BLS: Consumer Prices Rise Modestly

Urban consumers experienced a slightly higher overall price increase in May. According to the Bureau of Labor Statistics, (BLS), the Consumer Price Index – Urban Consumer (CPI) rose by 0.1% on a seasonally adjusted month-to-month basis. Over the past twelve months, CPI has risen by 1.4% on a not seasonally adjusted basis. Energy prices, which often contribute to the monthly volatility in headline CPI, rose by 0.4% as gasoline prices were flat over the month. Meanwhile, food prices fell over the month by 0.1%. Over the past year, energy prices declined by 1.0% while food prices rose by 1.4%. “Core” CPI, which excludes the more volatile food and energy prices, rose by 0.2% over the month. Over the past twelve months, “core” CPI rose by 1.7% on a not seasonally adjusted basis.

The increase in consumer prices over the month of May largely reflected an increase in shelter costs. As Chart 1 illustrates below, shelter costs account for 32% of headline CPI or about one-third of the average urban consumer’s expenditures. Over the month of May, shelter costs rose by 0.3%. The 0.3% increase in a sizeable expenditure category such as shelter will have a larger affect on the total change in consumer expenditures as measured by headline CPI than the 0.4% monthly increase in energy prices, which represents 10% of expenditures, or the 0.4% month-to-month increase in transportation services, which accounts for 6% of consumer expenditures.

The increase in shelter prices partly reflects rising rental prices. In May, rental prices rose by 0.3%. However, this measure does not isolate the change in rental prices from the changes in the overall price index. To accomplish this, NAHB constructs a real rent price index by deflating the price index for rent by the index measuring core inflation. This measure indicates whether inflation in rents is faster or slower than general inflation and provides some insight into the supply and demand conditions for rental housing, after controlling for overall inflation. When rents are rising faster (or slower) than general inflation the real rent index rises (declines). As Chart 2 illustrates, the real rent index has increased for four consecutive months and 10 of the last 11 months. In May, the real rent index rose by 0.1%. Over the past year, the real rental prices have risen by 1.1%

Housing Production Modest Growth

May housing starts rose 6.8% as apartment construction rebounded from an unusually low April and single-family construction remained virtually even. Total starts at a 914,000 seasonally-adjusted annual rate (SAAR) have been above 900,000 for three of the last five months.

 
Regionally, the South was the only region with an increase in single-family starts (12.2%) while the Northeast dropped 20%, the Midwest dropped 15% and the West dropped 4%. Issued but unused single-family permits were up by double-digit percentages in all three of the regions with a drop in starts. Stock piling permits along with above average precipitation in those same regions suggests single-family starts were held back by wet weather.

 
Total permits were down 3.7% but also due to an out-of-bounds April figure for apartment buildings and a more normal rate of 352,000 permits (SAAR) for May. Single-family permits increased by 1.3% to 622,000 (SAAR), the highest since May 2008. No region experienced a decline.

 
The May housing construction report provides evidence that the housing market continues its modest growth path toward recovery as buyers trickle back into the market and builders deal with an industry reassembling itself after a seven year hiatus.

Builders’ Index Over 50

The NAHB/Wells Fargo Housing Market index passed the tipping point of 50 in June to top out at 52, the highest level since April 2006 and the largest monthly increase since 2002. The renewed confidence was spread across all three components, with the expectation for the next 6 months rising to 61, the highest in seven years.

 
The index compares the share of builders who believe the market is better with those who believe it is poor. The index flipping over 50 means builders seeing a better market outnumber those judging it as poor. In the 29 years of the HMI, it has been at 50 or more 58 percent of the time but for never longer than three years until this most recent seven year run below 50.

 
The causes are several. Builders are seeing more serious buyers, some coming from the existing home market because that inventory is so low. Some of the head winds weakened, particularly building material prices have some back from peaks that were near the peaks in the boom when building was twice as large as it is now. While mortgage rates pop about one-half a percentage point, they remain low by historic standards. Existing home prices are rising providing buyers with greater comfort that a purchase will sustain its value.

 
Regional three-month moving average indexes were up one point in the Northeast, three points in the Midwest and four points in the South. The West was down one point.

 
The rise in the HMI is consistent with the NAHB forecast for a 29 percent increase in housing starts in 2013 over 2012 and the first year to pass the one million mark since 2007.

 

Household Balance Sheets: Continuing Fiscal Cliff Impact

During the first quarter of 2013, household balance sheets improved with increases in home values and reductions in mortgage debt, thereby boosting household net worth. These are favorable improvements that will help housing demand in 2013. In particular, over the last five quarters household real estate values have risen by more than $2 trillion.

Since the end of the Great Recession such developments have typically been associated with a decline in the personal savings rate. Due to the Fiscal Cliff, this relationship has been disrupted for the last two quarters.

The graph above plots the current value of net worth to disposable personal income (NW/DPI) and the corresponding 25-year historical average (1982-2007). The dashed blue line charts the personal savings rate. Household net worth data are from the Federal Reserve’s Flow of Funds and the savings rate and disposable income data come from the Bureau of Economic Analysis National Income Product Accounts. 

While there has been a general trend of an increasing NW/DPI ratio since early 2009, there have been ups and downs in this process due to stock market and other asset value fluctuations. As of the start of 2013, the NW/DPI measure stood at a value of 5.86, above the historical level of 5.24 and significantly higher than the cyclical low of 4.85 set during the beginning of 2009. The increase since 2009 is a reasonable measure of the improvement in household balance sheets.

However, for the last two quarters, the savings rate and the measure of disposable income experienced non-balance sheet driven movement due to the Fiscal Cliff and its resolution. In particular, the legislation staving off the Fiscal Cliff included a number of tax increases, including an end to the payroll tax cut and rate hikes at the top end of the income distribution.

In anticipation of these higher tax rates, the amount of income paid out and earned by American households jumped in the last quarter of 2012 (the uptick/peak in 2012 for the blue line below). As this accelerated income was due to a one-time cause, spending did not increase at the same rate. Thus, with a rise in income and no corresponding increase in spending, the personal savings rate increased to a revised rate of 5.3%  in the fourth quarter of 2012, marking the highest rate of savings in more than two years.

As we forecasted in March, the data for the first quarter of 2013 showed that DPI fell at the start of year due to the accelerated income payments made at the end of 2012, as well as the enacted 2013 tax hikes. The result was that the NW/DPI measure reached its highest level since 2008. With a drop in DPI, and little change in consumption, the personal savings rate fell considerably.

It is important to note that while we’ve typically associated a rise in NW/DPI as a sign of recovering balance sheets, in this case the rise was drive by the decline in DPI. Similarly, the drop in the savings rate to 2.3% is less a sign of healing balance sheets, and more due to the timing impacts of income shifting due to the Fiscal Cliff. Data from the second and third quarter of 2013 will provide a clearer picture.

Nonetheless, household balance sheet repair is ongoing. Flow of Funds data from the first quarter of 2013 show that total home mortgage debt continues to decline. Since the first quarter of 2008, home mortgage debt has declined 12% or $1.27 trillion. And the value of real estate owned by households has risen for the last five consecutive quarters for an increase of $2.2 trillion.

Open Construction Jobs Rate the Highest Since 2007

Government employment data indicate the rate of construction sector job openings is at its highest level since 2007. While the increase in unfilled positions is consistent with the uptick in construction sector activity, particularly for home building, the data reflect only modest increases in total employment thus far.

For the construction sector, Job Openings and Labor Turnover Survey (JOLTS) data from the Bureau of Labor Statistics (BLS) indicate that gross hiring for the construction sector fell to 285,000 in April from 320,00 in March.

Consistent with reports of some labor shortages for builders, the number of open, unfilled positions in the construction industry remains near post-Great Recession highs. The number of unfilled positions in the sector stood at 108,000 in April, marking four consecutive months for which the total number of open positions was greater than 100,000. This is the first time this has occurred since a stretch that began in 2007. Successfully filling open positions with qualified workers is a top concern for home builders in 2013.

The April job openings rate (open positions measured as a percentage of current employment) for construction was 1.8%. Measured as a three-month moving average, the openings rate (the blue line above) has been growing for the last nine months. Combined with a declining sector layoff rate (nonseasonally adjusted), charted as a 12-month moving average in the graph above, these factors suggest good news for construction hiring in the months ahead – if firms can find workers with the right skills.

Monthly employment data for May 2013 (the employment count data from the BLS establishment survey are published one month ahead of the JOLTS data) indicate that total employment in home building stands at 2.135 million, broken down as 591,000 builders and 1.545 million residential specialty trade contractors.

According to the BLS data, over the last 12 months, the home building sector has added 94,000 jobs. Since the point of peak decline of home building employment, when total job losses for the industry stood at 1.466 million, 151,000 positions have been added to the residential construction sector.

While employment growth for the sector is not expected to occur at rates seen for the growth in building activity, the current level of improvement for total employment remains a puzzle. This small amount of job creation could be due to increased hours for existing workers, but if true, this is not a sustainable situation. Expected increases in building should lead to further growth in residential construction employment over the course of the year. Thus far in 2013, home building employment is averaging monthly growth of about 12,000.

For the economy as a whole, the April JOLTS data indicate that the hiring rate was relatively unchanged at 3.3% of total employment. The hiring rate has been in the 3.1% to 3.4% range since January 2011. The job openings rate fell slightly to 2.7% in April.

Growth in Consumer Credit Accelerates

According to the Federal Reserve Board, growth in the amount of consumer credit outstanding, this includes outstanding credit extended to individuals for household, family, and other personal expenditures, excluding loans secured by real estate, accelerated in April. According to the release, the amount of consumer credit outstanding increased at a seasonally adjusted annual rate of 4.7% in April, 1.1 percentage points higher than the 3.6% growth in consumer credit that took place in March. At the end of April the total amount of consumer credit outstanding was $2.8 trillion.

The increase in the amount of consumer credit outstanding reflects an expansion in both the outstanding amounts of non-revolving credit and revolving credit. While growth in non-revolving credit accelerated from the previous month, the monthly increase in revolving credit reversed the decline that took place in March. The amount of non-revolving credit outstanding, which is mostly composed of student loans and auto loans, rose by 6.4% or $124.5 billion on a seasonally adjusted annual basis in April. In March, non-revolving credit rose by 5.7%. Meanwhile, revolving credit outstanding, which is largely composed of credit cards, rose by 1.0% or $8.2 billion on a seasonally adjusted annual basis to $849.8 billion. In March, the amount of revolving credit outstanding fell by 1.3%.

The April expansion in revolving credit largely reflects an increase in the amount of revolving credit holdings at depository institutions. In April, depository institutions accounted for 80.4% of total revolving credit holdings. As Chart 1 illustrates, revolving credit increased by $2.6 billion in April on a not seasonally adjusted basis. Depository institutions contributed $4.0 billion in revolving credit holdings and credit unions accounted for an additional $0.1 billion. However, these gains were partially offset by a decline in the holdings of revolving credit by finance companies and pools of securitized assets. The monthly increase in the holdings of revolving credit by depository institutions may indicate that lending activity is beginning to grow.

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.

Single-Family Built-for-Rent Market Share Rises

At the start of 2013, single-family starts built-for-rent were up on a year-over-year basis, with the market share rising to a new high.

Despite some recent ups and downs, the share of single-family homes built for rental purposes continues to rise. But by and large, the construction market for these homes remains a niche market, even as rental demand increased in past years.

According to data from the Census Bureau’s Quarterly Starts and Completions by Purpose and Design, the market share of single-family homes built-for-rent, as measured on a one-year moving average, stands at 5.8% for the first quarter of 2013. This is significantly higher than the historical average of 2.77%.

With the onset of the Great Recession, the share of built-for-rent homes rose, with a dip in the share during the homebuyer tax credit period.

Despite the elevated market share, the total 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.

Of course, the built-for-rent share of single-family homes is considerably smaller than the single-family home portion of the rental housing stock, which is 27% according to the 2010 American Community Survey. The reason for this is that as single-family homes age, they are more likely to transition from the owner-occupied to the rental housing stock.

Owner and Contractor Built Housing Share Falls

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.

Census Data from the Quarterly Starts and Completions by Purpose and Design survey indicate that the number of starts of this particular type of custom home building was down 4% year-over year in the first quarter, totaling 25,000.

While the decline in starts was negligible, as the rest of the single-family construction market expanded, the market share of owner and contractor built housing has fallen significantly. As measured on a 1-year moving average, the market share has fallen to 22.5%, down from a cycle high of 31.5% set during the second quarter of 2009.

The onset of the housing crisis and the Great Recession interrupted a 15-year long trend away from homes built on the eventual owner’s land. However, as housing production slowed in 2006 and 2007, the share of this not-for-sale new housing increased even as the number of starts declined. The share increased because the credit crunch made it more difficult for builders to obtain AD&C credit and for home buyers to obtain mortgage financing, thus producing relatively greater production declines of for-sale single-family housing.

Single-Family and Multifamily Spending Up, Remodeling Declines Again

Total private residential construction spending decreased a negligible 0.1% on a month-over-month basis during April 2013, with the net decline driven by a further decrease in improvement spending. However, total housing-related spending is up 18.8% from April 2012 and has increased 35.7%  from the cycle low point in 2009.

Spending on new single-family housing has now increased for 22 of the last 23 months, increasing 1.4% over March. On a year-over-year basis new single-family expenditures have grown 38.6% and are up 81.9% from the cycle low pace set in mid-2009.

 

New multifamily construction spending registered a 3.4% gain in April and has increased 48.6% measured year-over-year.  Multifamily construction is up 123% from the cycle low recorded in mid-2010.

While single-family and multifamily construction continue to improve, home improvement spending has been and remains a source of weakness for the residential construction sector. Remodeling-related expenditures have 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 later in the year.