result, the acceleration in year-over-year house prices may be overstating the strength of the recovery. However, Chart 4 illustrates that the seasonally adjusted house price index more clearly demonstrates that house prices are accelerating.

For full histories of the composites and 20 markets included in the Case-Shiller composites, click here cs.

Remodelers’ Confidence Dips in the First Quarter

Conditions in the remodeling market dipped in the first quarter, according to NAHB’s survey of professional remodelers, as the overall Remodeling Market Index (RMI) derived from the survey fell six points to 49.   Prior to that, the RMI had been generally trending upward, albeit with significant quarter-to-quarter fluctuations.  So, although the first quarter 2013 RMI indicates a pause in the improvement that the remodeling market had been showing, it is nevertheless the third highest reading for the RMI since the first quarter of 2006.

An RMI above 50 indicates that more remodelers report market activity is higher (compared to the prior quarter) than report it is lower. The overall RMI averages ratings of current remodeling activity with indicators of future remodeling activity.

In the first quarter of 2013, both major components of the RMI declined. The future market indicators component decreased from 56 in the previous quarter to 48. Current market conditions fell from 54 in the previous quarter to 50.

Concern about the rising costs of construction materials and labor probably contributed to the pause in the general upward trend of remodelers’ confidence, as the rising cost of doing business makes it difficult to deliver at prices many customers expect.

For more detail on all RMI components and subcomponents, along with their history, see NAHB’s RMI web page.

Rates on New Home Loans Increase Slightly

Interest rates on loans for new homes increased slightly in March, according to data recently released by the Federal Housing Finance Agency (FHFA).  The average contract rate on conventional loans for newly built homes increased 13 basis points, to 3.50 percent.  Although initial fees and charges on the loans declined from 1.17 to 1.08 percent, that still resulted in an effective rate (amortizing the initial fees) that edged up 11 basis points, to 3.61 percent.  So far in 2013, rates on loans to purchase new homes have been drifting upward, reversing a downward trend that prevailed throughout most of 2011 and 2012.

The average term on loans for new homes in March was 28.4 years, up 0.2 years from February.  Meanwhile, the average price and loan amount both increased—the average price from $387,100 to $388,400, the average loan amount from $291,200 to $295,300.   Neither is quite back up to the average dollar figures reported at the end of 2012, however.

The changes in purchase price and loan amount resulted in an increase in the average loan-to-price ratio on conventional mortgages for new homes to 77.7 percent (up from 77.0 in February).

This information is based on FHFA’s Monthly Interest Rate Survey (MIRS) of loans closed from March 25 to the end of the month.   Loan terms are typically established 30 to 45 days before closing.  For other caveats and limitations of the survey data, see the technical note at the end of FHFA’s April 25 News Release.

House Prices Continue Their Ascent

Nationally, house prices continued to rise in February, contributing to the overall recovery in U.S. house prices. According to the most recent release by the Federal Housing Finance Agency, U.S. house prices rose by 0.7% on a month-over-month seasonally adjusted basis in February. This is the thirteenth consecutive monthly increase for the House Price Index – Purchase Only. Over this 13-month period, house prices have risen by 7.4%. Over the past year house prices have risen by 7.1%

The February increase in house prices was geographically widespread, increasing in nearly every division of the country. The Census Bureau uses divisions to segment the four major regions of the country; Northeast, Midwest, South, and West. As Chart 1 illustrates, February house prices increased in each division of the country except the Middle Atlantic region. Despite the February decline, house prices in the Middle Atlantic region are 1.9% higher than when they bottomed out one year ago.

Chart 2 compares national house prices, which began a sustained recovery in 2011, with mortgage applications for purchase, a measure of mortgage demand. According to the FHFA, the House Price Index – Purchase Only is composed of the purchase prices of houses with mortgages owned or guaranteed by Fannie Mae or Freddie Mac. As the chart below illustrates, the trend in house prices has generally mirrored the trend in mortgage applications for purchase. Prices are moving higher as demand increases from buyers coming back to the market and pushing application volumes up from housing bust lows, levels last seen in the late 1990s. Between January 2011 and February 2013, the HPI – Purchase Only has risen by 6.4%. Meanwhile, the Mortgage Bankers Association’s Mortgage Applications for Purchase Index has risen by 5.8% over this same period.

For full histories of the FHFA US and 9 Census divisions, click here.

Apartment Production Spikes to an Unsustainable Rate

The Census Bureau’s preliminary estimate for starts in buildings with five or more apartments in March came in at a massive (seasonally adjusted annual) rate of 392,000 units.  In the Census construction report, this shows up as a 27 percent increase over February.  However, the number for February was itself revised upward by 24,000—so the five-plus starts rate for March is actually 38 percent higher than the production rate we thought prevailed a month ago.

At 392,000, the five-plus starts rate is the highest it’s been since January of 2006 (a one-month anomaly that at the time was explainable as the industry’s response to changing building codes in some states).  Even if we smooth some of the volatility out of the five-plus starts series, the 3-month moving average is up to 325,000.  That’s above the annual number of five-plus starts in any year since the 1980s, so even the current moving average seems a bit too high to sustain going forward—a contention supported by the permit numbers in the latest construction report.

The report shows that, in March, the (seasonally adjusted annual) rate at which new five-plus permits were issued dropped 8 percent to 283,000, while the number of five-plus permits waiting in the pipeline (previously issued but not yet converted to starts at the end of the month) declined 19 percent, to 38,400 (not seasonally adjusted).