Mortgage Bankers: Loan Delinquencies Continue to Fall

The Mortgage Bankers Association’s National Delinquency Survey showed the (seasonally adjusted) overall delinquency rate on first-lien residential mortgages fell to 7.4% during the first quarter of 2012. According to the release, the 30-days late delinquency bucket saw its delinquency rate decline to its lowest reading in 5 years and is now on par with normal levels. The 60-day delinquency bucket saw a similarly large decline during the first quarter, while loans more than 90 days overdue (3.05%) dropped to late-2008 levels. Seriously delinquent loans, i.e. those 90+ days overdue or in the foreclosure process, as a share of all mortgages declined 29 basis points to 7.44%. Foreclosure inventories nationwide ticked slightly higher last month due to rising foreclosures among prime and FHA loans. By contrast, subprime loans are accounting for a smaller share of mortgage foreclosures as the non-performing loans have generally been resolved through the foreclosure or loan modification process already.

Geographically, the improvement in loan performance during the first quarter was fairly widespread. The foreclosure start rate declined in 41 states and only 7 (Washington, Oregon, New York, New Jersey, New Mexico, Maryland and Arkansas) saw their share of seriously delinquent loans increase versus the fourth quarter of 2011. Florida remained the epicenter of the nation’s foreclosure inventory, accounting for nearly a quarter of the national total, and also possessed the highest foreclosure start rate during the first three months of 2012 (1.73%). Overall, five states—Florida, California, Illinois, New York and New Jersey—account for 52% of the national foreclosure inventory, but represent less than 32% of all serviced loans in the U.S..

Michael Fratantoni, MBA’s Vice President of Research and Economics, discussed some of the causes for geographic disparity in foreclosure rates:

“The problem continues to be the slow-moving judicial foreclosure systems in some of the largest states.  While the rate of foreclosure starts is essentially the same in judicial and non-judicial foreclosure states, the percent of loans in the foreclosure process has reached another all-time high in the judicial states, 6.9 percent.  In contrast, that rate has fallen to 2.8 percent in non-judicial states, the lowest since early 2009. As the foreclosure starts rate is essentially the same in both groups of states, that difference is due entirely to the systems some states have in place that effectively block timely resolution of non-performing loans and is not an indicator of the fundamental health of the housing market or the economy.  In fact, hard-hit markets like Arizona that have moved through their foreclosure backlog quickly are seeing home price gains this spring.”

Improving Markets Index: Portland-Vancouver-Beaverton, OR-WA MSA

NAHB recently unveiled an index that tracks housing markets on the mend, the NAHB/First American Improving Markets Index (IMI).  The IMI is intended to draw attention to the fact that housing markets are local and that there are metropolitan areas where economic recovery is underway.  The index measures three readily available monthly data series that are independently collected and are indicative of improving economic health.  The three are employment, house prices and single family housing permit growth.

For the eighth release 100 markets are currently classified as improving under a conservative examination of local economic and housing market conditions.  Among these areas is the Portland-Vancouver-Beaverton, OR-WA metropolitan statistical area (MSA).

The health of the Portland housing market is due to the diversified nature of the Portland economy.  Portland is a very large regional healthcare center, possesses the third largest port on the West Coast, and is an important distribution center.  In addition, Portland also benefits substantially from the presence of the Portland State University, University of Portland, Oregon Health and Sciences University, and a large number of other post secondary educational institutions.  Portland is also a major high-tech manufacturing center with its largest single employer being Intel .  Because of that, there are hundreds of technology companies located in and around Portland.  Lastly, U.S. Bancorp, Wells Fargo and many other firms have large regional facilities in town, and Portland is headquarters for Nike, Inc. and Adidas America, Inc.    

According to home builder Tom Liesy, owner of T.A. Liesy Homes Northwest, “Portland is picking up because the number of homes for sale are very low, prices are starting to rise, and many are realizing that we will very soon run out of finished lots — as soon as this summer .  All of this is causing pent-up demand to finally manifest itself.”  He went on to say that “of late, move-up buyers with good incomes, good credit scores and good down-payments are looking to buy and if they can’t sell their existing house, they rent it.”        

Comparing 2010 American Community Survey data for Portland to the US, offers strong evidence that Portland is doing well and some insight into why.  The labor-force participation rate is almost four percentage points higher in Portland than in the rest of the country, and the percentages of persons employed in production, management, business, science and the arts are 10 percent higher than the national average.  In addition, the number of persons with a bachelor’s degree is about 20 percent above the national rate, and the percentage employed in manufacturing is also about 20 percent higher than the national average.  Lastly, because the local economy is doing well, the number of vacant housing units, be they owner-occupied units or rental units, is 44 percent lower than what it is for the nation as a whole.          

According to Nate Bond, Vice President of Sales for ProBuild in the northwest, “the market is picking up because people are once again moving to Portland by choice from elsewhere.  They come for the fresh water, because of the lifestyle, because of climate change issues, and also because many of the new homes being built here are energy efficient and green certified.”  Whatever the cause, house prices are definitely recovering.  Prices are up 3.8% since the trough in March 2011 and appear to be on track to continue to increase.       

Improving economic conditions have resulted in payroll employment being down just 4.8% from its peak in April 2008 and up by 3.4% since the bottom in December 2009.  Single family permitting activity is up 2.8% on a seasonally adjusted monthly average basis from the trough set in March 2009.  While new homes are being built in many parts of the Portland MSA, activity is now primarily centered in the northeast part of the City, the west side suburbs like Beaverton, and the City of Happy Valley in Clackamas County.

Housing Starts in April – A Positive Signal

New residential construction posted promising gains in April according to today’s joint release from the Census Bureau and Department of Housing and Urban Development. Preliminary estimates for housing starts show a seasonally adjusted annual rate of 717 thousand units, split between 492 thousand single family units and 225 thousand multifamily units, gains for both sectors. This is the sixth consecutive month with starts near or above 700 thousand.

There was some concern that the slower pace in March was an indication that a warm winter had pulled activity forward and the spring months could be weak as a result, but the strength of the April figures suggests momentum, rather than payback, will be the trend in coming months.

Building permit issuance did slow in April, but the decline was concentrated in the multifamily sector and brought April multifamily permitting more in line with the earlier trend.

Today’s starts numbers were consistent with yesterday’s release of the NAHB/Wells Fargo Housing Market Index (HMI) which showed improving builder sentiment. In particular, builders’ comments referred to increasing traffic in model homes, but also increasing commitment from buyers, in the form of deposits for sales.

This continuing upward trajectory in housing starts and builder sentiment suggests that consumers are regaining their confidence, and bodes well for a strengthening housing recovery.

Video: NAHB/Wells Fargo Housing Market Index Up Five Points

Falling Energy Prices Weigh on CPI

The Bureau of Labor Statistics reported today that the Consumer Price Index for All Urban Consumers (CPI-U) was unchanged between March and April 2012. Energy prices played a major role once again in shaping the CPI’s trajectory, but this month it put downward pressure on the overall CPI as the CPI for energy slumped 1.7 percent versus March. Gasoline accounted for the bulk of the decline in the broader energy CPI, even though retail gasoline prices actually peaked nationally at nearly $4.00 per gallon during the week of April 9^th.

Prices eventually declined 11 cents in the final three weeks of the month, which could have influenced this downward movement in the energy index. With retail gasoline prices falling appreciably in most parts of the U.S. over recent weeks, gasoline could weigh on the overall CPI for May. Natural gas prices continued to pull the energy component of CPI lower. Indeed, the spot price for natural gas averaged $1.95 per MMBTU during April—the lowest level observed since March 2009.

Core CPI, which excludes food and energy goods, increased 0.2 percent on a month-to-month basis in April and rose 2.3 percent versus April 2011. Year-over-year increases in core CPI have generally inched higher over the past 19 months, but at 2.3 percent the rate of growth in core CPI remains quite tame. Housing costs, as measured by the shelter index, continued their gradual march higher by climbing 0.2 percent for the 10^th time in the past 11 months and increased a modest 2.2 percent compared to April 2011. With prices for single-family housing beginning to stabilize, rental costs have become a point of focus as households make the decision between owning or renting and as available apartments have become scarcer in recent quarters. NAHB’s measure of real rental rates is constructed from the CPI for rent of primary residences and overall CPI. This index increased 2.1 percent on an annualized basis in April and registered its first year-over-year increase since October 2009. Relatively stronger increases in energy prices had masked the impact of rising rental rates in recent months.

Local Economic Benefits of Remodeling

Home building and remodeling generate significant economic benefits. Since May is National Home Remodeling month, we thought we would look at the economic benefits remodeling activity has on the community where it takes place.

According to NAHB estimates, for typical remodeling projects, every $10 million of total remodeling activity in an area generates:

• 78 local jobs
• $6.9 million local wage and business income
• $577,000 in taxes and fees for local governments

The ongoing effects include an additional $100,000 in residential property tax revenue for local jurisdictions through the improved value of homes.

The jobs impact in particular is worth noting, as net job loss in the residential construction sector due to the Great Recession currently stands at 1.41 million.

All in all, this is a reminder that housing equals jobs.

 

To derive these impacts, NAHB has developed a model that estimates the economic effects of various kinds of home building. The model captures the effect of the construction activity itself, the ripple impact that occurs when income earned from construction activity is spent and recycles in the local economy, and the ongoing impacts that comes from building or improving homes in a local area.

These impacts are “local” in that they measure the benefits that accrue to individuals, businesses and governments in a given area. National economic impacts would include larger business benefits, by estimating the manufacturing effects for example, but would also have lower ongoing impacts due to residents choosing to live or remain in a given area.

 

Producer Prices in April – Mixed

The Bureau of Labor Statistics (BLS) released the Producer Price Indexes (PPI) for April today. Overall, the PPI for finished goods declined 0.2 percent from March on a seasonally adjusted basis, as a 1.4 percent decline in energy prices outpaced 0.2 percent gains in both food goods and the core index (i.e., finished goods less food and energy).

In a surprise development, gypsum prices declined 1.9 percent from March to April, after strong gains through the beginning of the year that had brought prices to 13.8 percent above levels at the end of last year. Today’s decline brings the year to date gain in gypsum prices back down to 11.6 percent.

PPIs for other home building inputs showed softwood lumber prices rose 1.4 percent in April while concrete prices declined 0.2 percent. The aggregate index for residential construction rose 0.2 percent for the month and the pace of year over year increases slowed to 2.9 percent from recent highs between 6 and 7 percent in mid-2011.

 

NAHB Remodelers Tackle Jobs of All Sizes, but Greatest Share of Revenue Comes from Large Projects

Answers to questions on NAHB’s Remodeling Market Index (RMI) survey show that remodeling projects in every price range account for at least 9 percent of NAHB remodelers’ business (in dollar volume).  Even jobs that bring in less than $2,500 each account for 10 percent.

Given the small amount of revenue per job, and the challenges that scheduling a large number of relatively small jobs presents to a professional remodeler, it’s perhaps surprising that the under $2,500 share is as high as it is.  Even so, among the price categories specified in the survey, large projects costing at least $100,000 account for the greatest share NAHB remodelers’ business—21 percent.  Next are jobs costing $25,000-$50,000, with an 18 percent share.

According to a source like the American Housing Survey (AHS, sponsored by HUD and conducted by the Census Bureau), $100,000+ projects account for only 7 percent of all remodeling spending reported by home owners.  Almost one-fourth of home owners’ remodeling spending is on projects in the $10,000-$25,000 range.

The remodeler/homeowner share differences suggest that there is a relatively large slice of the pie in certain price ranges not captured by the type of remodeler who belongs to NAHB and responds to the RMI survey.  As a thought experiment, assume that these NAHB-type remodelers capture all of the work the $100,000+ range that involves a home owner hiring a professional contractor, and scale it up to total annual remodeling undertaken by home owners, calculated from the latest (2009) AHS:

The result shows that, even if NAHB remodelers were capturing all available work in the $100,000+ price category, they would be missing $35 billion in activity in the $10,000-$25,000 range.  Some of the difference is homeowners undertaking remodeling projects themselves, but there are also many small contractors in the field who generally don’t belong to trade associations like NAHB or respond to surveys like the RMI.  According to NAHB’s 2011 Member Census, median revenue for NAHB remodelers is a little over half a million, and almost all (over 95 percent) of them have a payroll (with an average of 6 employees).

In contrast, the latest Census statistics show almost 600,000 construction firms and 1.9 million trade contractors who have no payroll employees and average annual revenue of $86,000 and $50,000 respectively (as reported in NAHB’s article on the Structure of the Home Building Industry). These small self-employed businesses—i.e., individuals with a pick-up truck or van—are likely to account for a substantial number of the  jobs priced under $25,000 not captured by NAHB remodelers.

Confidence in the 55+ Housing Market Still Below 50, but Improves Significantly in the First Quarter

According to NAHB’s latest 55+ Housing Market Index (HMI) survey, builder confidence in the 55+ housing market for single-family homes increased significantly in the first quarter of 2012 compared to the same period a year ago. The 55+ single-family HMI increased 10 points to 27, and although 27 is relatively low for an index that lies on a scale of 0 to 100, it is nevertheless the highest reading since the inception of the index in 2008.

The 55+ single-family HMI measures builder sentiment based on a survey that asks  if current sales, buyer traffic and anticipated sales for that market are good, fair or poor (high, average or low for traffic).  An index number below 50 indicates that more builders view conditions as poor than good.

The overall 55+ single-family HMI is a weighted average of the current sales, traffic and anticipated sales components.  In the first quarter of 2012, all three components remained well below 50, but increased considerably from a year ago, each reaching an all-time high: present sales rose 12 points to 27, expected sales for the next six months increased eight points to 32 and traffic of prospective buyers rose nine points to 26.  The survey results are not yet seasonally adjusted, so numbers should only be compared year-over-year.

The 55+ HMI survey also shows multifamily rental holding its place as the strongest segment of the overall 55+ housing market. The index for current production of 55+ rental apartments climbed 11 points to 31, while the index measuring current demand for existing 55+ rental apartments rose three points to 42.  Expectations for future production and demand were up year-over-year also.

For complete history of all indices derived from NAHB’s 55+ HMI survey, see www.nahb.org/55HMI

Eye on the Economy: Waiting for Stronger Growth

*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. Beginning today, we will publish this biweekly economic overview on Eye on Housing as well.

The new year opened with hope that the 3% growth rate of Gross Domestic Product (GDP) reported for the end of 2011 would lead to stronger job growth and improving housing markets. While January and February offered positive economic news, March and April reporting suggested that unusually warm weather may have accelerated some economic activity at the expense of the spring months.

Overall, first-quarter GDP grew at a subpar, seasonally adjusted annual rate of 2.2%. Declining growth in inventory investment and weak nonresidential investment were the primary reasons. Increases in inventory investment boosted GDP growth at the end of 2011 by 1.8 percentage points. In addition, federal government spending also recorded a significant (5.6%) decline.

However, the long-term trend remains positive for economic growth. Personal consumption and exports were up for the first quarter of the year. And excluding the inventory adjustment, growth in GDP increased from 1.1% to 1.6% from the last quarter of 2011 to the first quarter of 2012.

Nonetheless, the slowdown was consistent with weak employment growth. The Bureau of Labor Statistics (BLS) reported only 115,000 net jobs were added to the economy in April. The unemployment rate ticked down to 8.1%, but this is a “good news is actually bad news” situation: The rate fell because 342,000 people stopped looking for work and left the labor force. Declines like these are bad for household formation and housing demand. Nonetheless, the recent average monthly employment gain stands at 200,000 jobs, so a pickup in GDP should lead to more robust job growth.

The BLS March Job Openings and Labor Turnover Survey reveals a disconnect worth watching in future months. The job openings rate has increased steadily since the end of the Great Recession. Total job openings totaled only about 1.75% of employment in early 2009. The openings rate is now at 2.7%. However, the hiring rate has experienced only a slight uptick over the same period, increasing from about 3% to 3.3%.

An obvious question: If the number of job openings is growing, why have we not experienced a corresponding increase in hiring and thus net job creation?

Two possible explanations seem likely. First, there may exist a skills mismatch between jobs needing to be filled and available workers. Second, ongoing problems in the housing market, particularly the ability of new home buyers to obtain affordable credit, may be preventing prospective workers from relocating to accept job opportunities.

Despite the recent slowdown, consumer confidence remains steady according to both the Conference Board’s Consumer Confidence Index and the University of Michigan Consumer Sentiment Survey. In fact, the three-month moving averages of both surveys continue to show dramatic improvement since the third quarter of last year.

The recent pause in improving economic conditions has been reflected in recent housing market data. The May NAHB/First American Improving Markets Index fell slightly from a count of 101 to a total of 100 improving markets, according to an evaluation of local residential construction, housing prices and job growth. The index continues to show about one-quarter of all metropolitan areas as improving according to this conservative measure.

Total private residential construction spending was, in fact, up slightly (0.7%) during March, according to the Bureau of Economic Analysis. Single-family construction led the way, increasing 3.8% in March, more than offsetting the 1.3% decline from February. Multifamily, which has been the standout for home building in the past year, was down in March by 3.1%, although the February gain was revised up from 2% to 3.6%. However, home improvement slumped for the fourth consecutive month, registering a 1.9% decline.

The lack of growth for remodeling spending in recent months is consistent with NAHB survey results. The NAHB Remodeling Market Index fell one point for the first quarter of 2012, falling to 47. Both components of the index, which measure current market conditions and future remodeling activity, fell during the quarter. It seems reasonable to believe that the end of the remodeling tax credit (the section 25C energy-efficient upgrade credit) is in part responsible.

Other housing indicators also show a slowing of improvement. For the first quarter of 2012, the Census Bureau reported that the homeownership rate fell to 65.5%, after three quarters of hovering around 66%. House price data from the Case-Shiller and Federal Housing Finance Agency indicate that prices were relatively unchanged for March.

Yet there are signs of future growth in housing demand. Perhaps most important is that the National Association of Realtors Pending Home Sales Index for March increased more than 4%, reaching its highest level since the end of the home buyer tax credit period. This level suggests higher rates of existing home sales in the near future.

However, builders should be aware of price increases for building materials. In particular, NAHB has been tracking the run-up in gypsum prices and, more recently, lumber prices due to supply issues in Canada. The increase in lumber prices may trigger a reduction in the import tariff.

Finally, May is National Remodeling Month. With this in mind, NAHB recently produced research on home improvement issues. The research finds that the existing housing stock is in worse condition that previous estimates suggested and concludes that more than 10 million homes are physically inadequate, twice the total of previous estimates. And NAHB survey data indicates that bathroom and kitchen remodeling projects were the most common home improvement jobs in 2011.