Eye on the Economy: Highlighting a Nation of Builders

Members of the nation’s home building industry visited Capitol Hill this week, highlighting both the economic value and future potential of the industry for job creation and economic growth and making the case on policy issues that could affect the industry: tax reform, housing finance reform, immigration reform and production credit. Because the home building industry is dominated by small businesses across the nation, the sector’s growth can have widespread beneficial impacts.

Indeed, continuing to support economic growth, construction activity increased for single-family and multifamily development in April. Having grown for 22 of the last 23 months, single-family home construction spending increased 1.4% over March and is up 38.6% from this time last year.

Among factors holding back more robust growth for single-family construction is tight production credit for acquisition, development and construction (AD&C loans). While the market for these loans is improving, data from the FDIC indicate that the stock of loans for AD&C purposes has not risen in tandem with the rise of demand for single-family construction, causing builders to seek alternative forms of development financing.

Recently released first-quarter 2013 Census data reveal market conditions for particular sectors of the industry. Construction of attached single-family housing (townhouses) grew both in terms of market share and year-over-year total units started, marking the fourth consecutive quarter of increases. Townhouse construction starts totaled 15,000 at the beginning of the year, a significant increase compared to 10,000 in the first quarter of 2012. Using a one-year moving average, the market share of townhouses now stands at 12.7% of all single-family starts, up from 10.4% for the first quarter of 2012.

The market share of homes built on an owner’s land, with either the owner or a builder acting as the general contractor, fell at the start of 2013 as the rest of the single-family market expanded. As measured on a one-year moving average, the market share of owner- and contractor-built single-family homes has fallen to 22.5%, down from a cycle high of 31.5% reached during the second quarter of 2009.

Single-family starts built-for-rent were up on a year-over-year basis, with the market share rising to a new high: 5.8% as measured as a one-year moving average compared to the historical average of 2.77%. Despite the elevated market share, the number of single-family starts built for rental purposes remains fairly low – only 33,000 homes started during the last four quarters, but this total has been increasing with the overall growth for housing starts.

Multifamily construction spending registered a 3.4% gain in April and has increased 48.6% measured year-over-year. This small monthly rise is consistent with the NAHB forecast, which calls for continued growth for 2013 but not at the pace witnessed in 2012. For example, the NAHB Multifamily Vacancy Index, which measures that industry’s perception of vacancies, rose seven points to 38 in the first quarter. Lower numbers indicate fewer vacancies.

The NAHB Multifamily Production Index inched down two points to an index level of 52 for the first quarter of 2013. Nonetheless, this marks the fifth straight quarter with a reading over 50. The index is scaled so that any number over 50 indicates that more respondents report conditions are improving than report conditions are getting worse.

Total private residential construction (single-family, multifamily and improvements) spending decreased a negligible 0.1% on a month-over-month basis during April due to a further decrease in home improvement spending. The pace of remodeling-related expenditures has declined significantly over the course of 2013. Improvement spending was down 3.3% in April and is down 7% from April 2012.

Rising existing home sales point to increases in remodeling later in the year. This dip at the start of the year comes as recent survey data point to labor shortages in the home-improvement industry that mirror the issues single-family builders have reported.

Home prices continue to rise per March data. According to the Federal Housing Finance Agency, they increased 1.3% on a month-over-month seasonally adjusted basis and 1.9% on quarter-over-quarter basis. This is the 14th consecutive monthly rise and the seventh consecutive quarterly increase. Over the past year, house prices are up 6.7%.

Similarly, the S&P/Case-Shiller House Price Index grew by 10.2% on a year-over-year, not seasonally adjusted basis in March. Following 19 consecutive months of year-over-year declines, house prices have now registered 10 consecutive year-over-year increases. House price growth in Phoenix had the largest annual increase at 22.5%, followed by San Francisco with 22.2% and Las Vegas with 20.6%.

Rising home prices may actually be helping to support the sales volume of existing home sales, as home owners test the market by placing their homes in the for-sale inventory. While not surging, the National Association of Realtors pending home sales index advanced 0.3% in April and stands 10.3% higher than in April of 2012. The continuing advance in contracts signed in April suggests sales in May will continue to climb.

Underlying these housing developments is improving consumer confidence. According to Thomson Reuters and the University of Michigan, the Consumer Sentiment Index increased by 10.6% on a monthly, seasonally adjusted basis to 84.5. Similarly, the Conference Board reported that its Consumer Confidence Index rose by 10.4% on a monthly seasonally adjusted basis in May to 76.2. These improvements come after soft reading of consumer confidence at the start of the year.

Finally, NAHB economists recently examined new student loan debt data that maps burdens and delinquencies by state. The data, from the New York Federal Reserve, illustrate higher-than-average student debt burdens typically occur in coastal states, where incomes are higher. Perhaps counter-intuitively, with the exception of Florida, Mississippi and Louisiana, states with higher-than-average student debt tend to have an average or below average delinquency rates (90 or more days late). NAHB will continue to track this issue, with an eye on impacts for housing.

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%.

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.

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.

Eye on the Economy: Growing Housing Demand Challenges Supply

Eye on the Economy is an NAHB newsletter that is published every two weeks and takes a larger view of recent economic and housing policy news.

The improvement in housing markets over the last year has been a welcome, if long-awaited, change for the economy as a whole. Improvements in home prices and building are widespread, with the NAHB/First American Improving Markets Index now standing at a count of 274 of 361 MSAs. With 76% of markets now making the list, there is no doubt the housing economy is on more solid footing than a year ago.

However, the pace of that improvement appeared to slow in February. Recent data suggest that continued tight credit access for buyers has the market more dependent on cash and investor buyers than in years past. And on the supply side, growth is challenging the ability of the housing pipeline – workers, lots and building materials – to meet rising demand. Given that housing has been a bright spot amidst an otherwise stagnant economy, this slowing of improvement could have important macroeconomic impacts.

The NAHB/Wells Fargo Housing Market Index, which tracks home builder confidence, fell to a level of 44 in March, down from 47 in December. For the most recent report, the decline was due to a decrease for the gauge of current sales, most likely connected to concerns about home buyer access to credit.

Consistent with the NAHB survey, the Census Bureau reported new home sales in February were down 4.6% from the preceding month. While the month-over-month drop was notable, it remains the case that the pace of new home sales remains significantly higher (12.3%) than this time a year ago. The February sales pace of 411,000 is in line with expectations for the year. NAHB expects new home sales to average 449,000 for 2013 as more consumers regain the confidence to purchase a home. At that rate, the home building industry remains at less than two-thirds of what would be considered a normal market.

The inventory of newly built home inventory remains historically low. The current months’-supply measure of new homes stands at 4.4. Prices of newly built homes are expected to increase in the coming year for multiple reasons. One is low supply, but rising building costs for lots, materials and labor will also boost new home sales prices.

Similarly, pending sales of existing homes fell 0.4% in February, as reported by the National Association of Realtors (NAR). Existing home sales also showed relative weakness, remaining virtually flat with a 0.8% monthly increase. Nonetheless, existing sales remain strongly higher (8.7%) compared to a year ago.

However, recent price growth may be helping to add inventory to the existing home market. The Case-Shiller 20-city index measure of house prices was up 8.1% year over year for the January report. Likewise, the Federal Housing Finance Agency reported national home prices were up 6.5% from January 2012 to January 2013.

As a result, existing home inventory is on the rise. The total housing inventory at the end of February increased 9.6% from the previous month to 1.94 million existing homes for sale. Part of this rise was seasonal, but rising prices are also inducing more home owners to place their homes on the market. While inventory is rising, demand is rising faster. At the current sales rate, the February 2013 inventory represents a 4.7-month supply compared to a 6.4-month supply of homes a year ago.

Yet concerns remain about the mix of home buyers. NAR estimates that in February, all-cash transactions rose to 32% of all existing home sales. Investor buyers constituted 22% of sales. The number of first-time buyers remain historically low, at 30% of buyers in February, down from 32% from a year ago.

Other notes of caution come from the builder side of the supply equation. Due to the historic nature of the downturn in residential construction, it is not surprising that the infrastructure of building – buildable lots, workers with the right skills and a pipeline of building materials – will at times and in certain locations be insufficient to meet the demands of rising home construction.

NAHB survey data confirm that shortages of many types of labor are having an adverse effect for builders in some parts of the country. Between June 2012 and March 2013, the share of builders reporting at least some shortage increased in every category of labor. Averaged across all 12 categories, 27.8% reported a shortage of directly employed workers in 2013, up from 19.6% in 2012.

More than half of builders reported that labor shortages over the past six months have caused them to pay higher wages or subcontractor bids, and to raise home prices. Other effects include delays in completing projects on time, being forced to turn down some projects and lost or cancelled sales.

Additionally, building materials prices continue to rise. While overall producer prices have been relatively stable, the prices for certain building materials have risen rapidly as the housing recovery has gained momentum since the beginning of 2012. Overall producer prices are up less than 3% while softwood lumber, OSB and gypsum prices are 30%, 80% and 26% higher than at the start of 2012. According to data associated with the Consumer Price Index, gasoline prices were up 3.3% in February year over year.

Yet the long-term prospects of home building demand remain positive, with builders ramping up production despite the occasional monthly dips. Housing starts for February came in at a healthy pace for both single- and multifamily units according to Census data. Single-family housing starts in February ran at a 618,000 annual pace while multifamily starts came in at 299,000. This represents a continuation of the solid growth trajectory in single-family starts that began in earnest in late 2011 and carried through 2012. Issuance of new building permits is on track to sustain the current levels of production and NAHB expects that going forward, the pace of single-family production will accelerate, approaching 1 million starts by the end of 2014.

Looking at a particular submarket, Census data from the end of 2012 suggests that the market share of townhouses (single-family attached) continues to rise back after the Great Recession, with the current market share standing at around 12%.

In policy analysis news, NAHB recently examined state-level IRS data that maps the share of taxpayers who benefit from the mortgage interest deduction (MID) who earn less than $200,000 in adjusted gross income. Nationally, the data indicate that 91% of taxpayers who claim the MID make less than $200,000. Not surprisingly, the share tends to drop somewhat in high-cost states, such as New York and California, for which household incomes tend to be higher.

The Federal Reserve also recently affirmed its accommodative monetary policy stance, noting that it will keeping the federal funds target rate at the 0-25 basis point range, and asset purchases (QE3) totaling $85 billion per month ($40 billion in MBS and $45 billion in Treasury securities).

Finally, NAHB recently published its home buyer preference survey: What Home Buyers Really Want. Among the finding are data on desired home size. Among all home buyers, the median home size desired is 2,226 square feet. Age plays an important role, with the amount of space desired dropping steadily as the age of the buyer increases. Among those younger than 35, the size desired is 2,494 square feet, compared to 2,065 square feet among those 65 or older.

Property Tax Share Falls as Total Tax Receipts Increase

Property taxes are an important source of revenue for state and local governments to finance services, particularly education.

Some analysts expected large declines in property tax collections for state and local governments in the wake of the Great Recession. However, this drop has never happened, despite historic price declines for owner-occupied housing. In fact, recent data demonstrate that nominal property tax collections are on the rise again, leading to higher effective property rates for homeowners and other property owners.

According to the latest data from the Census Bureau, over the course of 2012, approximately $474 billion of tax was paid by property owners.

As state/local income and corporate tax receipts recovered in recent years, the share of local tax collections due to property taxes fell from recession highs.

The average share for property taxes since 2000 is 32.3%, while the current share stands at 34.1%. Consequently, housing and other real estate owners are still paying a higher than average percentage of total state and local government tax receipts.

This elevated tax burden is significant, especially when one considers the decline in housing prices since 2006 – a decline that led many to incorrectly conclude that property tax payments would also significantly fall. According to the Case-Shiller national house price index, with the recent rebound in values, housing prices are down on net 29% over the last six years. Yet the decline of property taxes paid from the peak level is negligible (0.5%). This means that the effective tax homeowners pay on their homes remains high. 

There are several reasons why property taxes have not dropped with housing values. First, assessments of value tend to lag. Second, property tax authorities can adjust tax rates (such as millage rates in many jurisdictions) thus increasing rates as property values decline, holding receipts approximately constant. However, such policy actions mean the effective rate of tax (taxes paid divided by the property value) on the property  increases.

Taxes paid by homeowners and other real estate owners remain the largest single source of taxes for state and local governments. At 34%, property taxes represent a significantly larger share than the next largest sources: individual income taxes (22%) and sales taxes (21%).

* Data footnote: Census data for property tax collections include taxes paid for all real estate assets (as well as personal property), including owner-occupied homes, rental housing, commercial real estate, and agriculture. However, housing’s share is by far the largest when considering the stock of both owner-occupied and rental housing units.

Evidence of Growing Labor Shortages in Home Building

Growing shortages of many types of labor are already starting to have an adverse effect on home building in some parts of the country, according to a recent NAHB survey.

The survey consisted of special questions periodically included on the NAHB/Wells Fargo Housing Market Index (HMI) survey, asking single-family builders about shortages of labor in 12 categories: carpenters-rough, carpenters-finished, electricians, excavators, framing crews, roofers, plumbers, bricklayers/masons, painters, weatherization workers, HVAC and building maintenance managers.  After an absence of several years, the labor questions returned to the HMI in June 2012 and March 2013.

Between June 2012 and March 2013, the share of builders reporting at least some shortage increased in every category of labor.  Averaged across all 12 categories, 27.8 percent reported a shortage of directly employed workers in 2013, up from 19.6 percent in 2012.  Similarly, 30.7 percent reported a shortage of subcontractors in 2013, up from 22.6 percent in 2012.

The rising incidence of labor shortages in NAHB’s survey is consistent with the high number of unfilled positions in the construction industry overall, as reported in the government’s Job Openings and Labor Turnover Survey.  A likely reason for the shortages and unfilled openings is that, during the downturn, many workers left the industry, developed new skills, and are not coming back.  Other workers may have simply moved away and are not now living in the places where demand for new housing is recovering at the fastest pace.

NAHB’s survey also asked builders about the effects labor shortages have had on their businesses.  More than half of builders reported that labor shortages over the past six months have caused them to pay higher wages or subcontractor bids, and to raise home prices.  Other effects include delays in completing projects on time, builders forced to turn down some projects, and lost or cancelled sales.

It’s important not to overstate the results.  So far, relatively few builders are reporting that the shortages are extremely serious; and, even after  the 2012-2013 increases, the share reporting some shortage is not as high as it has been at times in the past when home building was very strong (the complete history of the survey results is  available here: HMI March2013SplQ EXTERNAL).

But, to put the current numbers in context, remember that the housing recovery is still in its infancy.  From 1960-2000, starts averaged over 1.5 million a year and were never under 1 million.  Even with substantial improvement in 2012 and further improvement forecast for 2013, NAHB projects that starts will remain under 1 million this year.  That would make 2013 the sixth worst year for housing starts since World War II (the five worst being 2008, 2009, 2010, 2011 and 2012).  So if some parts of the country are already experiencing a labor shortage, it’s definitely a cause for concern and a potentially serious barrier to further recovery.