Eye on the Economy: Builder Confidence and Home Sales on the Rise

June 25, 2014

Housing news turned positive this week as spring gave way to summer. Future data will confirm whether the recent turn in momentum reflects a return to the improving trend that was in place before the end of 2013, but early signs are encouraging.

New single-family home sales reached their highest pace in six years in May. According to estimates from the Census Bureau and HUD, new home sales were at a seasonally adjusted annual rate of 504,000 in May, a gain of 18.6% over a slightly downwardly revised April (425,000). The May 2014 rate of sales is the highest since May 2008 and is a significant increase from the winter low point for sales in March (410,000).

The May pace of sales was certainly an improvement over the soft patch experienced from February through April. The most recent gains are likely due to a payback for weather-related declines during the winter, so future months will indicate whether a better trend has taken hold. But encouraging signs like better jobs numbers are consistent with this outcome.

Another improved indicator is the NAHB/Wells Fargo Housing Market Index (HMI), which rose four points in June to 49. This is just shy of the 50 mark, indicating at least as much optimism as pessimism among single-family home builders. The index dipped 10 points to 46 in February from a sustained above-50 mark for eight months and remained near there for four months. The June gains were experienced in all the components of the HMI: current sales, expected sales and traffic.

Alongside the positive new home sales report was the May existing home sales measure. The National Association of Realtors reported that existing home sales were up 4.9% from April to May. While still 5% lower year over year, the 4.89 million seasonally adjusted annual rate confirmed a turn in the decline that had been in place since the middle of 2013. Year-over-year declines in existing home sales, which distinguish this market from the growing new home market, are likely due to recent drops in distressed and investor purchases, as well as the 2014 expiration of a tax rule connected to short sales.

The one negative housing report in recent weeks was construction starts. The Census Bureau and HUD estimated that total housing starts declined 6.5% in May. Single-family starts were down 5.9%, while multifamily construction in properties with five or more units was down a larger 8.3%. The declines were a result, in part, to April’s numbers, where were among the highest since the end of the recession. On a year-over-year basis, the May pace of single-family construction was 4.7% higher and 19.2% higher for five-plus multifamily building.

Home price appreciation appears to be slowing after the strong gains of the past year or two, propelled by increases in areas that experienced some of the largest price declines during the recession. House prices grew by 10.8% between April 2013 and 2014, according to the S&P/Case-Shiller 20-City Composite Home Price Index, which was less than the 12-month growth rate of 12.4% seen in March. Similarly, the Federal Housing Finance Agency’s Purchase-Only Index rose 6% compared to 6.4% in March. Both indices show that annual house appreciation slowed from December to April and suggest the housing market may be returning to its long-run growth trend.

Consistent with the weak housing reports from the winter and early spring, the final estimate of first quarter GDP indicated that the economy contracted as a 2.9% rate, the worst quarter in five years. Besides disappointing investment numbers, personal consumption growth was anemic and exports displayed particular weakness. Part of the poor performance was weather related and other one-off factors. Second quarter GDP growth should reflect some payback for deferred economic activity and post a growth rate higher than 3%.

Common measures of general prices and inflation, moved in opposite directions in May. Producer prices declined 0.2%, after notable increases of 0.5% and 0.6% for March and April respectively. Among building materials, softwood lumber prices rose 1% in May from April. Prices are 28% above the average level over 2011. OSB prices have flattened out in 2014, declining 0.7% in May. Prices are 23% above the average level over 2011. Gypsum prices declined 0.7% in May, 41% above the average 2011 mark.

In contrast, consumer prices in May experienced the largest monthly increase since February 2013, rising 0.4% on a seasonally adjusted month-over-month basis and 2.1% year over year. The increase was broad, affecting many items found in the consumer basket such as energy, food and shelter. The NAHB constructed real rent index increased nominally in May. Over the past year, real rental prices rose by 1.1%.

The Federal Open Market Committee, the Federal Reserve’s monetary policy committee, announced this week that the pace of asset purchases (quantitative easing) will be reduced by another $10 billion to $35 billion per month. The federal funds rate will continue to remain at the current near zero level for a “considerable time” after asset purchases have concluded.

In analysis news, economists at NAHB mapped the change in county-level housing permit activity for 2013. Overall, 1,807 counties and county equivalents saw an increase in the number of single family permits issued over the prior year while 858 saw a decrease. According to data from Hanley-Wood, there was some movement among the rankings of the top ten publicly traded home builders in 2013, although D.R. Horton maintained the top spot with more than 25,000 closings.

Additionally, NAHB economists discussed land banking and new mortgage application data for new homes. Lastly, data for the first quarter of 2014 revealed that property taxes, the top revenue source for state and local government, made up 40.3% of receipts from major sources over the last four quarters – an important reminder of the role real estate plays in local economies.


Eye on the Economy: New Home Sales and Starts Post Gains in April

May 28, 2014

Housing data for April offered positive news as the traditional spring housing season began with the pace of home building and new home sales increasing for the month.

The monthly rate of housing construction starts exceeded 1 million for first time since last year and housing permits were over 1 million for a third consecutive month. However, the monthly increases were almost entirely in multifamily rental construction. Single-family starts increased 5,000 on a seasonally adjusted annual basis to 649,000 from an upwardly revised March of 635,000.

Multifamily construction soared 40% to an annual rate of 423,000 starts, the highest since January 2006. Multifamily starts were particularly strong in the Midwest, where the pace more than doubled perhaps due to weather effects. Rental demand remains strong. Recent consumer price data, for example, indicate that inflation adjusted housing rents are up 1.2% year over year.

The pace of new single-family home sales increased 6.4% in April to a seasonally adjusted annual rate of 433,000, virtually matching the first quarter average of 434,000. The 26,000 monthly increase was entirely due to a 27,000 jump in sales in the Midwest region. However, this increase was not outside the survey’s regional confidence interval.

A positive component of the April new home sales report was a continued increase in inventory, now up to 192,000 homes for sale from a low of 142,000 in July 2012. Builders continue to experience supply-chain difficulties, but the slow increase in inventory indicates some ability to expand construction.

Existing home sales increased 1.3% in April but was down 6.8% from the same period a year ago. The National Association of Realtors (NAR) reported April 2014 total existing home sales at a seasonally adjusted rate of 4.65 million units combined for single-family homes, townhouses, condominiums and co-ops, up from 4.59 million units in March. Total housing inventory jumped 16.8% in April to 2.29 million existing homes due to typical seasonal patterns.

First-time buyers continue to display weakness in the existing home sales market, comprising 29% of April 2014 sales, down from 30% in March and unchanged from last April. The January first-time buyer share of 26% was the lowest since NAR began reporting that share monthly in October 2008.

Data for the first quarter of 2014 provide additional detail concerning the home construction market. Total townhouse construction declined on a year-over-year basis in the first quarter due in part to first-time buyer weaknesses. According to NAHB analysis of Census data, single-family attached starts totaled 13,000 for the quarter, compared to 15,000 during the first quarter of 2013. Over the last four quarters, townhouse construction starts totaled 66,000, down from the 72,000 total for the four quarters prior to this period.

The market share of homes built on an owner’s land, with either the owner or a builder acting as the general contractor, was effectively unchanged on a quarter-over-quarter basis at the start of 2014. NAHB’s analysis of Census data indicates that the number of starts of this type of building rose from 25,000 at the start of 2013 to 27,000 for the first quarter of 2014.

The average size of newly built single-family homes increased during the first quarter of 2014, with much of this ongoing multiyear trend of increasing size likely due to the greater proportion of move-up and higher income new home buyers. According to first-quarter 2014 data from the Census and NAHB analysis, average single-family floor area increased from 2,656 to 2,736 square feet, while the median rose from 2,465 to 2,483. Since cycle lows and on a three-month moving average basis, the average size of new single-family homes has increased 13% to 2,685 square feet, while the median size has increased more than 17% to 2,471 square feet.

While multifamily construction continues to expand due to rising rental demand, single-family starts built for rent were effectively unchanged at 4,000 starts for the first quarter of 2014. The market share of built-for-rent single-family remains elevated, but the share and count of starts appear to be declining off post-Great Recession highs, with the market share, as measured on a one-year moving average, standing at 3.3% for the first quarter of 2014. This is higher than the historical average of 2.8% but is down from the 5.8% registered a year ago.

After rising during the boom years and falling during the Great Recession, the average size of newly built, multifamily units remains close to levels seen a decade ago due to lack of typically larger condo construction. According to fourth quarter data from the Census Bureau and NAHB analysis, the average unit size for multifamily housing construction starts was 1,182 square feet. The median was 1,023. These current estimates are very close to the typical data from the 2001-2003 period.

As National Home Remodeling Month in May ends, NAHB continues to publish data and analysis concerning home improvement trends. This includes estimates of spending on improvements to owner-occupied housing by ZIP code. On average, total spending on improvements in a ZIP code is projected to be about $5.1 million in 2014.

The top five total-spending ZIP codes are all in Maryland, Texas, or Illinois. Each of these top five areas contains at least 15,000 owner-occupied homes and home owners who average at least $145,000 in income and are 60% or more college educated.

NAHB survey data recently revealed the leading green products used by remodelers. Nearly 9 out of 10 remodelers surveyed said they commonly used low-e windows during the past year. Next on the list were high efficiency HVAC systems and programmable thermostats at 70% each, closely followed by ENERGY STAR appliances at 69%.

Finally, industry survey data was published that examines consumer preferences when selecting an individual contractor for home improvement projects. “Reputation for quality construction” easily came in first, ranked most important by 45% of customers—over twice the “most important” percentage for any other attribute on the list. The survey also revealed that industry professional designations, such as NAHB Certified Graduate Remodeler and others, were important to home owners when selecting a service provider.

While weather played a significant negative role on housing and the economy in recent months, certain residential construction industry headwinds moved in positive directions in April but remain key concerns. With respect to building materials, softwood lumber prices were down 4% in April from March and off 8.2% from a peak one year ago. OSB prices continue to tread water so far in 2014, declining 0.6% in April, after a sharp 2013 reversal of the steep run-up in prices in 2012. OSB prices remain 23.8% above their average level in 2011. Gypsum prices declined 3.7% in April, the second monthly decline, but remain 41.9% above their average 2011 level.

Mortgage delinquency rates continue to decline. Data released by the Mortgage Bankers Association indicates that the delinquency rate for mortgage loans on one-to-four-unit residential properties, considered single-family properties, decreased to a not seasonally adjusted rate of 5.69% of all loans outstanding at the end of the first quarter of 2014, 106 basis points below the 6.75% delinquency rate recorded in the first quarter of 2013. This level represents the lowest level since the first quarter of 2008.

And in other finance news, NAHB survey data suggests that lending conditions for acquisition, development and construction (AD&C) loans continue to ease but remain tight. In the first quarter of 2014, the overall net tightening index based on the AD&C survey improved from -25.5 to -30.8. The index is constructed so negative numbers indicate easing of credit; positive tightening, so a lower negative index means greater easing.

Lastly in policy news, the Federal Reserve’s monetary policy committee turned its attention to the timing of its long-run intention to raise short-term interest rates. To avoid the adverse reaction experienced last spring during the speculation concerning the timing of quantitative easing tapering, the minutes included the phrases to communicate that the discussion was planning for the future. NAHB believes this moment will come during the summer of 2015.


Efficient Windows Top List of Green Products Used by Remodelers

May 22, 2014

Energy efficient windows emerged as the leading green product among remodelers responding to NAHB’s Remodeling Market Index (RMI) survey for the first quarter of 2014, as nearly 9 out of 10 remodelers surveyed said they’d commonly used low-e windows during the past year.  Next on the list were high efficiency HVAC systems and programmable thermostats at 70 percent each, closely followed by ENERGY STAR appliances at 69 percent.

Green Remod

Although the features at the top of the list all involve energy eficiency, the term “green” is usually defined more broadly than that.  Moisture control, for example, is classified as green here, because it results in some components of the home needing to be replaced less often, reducing environmental impacts associated with manufacturing, transporting and installing those components over time. The list of 23 green products and practices used in the RMI survey is based on the major sections of the National Green Building Standard (which can and should be applied to remodeling as well as new construction).

Given the difference in cost, it’s perhaps surprising that use of program-mable thermostats is no more common than use of high efficiency HVAC among remodelers.  Anecdotally, several NAHB members have reported that a small but discernible share of their customers tend to resist devices that require programming.  A similar result was found in a survey on green products and practices used by single-family builders.

It’s also interesting that, across the two surveys, the same four green features appear at the top of the list and in the same order for both remodelers and builders.  The remodelers’ percentages tend to be a little lower, but this is natural, because not every remodeling project involves every home component. High efficiency HVAC systems, for example (the second ranked green feature for both builders and remodelers) are commonly used by 90 percent of builders, compared to 70 percent of remodelers.  But remodelers who specialized in projects like replacing windows or building decks in 2013 may have seldom if ever needed to install HVAC systems, while builders of new homes would have, at some point, dealt with every aspect of HVAC.


Eye on the Economy: Home Improvement Season

May 14, 2014

After a weak performance for the economy as a whole during the first quarter, spring is a time for improvements – for homes and the overall housing market.

May is National Home Remodeling Month, and NAHB has useful data for remodelers who want to know why home owners are undertaking improvements, as well as the most common types. Among remodelers participating in an NAHB industry survey, bathroom remodeling was cited as the most common project, narrowly beating out kitchen remodeling. Window and door replacements, whole housing remodeling and room additions rounded out the top five.

Data from the American Housing Survey indicate that home owners are most likely to use a professional remodeler for jobs involving HVAC systems and roofing followed by siding, windows/doors, electrical systems, plumbing and floors. According to the NAHB survey, the most common reasons for remodeling included a desire for better amenities, a need to replace or repair old components, and a need for additional space in the home.

Home improvement spending has a direct economic benefit on the economy. New estimates from NAHB indicate that every $1 million in remodeling spending creates 8.9 jobs. These estimates also note that building 100 single-family homes creates 297 jobs, and developing 100 multifamily units generates 113 jobs.

The role of housing investment as a job creator was highlighted by NAHB in testimony before the Senate Economic Policy Subcommittee hearing “Drivers of Job Creation.” That hearing involved a discussion of the transitions in the construction labor market as housing construction continues to recover. March data from the Bureau of Labor Statistics JOLTS survey reveal 104,000 unfilled construction sector jobs, as firms in some markets report challenges in filling vacant positions.

Despite disappointing housing data at the start of 2014, the housing recovery continues. The NAHB/First American Leading Markets Index (LMI) rose one point in May to a level of 0.88. The LMI measures how close local markets are to normal conditions, based on reading of home prices, labor markets and housing construction permits. About one-quarter of all metro areas showed improvement from March to April on the LMI and 300 (85%) showed improved from May 2013.

As of the first quarter 2014, housing’s share of GDP stood at 15.5%, with home building contributing three percentage points of that total. NAHB is forecasting solid growth in single-family starts and continued expansion of multifamily development for the year; thus, housing’s share of the economy should continue to grow.

Residential construction spending in March posted a small increase but remains effectively unchanged over the course of 2014 thus far. The current pace of home construction spending ($369.8 billion on a seasonally adjusted annual basis) is 0.8% over February and 16% higher than a year ago. From March 2013, on a three-month average basis, single-family construction spending has increased by 16.3%, multifamily is up by 30.8%, and remodeling has grown by 12.8%.

The NAHB single-family 55+ survey reported the most positive first quarter market conditions for senior housing development in its history. Compared to the first quarter of 2013, the single-family index increased four points to a level of 50, which is the highest first-quarter reading since the inception of the index in 2008 and the 10th consecutive quarter of year –over- year improvements. There are many factors contributing to the positive signs in the 55+ housing market, including rising house prices and low interest rates that are helping baby boomers sell their current homes at a favorable price and in turn, purchase a new home more suited to their preferred lifestyles.

Recent declines in housing affordability remain an industry headwind as the housing sector meets the traditional spring selling season. Home prices continue to rise, with the S&P/Case Shiller 20-City Index up 0.8% in February and gaining 12.9% over the prior 12 months.

For the overall housing market, data from the Federal Reserve’s Senior Loan Offer Opinion Survey suggest that demand for mortgages weakened during the first quarter, with many regional banks reporting tightened lending standards. Nonetheless, housing affordability conditions remain positive by historical standards. The NAHB/Wells Fargo Housing Opportunity Index ticked up during the first quarter of 2014. Per the HOI, 65.5% of all homes sold between the beginning of January and end of March were affordable to families earning the U.S. median income of $63,900.

In macroeconomic news, GDP growth in the first quarter was a disappointing 0.1% gain, with downward revisions expected. Weather impacts took a toll on investment components, including home building during the start of the year. However, personal consumption expenditures remained solid, growing 3%.

The April employment report brought relatively positive news, with 288,000 net jobs created for the month. The unemployment rate fell from 6.7% to 6.3%, although that decline was due to large 806,000 decline in the number of people in the labor force.

Finally in analysis news, NAHB followed up prior examinations of local housing markets using Census data. The most recent study tracked the top markets for changes in single-family and multifamily market shares. Among the findings: Areas with the largest gains in single-family market concentration tended to have above- average population growth. Top markets using this measure included Fairbanks (Alaska), St. George (Utah), Yuma (Ariz.), and Yakima (Wash.).


Housing as a Job Creator – Congressional Testimony

May 7, 2014

Today NAHB economist Robert Dietz testified before the Economic Policy Subcommittee of the Senate Banking Committee on housing issues and the economics of home building as a job creator.

The testimony summarized a number of issues we have covered on Eye on Housing in 2014.  These include:

The subcommittee also asked for policy recommendations. NAHB endorsed passing comprehensive housing finance legislation and enactment of a tax extenders bill, that would extend the 9% credit rate floor for the LIHTC and the 25C and 45L energy efficiency tax credits.

 


Eye on the Economy: Mixed Signals as Spring Data Bloom

April 30, 2014

With the unseasonably cold winter now finally over, the spring home building and selling season has begun. Economic data thus far presents mixed news. For example, new home sales disappointed for the month of March. The U.S. Census Bureau and the Department of Housing and Urban Development reported that March new home sales were down 14.5% in March to a seasonally-adjusted annual basis of 384,000, the lowest pace since July 2013 and down 13.3% year-over-year.

Nonetheless, despite significant headwinds first quarter home sales numbers were only slightly lower than NAHB’s forecast: 434,000 annualized average pace of sales versus a 438,000 forecast. And as detailed at NAHB’s bi-annual Construction Forecast Webinar, NAHB expects the housing recovery to continue on improved economic trends.

Existing home sales decreased 0.2% in March, according to the National Association of Realtors (NAR). However, the level of activity was down 7.5% from March 2013. Potential reasons for this year-over-year decline is the fall in distressed sales (down from 21% to 14% of the market year-over-year) and ongoing weakness in demand among first-time home buyers. The current share of first-time home buyers is 28%, compared to a historical average of about 40%.

A positive future note was found in the NAR Pending Home Sales Index for March, which increased 3.4%. While the index remains 7.9% lower year-over-year, the bump up in pending existing home sales contracts is a hopeful sign for the spring selling season.

Among positive factors for the short-term for housing are ongoing historically low mortgage interest rates. For example, data from the Federal Housing Finance Agency (FHFA) indicate that the average contract interest rate on conventional mortgages was 4.21% in March. This is higher than rates experienced for the first half of 2013 but remains low by historical standards. On the other hand, affordability has been challenged by rising home prices. The FHFA Housing Price Index has risen by 15% over the last 25 months.

Another indicator reflecting lingering winter effects is the NAHB Remodeling Market Index (RMI). The RMI declined from 57 to 53 for the first quarter of 2014. While still above the key level of 50, the economic impact of the winter likely affected the RMI at the start of the year.

A persistent headwind for the residential construction sector has been access to credit. Recent Federal Deposit Insurance Corp. (FDIC) data and NAHB industry surveys suggest that credit conditions for acquisition, development and construction (AD&C) loans are improving slightly, but a lending gap remains. With this in mind, a recent NAHB analysis examined the most common sources of AD&C lending for home builders. The analysis found that 62% of home building AD&C was held by community banks – financial institutions with less than $10 billion in assets. This concentration among smaller banks was lower prior to the Great Recession.

In other analysis news, NAHB economists used the American Community Survey to contrast income, age and household size characteristics among renters and owners. Not surprisingly, the numbers reveal that home owners tend to be older, have higher income and reside in larger households. For example, the average household income of a homeowning married couple with children was just over $98,000 in 2012. A separate analysis examined car ownership by home owner/renter status, including geographic differences across markets.

Finally, as April marked New Homes month, NAHB updated an analysis contrasting maintenance, utility and other housing costs between owners of new construction and other homes. The data reveal that new homes are less costly to maintain, insure, and operate on a per square foot basis than other owner-occupied homes.


Eye on the Economy: Builder Confidence Flat As Winter Ends

April 16, 2014

Single-family Starts and NAHB

An unseasonably cold winter took its toll on economic activity at the start of 2014, causing many key market measures to fall short of initial forecasts. For example, first quarter GDP growth will likely prove to have been less than 1%. However, as winter turns to spring, we can expect a rebound as consumers undertake activities that may have been deferred at the start of the year.

Consistent with this situation, the NAHB/Wells Fargo Housing Market Index (HMI) was effectively flat in April, rising one point from a downwardly revised March level. At 47, the HMI has now been below the key level of 50 for three consecutive months.

The essentially unchanged index is the result of builders waiting on expected spring demand while holding any further optimism until actual sales occur. Many of the individual comments mentioned stronger traffic or more serious buyers, but the interest has yet turned into contract signings. Builders continue to meet some supply constraints as buildable lot supply either is not available or is priced beyond what the builder feels can be recaptured in a sale.

Housing starts for the month of March, as reported by the Census and HUD, indicated a 2.8% increase from the upwardly revised February numbers. On a seasonally adjusted annual basis, total single-family starts rose 6% to a 635,000 annual rate. The increase was particularly strong in the Northeast and Midwest, where building was down during recent winter months.

Builder hiring increased in March. According to data from the Bureau of Labor Statistics (BLS), the residential construction sector added 9,100 jobs on a seasonally adjusted basis in March. Total industry employment now stands at 2.242 million. And over the last 12 months, builders and remodelers have created 103,000 jobs.

Worker shortages remain an issue in some markets. However, the count of unfilled construction-sector jobs fell at the start of 2014. As of February, data from the BLS JOLTS survey indicate there were 120,000 open positions at construction firms, down from 165,000 in November. Nonetheless, the February open rate (2%), as measured as a percent of total industry employment, remained the fifth-highest mark since the recession ended.

The general improvement for housing markets can be tracked using the NAHB/First American Leading Market Index (LMI). The index, which measures how close markets are to their normal levels of activity, increased from 0.87 to 0.88 in April. The index measures single-family permits, home prices and employment in the past 12 months and divides that by the last normal annual level. For permits and prices, the last normal period is 2000-2003 and for employment 2007.

The LMI has been moving steadily upward for two years from a low of .78 in April 2012. At the same time, the number of markets at or above their last normal level of activity increased from 34, with 19 in energy-producing states, to 59, with 30 in energy-producing states (Texas, Louisiana, Montana, North Dakota, Oklahoma and Wyoming). The slight broadening into states with other economic bases is consistent with broader economic growth in the U.S.

March BLS producer price data signals building material cost concerns as the housing recovery continues. Gypsum prices were effectively flat in March (0.9% decline), after a significant increase at the start of the year — the third year in a row of such prices increases. Gypsum prices are up 9.5% year over year. Softwood lumber products increased 1.7% in March, while OSB prices were effectively flat.

Over the past 12 months, prices on consumer expenditures increased 1.5%. Consumer prices increased in March by 0.2% on a seasonally adjusted month-over-month basis. The real rent index increased in March by 0.1% month over month and 1.2% for the year.

In analysis news, NAHB economists continued their look at home buyer preferences. The last review found that buyers of all backgrounds possess strong preferences for energy-efficient products.

Using IRS and Census data, economists examined the rising – although still small – market share of individuals who work at home, which represents a potential market opportunity for builders and remodelers. The data indicate clear geographic clustering of home office use among states and industries.

Finally, wrapping up NAHB’s ranking of metropolitan housing markets, American Community Survey data indicate the top markets in terms of share for new construction, home values and median income.


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