Student Loans Conditions Vary Across the Country

Student loan debt reflects the cost of an investment in human capital. The typical return on this investment is characterized by both higher wages and a more stable employment. College graduates and those with some college experience tend to have higher wages and lower unemployment rates than their counterparts with a high school degree or less. However, failure to repay student loan debt could impair a borrower’s access to other forms of credit restricting their ability to buy a home or a car.

Recent research from the Federal Reserve Bank of New York focuses on the geographical distribution of student loan debt. Higher than average student debt per borrower typically occurs in states along the coastal states of the country, while the majority of the country, especially those located in the middle of the mainland, tend to have lower than average student debt. The one exception is Illinois (i.e. Chicago).

Counter-intuitively, with the exception of Florida, Mississippi, and Louisiana, states with higher than average student debt per borrower tend to also have an average or below average percent of student loan balance that is seriously delinquent (90 or more days late). The majority of the states that have above average serious delinquency rates are also states with lower than average student debt per borrower.

Earlier research by the Federal Reserve Bank of New York illustrates that borrowers who are seriously delinquent on student loan are less likely to secure mortgage credit. However, the underlying reasons behind serious delinquency in student loan debt are not immediately clear. Some states that have a high share of seriously delinquent student debt also have an elevated unemployment rate or low employment growth. Conversely other states with strained employment indicators have below-average student delinquency rates. At the same time, some states with higher than average seriously delinquency rates also suffered the worst of the housing bust, but this is not the case across the 50 states, the District of Columbia and Puerto Rico. Moreover, the link between student loan delinquency and access to mortgage credit may not be causally related if those that are seriously delinquent on student debt tend not to apply for mortgage credit. Given the potential implications of student loan debt repayment for future housing demand, additional research on this topic should seek to establish the sources of student loan delinquency.

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%.

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.

Eye on the Economy: Rising Home Values Fail to Lift Remodeling in Early 2013

Spending on remodeling and home improvements has gotten off to a slow start this year, according to newly revised Census data. Remodeling expenditures have declined in each of the last five months, with the March estimate down 1.4% for the month and significant downward revisions for January and February. This dip comes after a healthy surge for improvement spending between the spring and fall of 2012.

This weakness is mirrored by the most recent NAHB Remodeling Market Index (RMI), which fell six points to 49. Despite the drop, the first-quarter reading is the third highest since the first quarter of 2006.

The slow start at the beginning of 2013 is surprising given improving trends for existing home sales, which are traditionally a useful indicator of the direction of the remodeling market. For example, the National Association of Realtors Pending Home Sales Index for March was up 1.5% and is 7% higher year over year.

Moreover, home values – and therefore home owner wealth – are improving. And higher wealth should help boost remodeling demand. The Case-Shiller Index (20 City Composite) was up 9.3% year over year, according to the February report. And according to the Federal Housing Finance Agency (FHFA), U.S. home prices rose by 0.7% in February, the 13th consecutive monthly increase. Over the past year, home prices have risen by 7.1%.

One possible explanation for remodeling’s slow start is the general challenges faced by builders and remodelers from rising building material costs and the availability of workers.

Residential construction employment is growing, albeit slowly. Data from the Bureau of Labor Statistics (BLS) indicates that total payroll employment for builders and residential contractors increased by 13,300 in April. Over the last 12 months, home building employment is up 84,000, but is only averaging gains of about 14,000 each month in 2013.

Given the increased demand for construction activity over the last year, the lack of more hiring means there are now more open positions in the construction sector. In fact, the BLS JOLTS survey indicates that the number of unfilled jobs in construction stood at 101,000 in March. This marks the third consecutive month that total has exceeded 100,000, the first such quarter since 2008.

A second possible explanation would be related to less-than-robust consumer confidence at the beginning of 2013. According to Thomson Reuters and the University of Michigan, the Consumer Sentiment Index fell by 2.8% in April. Conversely, the Conference Board reported that its Consumer Confidence Index is down 0.8% year-over-year.

It is not clear what interrupted the improvement of confidence witnessed in 2012, although it is reasonable to believe that the political drama surrounding the fiscal cliff had some impact. Regardless of the cause, these measures are consistent with other data, such as consumer credit reporting from the Federal Reserve that indicates that, for example, revolving debt (i.e. credit cards) was down 2.4% in March and basically flat for the first quarter.

Despite short-term ups and downs, housing continues its long-run improving trend. For example, the count of housing markets on the NAHB/First American Improving Markets Index (IMI) fell by a net count of 15 to 258. In spite of the small drop, which was mostly due to seasonal price declines in some markets, the current list represents 70% of all metros, with all states having at least one market on the IMI.

And underlying economic conditions remain positive for continued improvement for all sectors of residential construction. Interest rates remain low, with the average contract rate on conventional loans for newly built homes standing at 3.5%, according to FHFA data. And the Federal Reserve Board’s Senior Loan Officer Opinion Survey indicates that mortgage lending is expected to rise over the coming year, albeit with some downside risks due to profitability and potential GSE putback risk. Moreover, accommodative Federal Reserve monetary policy is holding long-term interest rates down.

While the homeownership rate continues to decline, falling to 65.2% for the first quarter of 2013 according to the Census Bureau, rising numbers of buyers of new and existing homes should slow future declines. Some additional reduction in the rate will occur as pent-up housing demand is unlocked, producing more renters than owners in the short term. However, these forces should not push the homeownership rate much below 64%, a rate comparable to 1995 levels.

Finally, given that May is National Remodeling Month, NAHB economists used data from the 2011 American Housing Survey to examine improvement-related spending. The analysis found that while 37% of all home remodeling projects over the 2010-2011 period were do-it-yourself (DIY), only 18% of total remodeling spending was DIY. Such projects tend to be smaller, require less technical training and expertise, and cost less, with median household DIY spending over the two-year period totaling $950. Median spending on professional remodeling projects over the two-year period was about $4,000.

These data are a reminder of the economic potential of the remodeling sector. Earlier NAHB research has found that that  every $10 million of remodeling spending creates 111 full-time equivalent jobs as well as associated economic benefits including taxes paid to state, local and federal governments.

Such housing growth is particularly important now. After a disappointing GDP growth report for the fourth quarter of 2012 (0.4%) and a lackluster first quarter (2.5%) estimate, the continued recovery in housing can lead the economy to sustainable growth and job creation. In fact, over the last six quarters, expansion of home building and remodeling has been responsible for 20% of national economic growth.

Number of Open Construction Jobs Remains Elevated

Recent government employment data suggest a pickup in construction sector job openings over the last half-year. While the increase in unfilled positions is consistent with the uptick in construction sector activity, particularly for home building, the data reflect only modest increases in total employment thus far.

For the construction sector, Job Openings and Labor Turnover Survey (JOLTS) data from the Bureau of Labor Statistics (BLS) indicate that gross hiring for the construction sector totaled 338,000 in March 2013.

More importantly, the number of open, unfilled positions in the construction industry remained near post-Great Recession highs. The number of unfilled positions in the sector stood at 101,000 in March, marking three consecutive months for which the total number of open positions was greater than 100,000. This is the first time this has occurred since 2008. Successfully filling open positions with qualified workers is a top concern for home builders in 2013.

The March job openings rate (open positions measured as a percentage of current employment) for construction was 1.7%. Measured as a three-month moving average, the openings rate (the blue line above) has shown noticeable strength for the last seven months. Combined with a declining sector layoff rate (nonseasonally adjusted), charted as a 12-month moving average in the graph above, these factors suggest good news for construction hiring in the months ahead.

Monthly employment data for April 2013 (the employment count data from the BLS establishment survey are published one month ahead of the JOLTS data) indicate that total employment in home building stands at 2.132 million, broken down as 586,000 builders and 1.545 million residential specialty trade contractors.

According to the BLS data, over the last 12 months, the home building sector has added only 84,000 jobs. Since the point of peak decline of home building employment, when total job losses for the industry stood at 1.466 million, 148,000 positions have been added to the residential construction sector.

While employment growth for the sector is not expected to occur at rates seen for the growth in building, the current slight level of improvement for total employment is a puzzle. This small amount of job creation could be due to increased hours for existing workers, but if true, this is not a sustainable situation. Expected increases in building should lead to further growth in residential construction employment over the course of the year. Thus far in 2013, home building employment is averaging monthly growth of about 14,000.

For the economy as a whole, the March JOLTS data indicate that the hiring rate was relatively unchanged at 3.2% of total employment. The hiring rate has been in the 3.1% to 3.4% range since January 2011. The job openings rate  remained elevated, at 2.8% in March, the highest since June 2012.

Housing is Contributing to Economic Growth

Over the last two years, home building has experienced significant growth, albeit off of low levels. And this expansion has added to overall growth of Gross Domestic Product (GDP). In fact, since the last quarter of 2011, advances in home building have been responsible for 20% of total economic expansion.

While the economy as a whole has slowed somewhat over the last year, the expansion of home building has picked up steam. The home building component of the GDP accounts, as measured by the Bureau of Economic Analysis, is Residential Fixed Investment (RFI). RFI includes spending on residential structures and some equipment. The category of residential structures includes new construction of single-family and multifamily housing units, improvements and remodeling that expand or extend the life of housing units, expenditures for manufactured homes, brokers’ commissions on the sales of residential property and net purchases from government agencies. The bulk of this spending is associated with construction of new single-family and multifamily units, plus improvement spending.

It is also worth noting that this measure of home building’s contribution to economic growth does not include other housing-related spending, such as the average $7,400 spent by buyers of newly built homes on furnishings, appliances and other items in the two-year period after the purchase.

Since the last quarter of 2011, RFI has averaged a 14% growth rate. And as seen in the green line above, this growth has added between 0.19 and 0.43 total percentage points to the headline GDP growth rate in the last six quarters. For example, GDP growth in the first quarter of 2012 totaled 2%. Of that total, 0.43 points (or 21.5%) was due to advances in home building . Absent the expansion in residential construction, GDP growth in that quarter would have been only 1.6%.

As a result of this growth in home building and remodeling, housing’s overall share of the economy is climbing – slowly – back to historic norms. Housing’s share of the economy, determined by the contribution of the sum of housing services (the flow of economic benefits from the housing stock) and RFI (the contribution of home building and remodeling to the capital stock) has typically totaled 17 to 18 percent.

As of the first quarter of 2013, the total share of GDP due to housing stood at 15.18%, with 2.89 percentage points of that total due to home building. This is up from the cycle low share for RFI of 2.44% for the first quarter of 2011 at the end of the federal home buyer tax credit program.

Eye on the Economy: Short-Term Ups and Downs for Housing

Recent housing market data have illustrated that while the long-run trend for housing remains one of improvement, there will be bumps along the road. In particular, availability of building lots and skilled labor, rising building material prices, and big picture economic and policy developments will present month-to-month challenges for home builders and other housing businesses.

For instance, the share of first-time home buyers remains lower than the historic average. For the housing market to return to normal, these buyers need access to credit and stable labor market conditions to afford a home.

As a result of these challenges, builder confidence has declined slightly in 2013. The NAHB/Wells Fargo Housing Market Index (HMI) dropped two points to 42 in April. This is the third monthly decline from a peak of 47 in December and January. Two of the three components pulled the composite index down: The current sales component fell two points to 45 and the normally lower traffic component fell four points to 30.

However, consistent with long-run improving trends, the component measuring expectations for future sales increased three points to 53, tied for the highest level since February 2007.

One factor holding builder confidence back is a rise in the cost of some building materials. Since last March, Production Price Indices have significantly increased for gypsum (18%), softwood lumber (30%) and OSB (68%).

Consistent with the decline the HMI, single-family housing starts were down 4.8% in March. Single-family construction fell to a 619,000 annual pace from an upwardly revised February rate, which in turn was the highest since May 2008. The first-quarter single-family starts average was 628,000, up 6% from the fourth quarter of 2012.

Overall housing starts actually rose 7% for March, but this surge was due to an unsustainable jump in multifamily apartment construction, which was up 31% month over month.

At a 392,000 annualized pace, the starts rate for units in properties with more than five units is the highest it has been since January 2006.  This pace is above the total number of five-plus starts in any year since the 1980s, suggesting that the rate of multifamily construction is not sustainable going forward. Consistent with this conclusion, multifamily permits for March were down 8%, while the number of five-plus permits waiting in the pipeline (previously issued but not yet converted to starts) declined 19%.

Nonetheless, total housing starts in March rose above the 1 million pace (1.036 million), a psychological if not economically meaningful threshold.

New home sales continued slow improvement. HUD and Census reported new home sales up 1.5% in March at an annual rate of 417,000 per year. Except for the January outlier rate of 445,000, this is the highest rate of sales since the end of the home buyer tax credit in early 2010. The first-quarter average came in at a 424,000 annualized sales rate, which is the highest since third quarter 2008.

Inventories of newly built homes continue to stand near historic lows at 153,000, with a mere 41,000 homes completed and ready to occupy. In a normal market, there are about 100,000 ready-to-occupy new homes for sale. At the current sales pace, the inventory represents only a 4.4-month supply.

On the other hand, existing home sales were down in March. Per the National Association of Realtors (NAR), existing home sales decreased 0.6% in March from a downwardly revised level in February. However, the sales rate is up 10.3% from the same period a year ago.

NAR reported that March 2013 total existing home sales were at a seasonally adjusted rate of 4.92 million units combined for single-family homes, townhomes, condominiums and co-ops. That compares to 4.95 million units in February, and 4.46 million units during the same period a year ago.

Total housing inventory at the end of March increased 1.6% from the previous month to 1.93 million existing homes for sale. At the current sales rate, the March 2013 inventory represents a 4.7-month supply compared to a 4.6-month supply in February, and a 6.2-month supply of homes a year ago.

The increase in March inventory suggests that rising prices are inducing more households to place their homes on the market, after previously holding back because of low prices. Those same rising prices may be dampening the enthusiasm of investors and cash buyers whose participation declined in March.

Indeed, all cash sales were 30% of transactions compared to 32% in February, and 32% in March 2012. Investors accounted for 19% of March 2013 home sales, compared to 22% in February and 21% a year ago. First-time buyers accounted for 30% of March 2013 sales, the same as the previous three months, although down from 33% during the same period a year ago. Historic norms would place the first-time home buyer share closer to 40%.

Rising rents could further increase demand for new and existing home sales in the months ahead. Per data from the Consumer Price Index, real rental prices rose by 0.1% in March. They have increased steadily since June 2012 and have now surpassed the cycle high established in May 2009.

Lastly, with the release of the 2010 Census, the Office of Management and Budget (OMB) has published new definitions for metropolitan statistical areas (MSAs). Major changes to MSA definitions take place every 10 years when population counts and commuting patterns are revised following the decennial census. In 2013, 23 brand-new areas were designated as MSAs: 10 in the South region, five in the Northeast, five in the West, and three in the Midwest. Pennsylvania added four news MSAs, the most of any state.

Besides creating brand-new metro areas, the OMB guidelines also changed the name of many MSAs (and a few Divisions). One such name change, for example, took place in Baltimore, where the MSA name changed from Baltimore-Towson, Md., to Baltimore-Columbia-Towson, Md.  This indicates that Columbia now has the necessary population and employment totals to be named a principal city of this metropolitan area.

The new OMB guidelines also resulted in a few areas losing their MSA status. In some cases, the counties affected were absorbed by another MSA. In other cases, the counties are simply not metropolitan counties any longer.  Poughkeepsie-Newburgh-Middletown, N.Y. is an example of the former. Its two counties were absorbed into the divisions that make up the New York City MSA.

Eye on the Economy: As Housing Improves, Job Creation Follows

As the market recovers, the demand for labor in the housing industry grows. Indeed, recent BLS data suggests a rise in construction job openings over the course of 2013, which bodes well for future job creation, which in turn will help support the ongoing sluggish recovery in the broader economy.

In general, economic news continues to be a mix of positive and negative developments. For example, separate readings of consumer confidence indicated differing findings. The Thompson Reuters and University of Michigan report of consumer sentiment was up 1.3% on a monthly basis in March, but the Conference Board measure was down 12.3% on a monthly basis.

As reported by the Bureau of Economic Analysis, GDP growth for the final quarter of 2012 was revised up to a meager but positive 0.4% rate. While an improvement over the prior estimate of a 0.1% decline, the final estimate also included a downward revision of the growth of personal consumption expenditures, perhaps reflecting the cautious mood of consumers.

After the resolution of the Fiscal Cliff situation in January, the payroll tax cuts of previous years ended. While it is uncertain the degree to which this will affect growth in 2013, there is a growing consensus that the reduced level of after-tax income for households this year will depress GDP later in the year. The end of the payroll tax cut, plus impacts from the smaller fiscal drag from the sequester of federal government spending that began in March, will act to reduce economic growth.

However, other offsetting factors will help support the long-run improvement of the economy. For example, according to data from the Federal Reserve, the total amount of consumer credit grew in February at a 7.8% rate, which is good news for consumption growth. This marks the 18th consecutive increase in credit, with auto and credit card loans up in February. On the other hand, student loans continue to grow, which could have a growing negative impact for home buying among younger households in the years ahead.

The mixed economic news was also reflected in a relatively weak jobs report for March. Only 88,000 net jobs were created, about half of analysts’ expectations. The unemployment rate fell to 7.6%, but this decline was actually generated by 496,000 individuals exiting the labor force. And these exits were not attributable to soon-to-retire older workers. In fact, the BLS data indicated that labor force participation rates continue to decline for those aged 25 to 54 in the prime working years but are remaining steady for those 55 and above.

Despite the gloomy labor report, employment growth in home building appears to be picking up. In March, the count of home builders and residential contractors grew by almost 15,000. This marks total job growth over the last six months of nearly 74,000 for this sector.

More employment growth for building is expected as housing improves. In April, the NAHB / First American Improving Markets Index (IMI) held steady at a count of 273 metro areas. The IMI currently includes about 75% of metro areas in the nation, reflecting the broad-based nature of the housing recovery.

Another indicator of the improvement in housing is that property tax collections for state and local governments are now on the rise, reaching a $474 billion annualized rate of collections among all property owners at the end of 2012. Despite the large declines in housing prices in recent years, property tax collections never fell significantly, leaving home owners facing higher than historical effective property tax rates.

Additional evidence of housing stability will be a decline in the share of single-family homes that are built for rent. At the end of 2012, the market share of such construction stands at 5%, which is noticeably higher than the 20-year historical average of 2.7%. As the single-family construction market recovers, this share will retreat back to shares closer to the historical trend.

Total residential construction spending was up in February by 2.2% on a monthly basis, after three consecutive months of decline. Nonetheless, construction spending levels are up more than 20% year-over-year and up 36% from the cycle low of mid-2011. Single-family construction spending was up 4.3% from January. NAHB is forecasting a 23% growth rate in 2013.

Multifamily spending fell 2.2% from January, registering the first monthly decline since September 2011. Home improvement spending improved slightly in February, but is up only 1.1% from February of 2012. Nonetheless, remodeling spending is expected to pick up with growth in existing home sales. And recent HUD data suggests that 5.9%, of all homes, up from prior analyses using different methodology, meet a definition of physically “inadequate,” suggesting future residential improvement business.

In addition to the recent job growth we have seen for builders and contractors, there are a rising number of open positions. In fact, at 116,000 unfilled positions in the construction sector, the number of open jobs is now at a post-Great Recession high.

With the focus on shortages of construction labor in certain areas of the nation and an impending end game on Capitol Hill for immigration reform, NAHB recently examined the share of the building workforce comprised of immigrants. According to the 2011 American Community Survey, 22% of all labor in the construction sector is made up of immigrants.

In other policy news, the President delivered his budget proposal to Congress this week. Overall, the president has endorsed revenue neutral corporate tax reform, which would involve eliminating certain tax credits and deductions for C corporations and reducing the applicable corporate tax rate. Such an approach would leave taxes on pass-thru and sole proprietorship income unchanged. Many in Congress, including Chairman Dave Camp (R-Mich.) of the House Ways and Means Committee, have rejected this approach and are working toward tax reform involving both the corporate and individual sides of the tax code.

Among other items in the budget, the President once again proposed limiting the value of, among other tax expenditures, itemized deductions like those for mortgage interest and real estate taxes. This rule would limit the tax value of such deductions at a 28% rate. Thus, this proposal would raise taxes on home owners with a mortgage with adjusted gross income of more than $223,050 ($183,250 if single).

The 28% cap would also apply to tax-exempt multifamily bonds and the section 199 domestic activities deduction claimed by many home builders (although this limit would not apply to C corporations). The budget also calls for an end to the taxation of capital gains due to a carried interest (i.e. sale of an apartment building) as capital gains. Additionally, the fiscal plan suggests improvements for the Low-Income Housing Tax Credit, but restrictions on the use of independent contractor status.

With New Homes Month in April, NAHB Economics and Housing Policy’s Survey team has taken a look at housing and home buyer preferences. According to NAHB’s What Home Buyers Really Want, 43% of recent and prospective buyers want a home with either two and a half or three bathrooms. Newly built homes are more likely to meet this consumer need.

Additionally, the same survey data suggest that 62% of home buyers want a home with at least 2,000 square feet of living space. This is exactly the share of new single-family homes meeting this size threshold, while only 42% of existing homes meet this requirement.

Finally, a new HUD survey reveals that there are 2.25 million multifamily rental properties in the U.S. Of this total, 1.64 million consist of a single building, but almost 100,000 consist of 20 or more buildings. But most are small, with 1.4 million such properties valued at less than $500,000.　　　　　　　　　　　

The President’s Budget: Housing-Related Proposals

The President’s Budget includes policies that, if enacted, would have impacts on the housing market and home builders, including a number of tax increases.

While the budget proposal is not a legislative proposal that the Congress will consider in full, the set of policies contained in the document do represent a wish-list for the administration. And with tax reform discussions underway within the House Ways and Means and Senate Finance Committees, it worth examining the proposals submitted by the President to Congress.

Overall, the president has endorsed revenue neutral corporate tax reform, which would involve eliminating certain tax credits and deductions for C Corporations and reducing the applicable corporate tax rate. Such an approach would leave taxes on pass-thru and sole proprietorship income unchanged. Many in Congress, including Chairman Dave Camp of the Ways and Means Committee, have rejected this approach and are working toward tax reform involving both the corporate and individual sides of the tax code.

The President’s proposal also includes a change to how inflation is calculated for both entitlements and income tax brackets. This chained CPI definition reports a smaller increase in inflation than the traditional CPI approach because it allows for greater consumer substitution among goods. This methodological change is estimated to reduce deficits by $230 billion over ten years through a combination of reduced (projected) government spending (Social Security) and income tax bracket creep.

All in, the budget proposals would purportedly reduce deficits by an additional $1.8 trillion, bringing total deficit reduction to more than $4 trillion when combined with other efforts from the last two years. Estimating an exact scorecard is difficult however due to varying baselines and how to account for declines in spending due to such items as reduced costs for military expenses.

 

Tax Proposals

28% Cap on Certain Deductions, Exemptions and Exclusions

Proposed in prior year budgets in more narrow forms, this proposal would limit the tax value of certain tax expenditures for taxpayers paying more than a 28% marginal income tax rate. In particular, the proposal would limit the value of the mortgage interest deduction and real estate tax deduction for homeowners, particularly in high cost areas, for taxpayers with adjusted gross income of more than $223,050 ($183,250 if single). The cap would apply to all itemized deductions.

Additionally, the proposal would tax in part currently tax-exempt items such as tax-exempt bond income (including multifamily tax exempt bonds) and the employer-paid health insurance exclusion and self-employed health insurance costs. Certain “above the line” deductions, such as moving expenses, would also be subject to the cap.

Finally, small businesses, including home builders and remodelers, who claim the section 199 domestic activities deduction would also face potential tax hikes in the form of the 28% cap. It is worth noting that section 199 is available for both corporations and pass-thru/sole proprietorships, and this proposal would only affect the non C Corporation businesses, who tend to be smaller enterprises.

This proposal is estimated to raise $529 billion over ten years.

Carried Interest

Despite being associated with hedge funds and private equity, this proposal would also have an impact on the multifamily sector, where the use of carried interest is a common financing mechanism to attract equity for the development of residential rental property. The proposal would require capital gain income from, among other items, sale of multifamily property to be taxed at ordinary income tax rates when the share of gain from the sale earned by the taxpayer exceeds the share of equity originally invested by taxpayer.

The proposal is estimated to raise $16 billion over ten years.

Debt Forgiveness for Principal Forgiveness

The proposal would extend from the end of 2013 to the end of 2015 the tax exclusion for forgiven or cancelled mortgage debt associated with a principal residence. This tax exclusion, in place since 2007, has facilitated short sales and certain debt workouts.

This proposal reduces federal tax receipts by $2.6 over ten years.

Small Business Section 179 Expensing Extended

The proposal would extend for 2014 and beyond the 2013 small business expensing rules. These rules include a $500,000 expensing deduction limit and a phaseout of the allowance beginning at $2 million of qualified investment.

This proposal reduces revenues by $69 billion over ten years.

Buffett Rule

The proposal would impose a new minimum tax of 30% on adjusted gross income reduced by a maximum 28% deduction for charitable giving. The rule would begin to apply on incomes of $1 million and be fully phased-in at $2 million. Ordinary business expenses would remain deductible.

This proposal raises $53 billion.

Independent Contractor

The proposal would repeal the Section 530 of the Revenue Act of 1978 rule protecting independent contractor status. The proposal would allow the IRS to issue new regulations dealing with the independent contractor versus employee classification using common law tests.

The proposal is estimated to raise $9 billion over ten years.

Contractor Reporting and Withholding

The proposal would require a business to verify the taxpayer identification number (TIN) with the IRS for all contractors receiving more than $600 in a year. If the contractor failed to provide a valid TIN, the business would be required to withhold a flat rate of taxes on the payments made to the contractor.

The proposal is estimated to raise $1 billion over ten years.

Energy Efficient Commercial Building Deduction

Under present law, the section 179D energy-efficient building deduction is available to commercial and multifamily properties (apartment buildings of more than three stories above grade). The proposal would reform the 179D tax rule to promote its use and achieve energy efficiencies for existing commercial and multifamily properties. Among other changes, the per square foot deduction amount would be increased to $3.

The proposal would reduce federal tax receipts by $5 billion over ten years.

Estate Tax

The proposal would reinstate the 2009 rules regarding the estate tax, including increasing the tax rate from 40% to 45% and reducing the exemption amount from $5 million to $3.5 million.

The proposal would raise $71 billion over ten years.

Low-Income Housing Tax Credit

The budget proposal includes a number of changes intended to improve the effectiveness of the LIHTC program. These changes include a small increase of rate to the 70% present value credit (which absent the temporary 9% rate floor would fall to 7.43%).  The proposal would change the formula producing a rate closer to 7.9%. The proposals would also allow certain income averaging for tenant requirements, allow states to convert some amounts of unused private activity bond cap for LIHTC credit use, and make changes that would permit REITs to invest in LIHTC partnerships.

Together these proposals reduce tax receipts by $1.4 billion over ten years.

 

Other Fiscal Policy Proposals

 

Streamline HARP to Allow for Additional Refinancing

The proposal calls for legislation to modify the HARP program to increase access and lower costs to allow refinancing of mortgages that are not backed by the GSEs in order to reduce monthly costs for underwater homeowners.

Neighborhood Stabilization Efforts

The budget provides funding for rehabilitating, repurposing, and demolishing vacant and blighted properties. In addition, the budget includes funding to support public-private land banks, provide grants to areas with high-levels of vacancies or severe blight, and offer loan subsidies to stimulate private investment.

HOME Program

The budget reduces funding for the HOME program by 5% relative to 2012 levels.

Immigrant Workers in Construction

A new study from NAHB Economics examines where construction workers come from by analyzing the most recent 2011 American Community Survey (ACS). The results show that immigrants have been an important source of new recruits to the construction industry—accounting for 22 percent of the overall labor force. The inflow of foreign born labor into construction is cyclical and coincides with the overall housing activity. Their share was rising rapidly during the housing boom years when labor shortages were widespread and serious. But even during the severe housing downturn and a period of high unemployment the construction labor force continued to recruit new immigrants to partially replace native and foreign born workers leaving the industry.

Particularly, immigrants are concentrated in some of the trades needed to build a home, like carpenters, painters, drywall/ceiling tile installers, brick masons, and construction laborers – trades that require less training and education but consistently register some of the highest labor shortages in the (HMI) surveys. The two most prevalent construction occupations, laborers and carpenters, account for about 30 percent of the construction labor force. More than a third of all construction laborers and one out of four carpenters are of foreign born origin. Immigrants account for almost half of drywall/ceiling tile installers and tapers, a trade where 44 percent of workers do not have a high school diploma. More than a third of all carpet/floor/tile installers and painters did not finish high school, immigrants account for 43 percent of workers in these occupations.

 The immigrant presence in construction trades that require more years of education and advanced skills looks less relevant. The trades with low presence of foreign born labor, such as electricians, construction and building inspectors, first-line supervisors, elevator installers – tend to recruit better educated workers. Only 4 percent of construction and building inspectors and 7 percent of electricians did not graduate from high school.

 It turns out the trades with high concentration of immigrant workers also tend to have more vacancies and labor shortages. According to NAHB’s monthly Housing Market Index (HMI) surveys, construction trades with the most consistent labor shortages are framing crews, carpenters and bricklayers. About 30 percent of surveyed builders were still reporting some shortages of labor in these trades in June 2012, even though the shortages were not nearly as severe as in the midst of the housing boom. Nine months later, in March 2013, reported labor shortages got worse across all trades but particularly among framing crews and carpenters, with more than a half of respondents reporting shortages of framing crews and carpenters-rough subcontractors.

The study further shows that the distribution of immigrant construction workers is not even across the US, with some states drawing more than a third of their construction workers from abroad. States that traditionally rely on foreign born labor but lost its significant share during the housing downturn – such as Arizona, California, Colorado, Florida, Nevada, and Georgia – are most likely to experience difficulties in filling out construction job vacancies once home building takes off.