New Home Sales in April – Steady Progress

Newly constructed single family homes sold at a seasonally adjusted annual rate of 454,000 in April, as reported in the joint release of the US Census Bureau and the US Department of Housing and Urban Development. This is a 2.3% increase from the upwardly revised pace in March and represents steady progress as the housing market recovers from the post-boom crash.

With the inventory of new homes for sale at historic lows, buyers bid up prices as demand outpaces supply at this stage of the recovery. The median sales price rose to $271,600 with 155,000 units available for sale nationally (not seasonally adjusted). Excluding units under construction and including only completed houses, ready to be occupied, the available supply is 39,000 units.

Razor thin inventories are a reflection of builder caution in the market place as well as the headwinds restraining a more robust housing recovery. Access to credit for both builders and home buyers remains a challenge, while builders struggle with shortages of available lots and skilled labor, as well as rising building materials prices.

The increase in the median price of new construction represents some welcome relief for builders who have endured the sharp declines in house prices combined with sharp increases in some of their input materials costs.

Despite the progress reflected in today’s report the housing market recovery is still only half complete. We expect the pace of sales to continue to improve through 2013 and 2014 as the housing market returns to normal with sales nearly twice today’s pace.

 

Existing Sales and Prices Increase

Existing home sales increased 0.6% in April from an upwardly revised level in March, and were up 9.7% from the same period a year ago. The National Association of Realtors (NAR) reported that April 2013 total existing home sales were at a seasonally adjusted rate of 4.97 million units combined for single-family homes, townhomes, condominiums and co-ops. That compares to 4.94 million units in March, and 4.53 million units during the same period a year ago. All regions were up from a year ago, ranging from 14.9% in the South to 4.3% in the West. For the current month, the only decrease was 3.4% in the Midwest.

The April 2013 level of single-family existing sales increased 1.2% from March to a seasonally adjusted 4.38 million sales, and was up 9.0 % from the same month a year ago. Seasonally adjusted condominium and co-op sales decreased 3.3% from March to a seasonally adjusted 590,000 units in April, but were up 15.7% from the same period a year ago.

The total housing inventory at the end of April 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. The April inventory of condominiums/co-ops increased to a 4.9-month supply from a 4.8-month supply in March, but was down from a 7.5-month supply a year ago. NAR reported that listed inventory is 13.6% below the same period a year ago, and that listed inventory is most restricted in lower price ranges. NAR also reported that the April median time on market for all homes was 46 days, down from 62 days in March and 83 days during the same month a year ago.

Some 18% of April 2013 sales were distressed, defined as foreclosures and short sales sold at deep discounts. This level was down from 21% in March and 28% during the same month a year ago.

The median sales price for existing homes of all types in April 2013 was $192,800, up from $183,900 in March, and up 11.0% from $173,700 during the same period a year ago. NAR reported that April represented the fourteenth consecutive monthly year-over-year price increase. The median condominium/co-op price increased from $180,000 in March to $189,500 in April, and was up 11.3% from $170,200 a year ago.

In April 2013, all cash sales were 32% of transactions compared to 30% in March, and 29% in April 2012. Investors accounted for 19% of April 2013 home sales, unchanged from March and down slightly from 20 % in April 2013. First-time buyers accounted for 29% of April 2013 sales, down from 30% in March and down from 35% during the same period a year ago.

NAR reported that buyer traffic is up 31% from a year ago, but sales are only up about 10%, despite noting that April existing sales reached the highest level since November 2009 when the market was responding to the home buyer tax credit. Potential buyers continue to face higher prices. Those same increasing prices will induce more households to place their homes on the market, and will eventually dampen the enthusiasm of investors and cash buyers.

The modest increase in April existing home sales was consistent with the 1.5% increase in the March 2013 Pending Home Sales Index.

Rental Price Growth Continues to Exceed Overall Inflation

The Bureau of Labor Statistics reported that its measure of consumer prices declined in April. According to the Consumer Price Index – Urban Consumer (CPI), prices faced by consumers declined by 0.4% on a month-over-month seasonally adjusted basis. This is the second consecutive monthly decline for the index. In March, consumer prices fell by 0.2%. Consumer prices have experienced three episodes of month-over-month declines in the past 6 months and 5 instances of monthly declines over the past twelve months. Over the past year, consumer prices have risen by 1.1% on a not seasonally adjusted basis.

As Chart 1 illustrates, the decline in consumer prices largely reflects falling energy prices. In April, energy prices declined by 4.3% on a month-over-month seasonally adjusted basis after falling by 2.6% in March. Gasoline prices were largely responsible for the decline in energy prices, falling by 8.1% in April. Over the past twelve months energy prices have declined by 4.3%. Meanwhile, food prices, which also display higher than average volatility, rose by 0.2% in April after remaining flat in March. Core CPI, which excludes both food and energy prices, rose by 0.1% in April, mimicking its growth rate in March. Over the past twelve months, core prices have risen by 1.7% on a not seasonally adjusted basis.

NAHB constructs a real rental price index by deflating the price index for rent by the index for overall inflation. This measure indicates whether inflation in rents is faster or slower than general inflation, excluding more volatile food and energy prices, and provides some insight into the supply and demand conditions for rental housing. When rents are rising faster (slower) than general inflation the real rent index rises (declines). Alternatively, the real rental price index also conveys information about the importance of the rental prices faced by consumers relative to their other expenditures and sheds some light on the relative importance of household expenditure items. In this way, an increase (decrease) in the real rent index also indicates that rental prices are a growing (shrinking) share of the overall expenditures made by consumers.

Computationally, the real rental price index and the relative weight calculation are closely related. As Chart 2 illustrates, the real rental price index and the relative weight of rental prices within core CPI follow a very similar trend. The relative weight measure is first calculated using not seasonally adjusted data and overall CPI in order to ensure proper measurement. Then core CPI is substituted for overall CPI and finally the not seasonally adjusted data is converted to its seasonally adjusted counterpart. In April, rental price inflation, 0.2%, exceeded core inflation, 0.1%. As a result, real rental prices faced by consumers increased. This is the third consecutive month that real rental prices have increased. Similarly, seasonally adjusted rental prices as a share of consumers’ overall expenditures also rose for the third consecutive month.

Housing Starts – What March Giveth, April Taketh Away – All Multifamily

Today’s report on housing starts for April from the Census Bureau and HUD shows a fall back from the revised March annual pace of 1.0 million units to 853 thousand. Most of the decline is attributable to a correction in the multifamily sector. Single family starts dipped to an annual pace of 610 thousand in April from 623 thousand in March, but multifamily starts plunged from a pace of 398 thousand in March to 243 thousand in April.

Multifamily starts traditionally are more volatile than single family and the swings in the last several months are a perfect example. The average pace of multifamily starts has been 321 thousand since December, but that average is based on the pace of starts jumping up 97 thousand units in December from November’s pace before falling back 79 thousand units in January. February and March accelerated the pace by 114 thousand units, so the correction to the pace this month is no surprise.

Overall, today’s report is less exciting than it may appear, single family remains on track while multifamily continues to thrill. The pace of single family construction has risen steadily since late 2011 while the pace of multifamily surged in late 2012. We expect single family production to continue to make steady gains over the next two years on its way to a more normal level of production surpassing one million units annually. Multifamily housing starts are likely to exhibit continued volatility as it finds its sustainable level of production between 350 thousand and 400 thousand units annually.

 

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.

 

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.

Mortgage Lending Expected to Rise, but Risks Remain

The Federal Reserve Board released the latest results from the Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS). Responses to the April survey indicate that mortgage lending is expected to rise over the coming year, but certain risks could derail its recovery.

In each survey iteration, the SLOOS asks senior bank officers to assess their business and consumer lending activity, providing information on the change in both their bank’s lending standards and in demand for various bank products. In addition to these routine questions, the SLOOS will also include a set of special questions that address developments in banking practices of timely interest.

In its most recent installment, the SLOOS included a special question that asked domestic banks to assess the likely change in certain types of residential real estate assets such as loans, agency mortgage-backed securities (MBS), and private-label MBS. On net, senior bank officers expected their banks holdings of total residential real estate assets to rise in the coming year, reflecting an expansion in their holdings of residential real estate loans. According to Chart 1, a net of 18% of bank respondents expect their bank’s holdings of total residential real estate assets to increase in the coming year, 38% expect their holdings of total residential real estate assets to rise while 20% expect their bank’s holdings to decline over the coming year. The remaining 42% did not expect their holdings of total residential real estate assets to change over the coming year. A net of 27% of respondents expect their bank’s holdings of residential real estate loans to rise while on net, bank officers expect their bank’s holdings of MBS, agency and private label, to decline.

A special question also asked senior bank officers to assess the change over the past year in factors affecting mortgage lending. According to Chart 2, mortgage lending has become relatively more profitable for banks over the past year, but certain risks have also increased. On net, 40% of bank respondents said that risk-adjusted profitability of mortgage lending relative to other possible uses of funds had increased. However, 39% of senior bank respondents on net mentioned that GSE putback risk, which is the forced repurchase of mortgages sold to GSEs, had also risen. A net of 27% of senior bank officers thought that guarantee fees charged by GSEs, fees charged to lenders for bundling, servicing, selling and reporting MBS to investors, had increased over the past year. Meanwhile a net of 12% of bank officers said that investor appetite for private-label securitizations had increased over the past year and a net of 17% of senior bank officers agreed that balance sheet capacity had increased over the past year.

The ultimate impact of each individual factor on mortgage lending activity depends not only on its change over the past year, but also on its relative importance. In response to a special question asking bank officers to describe the importance of these same factors for mortgage lending, profitability and GSE putback risk, two mortgage lending factors that the largest share of bank respondents said had increased the most over the past year were also the two most important factors restraining mortgage lending. The results show that 78% of bank officers cited profitability as an important factor restraining mortgage lending and 74% of bank respondents cited GSE putback risk as “important”.

Although Chart 2 shows a relatively sizeable net share of bank officers cited guarantee fees, a high volume of applications that exceeds processing capacity, and servicing costs upon borrower delinquency as having increased in the past year, these factors are near the bottom in terms of their importance for mortgage lending as shown in Chart 3. Conversely, while a relatively smaller net share of bank respondents cited the economic and housing outlook, mortgage insurance, and investors’ appetite for private-label securitizations as having increased over the past year, these factors are relatively more important to mortgage lending than guarantee fees charged by GSEs, a high volume of applications, and servicing costs upon borrower delinquency.