Producer Prices in April – Builders May Get Relief on Wood Products Prices

The Bureau of Labor Statistics (BLS) released the Producer Price Indexes (PPI) for April. Overall, producer prices declined for a second month based on continuing declines in energy prices, but the sharp price increases for the building materials framing lumber and OSB may be nearing an end.

The PPI for finished goods declined 0.7% in April from March (seasonally adjusted) driven by a 2.5% decline in energy prices. Core prices (excluding food and energy) continued their modest pace, rising 0.1% in April. Declining food prices also contributed to the decline in overall producer prices.

The monthly PPIs for framing lumber and OSB increased from March to April, 3.2% and 6.5% respectively, but weekly price data from Random Lengths indicate that turning points during April may be the beginning of a reversal of the steep increases that have accompanied the housing market recovery. If sustained these declines should appear in the June release of the May data.

Indexing both the PPI and the Random Lengths framing lumber price to January 1995 shows that they move together closely, reflecting the same price dynamics, with the weekly data from Random Lengths showing a larger amplitude in the changes. Based on monthly prices the PPI indicates a 67% increase from the 2009 trough to April; the weekly data show a trough to April increase of 124% in lumber prices.

Price increases for OSB are even more dramatic. According to the PPI data OSB prices have increased 151% since bottoming out in the housing bust; the weekly Random Lengths data show a 206% increase.

A break in prices would be a welcome relief for builders. With house prices less than 10% above their housing bust lows, the impact of these rising input costs has presented a significant challenge for builders during the recovery.

 

Home Builder Confidence Up

Builders expressed renewed confidence in May after a three month drop in the NAHB/Wells Fargo Housing Market Index.  The May index rose three points to 44 from a downwardly revised April level of 41.  All three components increased: current sales increased four points to 48, expected sales increased one point to 53, a seven year high, and traffic increased three points to 33.  Except for future expectations, the main index and the other two components remain below their peaks in December and January.

Builders report buyers are more aggressive in the market now as house prices continue to rise consistently while interest rates and the inventory of existing homes for sale remain low.  In a few markets, builders report healthy competition that has allowed them to raise prices. 

Many builders are reporting increased material costs and the producer price indexes for lumber, plywood, gypsum and oriented strand board (OSB) have shown significant increases in the past year.  Gypsum is at 94% of its peak during the boom; softwood lumber is at 93% of its cyclic peak and concrete is at 99% of its peak while housing starts are at 46% of their peak.

Builders’ confidence has not returned to the peak in December and January as the headwinds of rising material prices, scarce labor and land and tight credit conditions continue but increased demand has offset some of those hurdles and caused builders to become more optimistic than they were in April.  NAHB expects the housing market to continue its current rate of improvement and end the year at just over 1 million starts.

Housing Affordability Holding Strong in Early 2013

Nationwide housing affordability held near historic highs in the first quarter of 2013, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI), at 73.7 percent, down slightly from 74.9 percent 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 percent of all homes sold in the first three months of 2013 were affordable to families earning the national median income ($64,400).

This was the third consecutive quarter in which Ogden-Clearfield hit the top of the affordability chart for major markets. There, 93.4 percent of all new and existing homes sold in this year’s first quarter were affordable to families earning the area’s median income of $70,800 – essentially unchanged from the 93.7 percent of homes affordable to median-income earners at year-end 2012.

Among smaller housing markets, Mansfield, Ohio, claimed the “most affordable” title this time around, with 97.5 percent of homes sold in the first quarter being affordable to those earning the median income of $54,600.

This was the second consecutive quarter in which the San Francisco-San Mateo-Redwood City, Calif. metro area hit the bottom of the affordability chart for major markets. There, just 28.9 percent of homes sold in the first quarter were affordable to families earning the area’s median income of $102,000.

The least affordable small housing market in the first quarter was Santa Cruz-Watsonville, Calif., where 37.1 percent of all new and existing homes sold were affordable to those earning the area’s median family income of $73,800.

Confidence in the 55+ Housing Market Shows Strong Growth

In the first quarter of 2013, the National Association of Home Builders’ 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 the inception of the index in 2008 and sixth consecutive quarter of year over year improvements.

The index is up on increases in consumer demand for homes and communities that are designed to address the specific needs of mature homebuyers. 

There are separate 55+ HMIs for two segments of the 55+ housing market: single-family homes and multifamily condominiums. Each 55+ HMI measures builder sentiment based on a survey that asks if current sales, prospective buyer traffic and anticipated six-month 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.

All of the components of the 55+ single-family HMI showed significant growth from a year ago: present sales climbed 19 points to 46, expected sales for the next six months increased 21 points to 53 and traffic of prospective buyers rose 15 points to 41.

 The 55+ multifamily condo HMI posted a substantial gain of 23 points to 38, which is the highest first-quarter reading since the inception of the index. All 55+ multifamily condo HMI components increased compared to a year ago as present sales rose 23 points to 37, expected sales for the next six months climbed 23 points to 43 and traffic of prospective buyers rose 23 points to 38.

The 55+ multifamily rental indices also showed strong gains in the first quarter as present production increased 12 points to 43, expected future production rose 13 points to 48, current demand for existing units climbed 14 points to 56 and future demand increased 13 points to 58.

The strong year over year increase in confidence reported by builders for the 55+ market is consistent with year over year increases in other segments of the home building industry. While demand for new 55+ housing has improved due to a reduced inventory of homes on the market and low interest rates, builders’ ability to respond to the demand is being limited by a shortage of labor with basic construction skills and rising prices for some building materials.

Delinquencies Rise in First Quarter, but Foreclosure Starts Hold Steady

The seasonally adjusted mortgage delinquency rate increased 16 basis points over the first quarter of 2013, increasing to 7.25%. Even with this quarterly increase, the current share of mortgage loans at some stage of delinquency still ranks as the second-lowest reading since 2008. In addition, the overall increase in delinquencies was driven by a sizable jump in the 30-day past due category and a slight uptick in mortgages 60 days past due. The 90+ day delinquency bucket edged lower to 2.88%, and is now at nearly a five-year low.

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. Also, the state-by-state variation for foreclosures started is at its smallest since mid-2007.

Florida remains at the heart of the nation’s ongoing foreclosure troubles, ending the first quarter with the highest foreclosure starts rate (1.13%) and accounting for 11.6% of all foreclosures started nationally. Georgia, Mississippi and Illinois all posted foreclosure start rates at or above 1% in the first three months of 2013, but combined these three states accounted for only a slightly larger share of the national total than Florida.

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.

Foreclosure inventories fell in 40 states versus last quarter and 45 states have seen their inventories shrink in the past year. Once again, Florida is at the epicenter, containing more than 23% of the nation’s total inventory of foreclosed loans and just 7.3% of all loans. Combined with the remaining top 5 (New York, New Jersey, Illinois and California), these states accounted for 51.6% of the nation’s total number of loans in foreclosure, yet represented just 32.1% of all serviced loans.

New York’s high national share of inventories is likely a product of the state’s slow judicial process in handling foreclosure cases and recent moratoriums on new foreclosure activity. New Jersey and Illinois continue to struggle with disproportionately large shares of foreclosure inventories relative to loans and also have high foreclosure starts rates. By comparison, California’s foreclosure situation has improved significantly and only ranks among the top 5 due to the fact that it is a state with a very large number of mortgages—it accounts for 13.1% of all mortgages, but only 6.4% of the loans in foreclosure. In addition, the state’s foreclosure starts rate has declined steadily since the third quarter of 2011 and has come in below the national average in each of the past four quarters.

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.

Non-revolving Credit Continues Growing, but Revolving Credit Declines

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

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

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