Apartment and Condominium Market Remains Strong after Small Correction

The Multifamily Production Index (MPI) inched down two points to an index level of 52 for the first quarter of 2013. This marks the fifth straight quarter with a reading over 50.

The MPI measures builder and developer sentiment about current conditions in the apartment and condominium market on a scale of 0 to 100. The index and all of its components are scaled so that any number over 50 indicates that more respondents report conditions are improving than report conditions are getting worse.

The MPI provides a composite measure of three key elements of the multifamily housing market: construction of low-rent units, market-rate rental units and “for-sale” units, or condominiums.

 

In the first quarter of 2013, the MPI component tracking builder and developer perceptions of market-rate rental properties dropped four points to 61, but has been above 60 for seven consecutive quarters–the longest sustained period of strength since the inception of the index in 2003. For-sale units dipped four points to 42, while low-rent units rose two points to 55.

The Multifamily Vacancy Index (MVI), which measures the multifamily housing industry’s perception of vacancies, rose seven points to 38. With the MVI, lower numbers indicate fewer vacancies. After peaking at 70 in the second quarter of 2009, the MVI improved consistently through 2010 and has been at a fairly moderate level throughout 2011 and 2012.

Historically, the MPI and MVI have performed well as leading indicators of U.S. Census figures for multifamily starts and vacancy rates, providing information on likely movement in the Census figures one to three quarters in advance.

Stock of Residential AD&C Loans Declines Slightly

One factor holding back an even stronger rebound in home construction is the declining availability of acquisition, development and construction (AD&C) loans. While it appears the period of dramatic declines of the outstanding stock of AD&C loans ended in 2012, there has not yet been a robust expansion of lending consistent with current demand for home building. 

According to data from the FDIC, the outstanding stock of residential AD&C loans made by FDIC-insured institutions fell by $1.5 billion during the first quarter of 2013 (i.e. the retirement of old debt exceeded the issuance of new debt by $1.5 billion), a quarterly drop of 3.7%. It is possible that the drop in the first quarter was due to seasonal-related declines. The new data marks six consecutive quarters of the outstanding stock of residential AD&C loans remaining in the $40 to $44 billion range.

It is worth noting the FDIC data report only the stock of loans, not changes in the underlying flows, so it is an imperfect data source. Nonetheless, the rough stabilization of the stock value over the last year and a half suggests overall improving conditions for AD&C lending.

The current stock of existing residential AD&C loans (the blue area on the graph below) of $40.7 billion now stands 80% lower (denoted by the red line) than the peak level of AD&C lending of $203.8 billion reached during the first quarter of 2008. 

The FDIC data reveal that the total decline from peak lending for home building AD&C loans continues to exceed that of other AD&C loans (nonresidential and some land development).  Such forms of AD&C lending are off a smaller 63% from peak lending. Some land development loans connected to home building are grouped in this other class. NAHB survey data suggest land development loans face tighter lending conditions than loans for residential construction purposes.

Despite the recent stabilization in residential AD&C lending, there exists a lending gap between home building demand and available credit. Since the beginning of 2007, the dollar value of single-family permitted construction is down 41%. During this same period, home building lending for AD&C purposes is down 79%.

This lending gap is being made up with other sources of capital, including equity and investments from non-FDIC insured institutions or lending from other private sources, which may in some cases offer less favorable terms for home builders than traditional AD&C loans.

House Prices Continue Upward “March”

Standard and Poor’s reported that house prices rose in March. According to the most recent release, the S&P/Case-Shiller House Price Index – National Index grew by 10.2% on a year-over-year not seasonally adjusted basis. Following 19 consecutive months of year-over-year declines, house prices registered their tenth consecutive year-over-year increase in March. 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%. Meanwhile, house prices in New York rose by 2.6% on a year-over-year not seasonally adjusted basis.

Standard & Poor’s calculates tiered house price indexes for 17 of the 20 MSAs included in the House Price Index – 20 City Composite. Tiered house price indexes for the Cleveland MSA were not available in March 2013. Tiered indexes measure changes in the value of existing single-family houses in three price tiers – low, middle, and high. Each tier represents approximately one-third of the sales transactions in each respective market. Over the past 12 months, house prices in the low tier have generally outperformed house prices in the middle tier and the high tier. As Chart 1 illustrates, the year-over-year increase in the low tier house price index has exceeded the annual percent growth in the middle- and upper-tier house price indexes for every MSA except Tampa.

The faster growth displayed by the low tier house prices in March 2013 relative to the middle and high tier is a continuation of the strong rebound exhibited by these house prices following the housing bust. Since reaching its respective trough, house price growth in the low tier has exceeded house price growth in both the middle and upper tier in each of the 16 MSAs except Seattle. In Seattle, the rebound in middle tier house prices has slightly exceeded the recovery of house prices in the low tier. However, the rebound in low tier house prices exceeds that of the high tier. A previous post noted that the strongest house price recoveries have typically taken place in geographic areas where house prices declined the most. A similar phenomenon is occurring across house price tiers. According to Chart 3, house price declines that took place following the housing bust were deepest in the low tier in every MSA for which data is available.

For full histories of the composites and 20 markets included in the Case-Shiller composites, click here cs.

Townhouse Market Share Rises at Start of 2013

For the fourth consecutive quarter, construction of attached single-family housing (townhouses) increased both in terms of market share and year-over-year total units started.

Per first quarter 2013 Census data of Starts and Completions by Purpose and Design, total townhouse construction continued to grow at the beginning of year, reaching a starts total and market share last seen in 2009.

Townhouse construction starts totaled 15,000 for the quarter, a significant increase compared to 10,000 in the first quarter of 2012. Over the period spanning the second quarter of 2012 through the end of the first quarter of 2013, 72,000 townhouses were started.

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 peak market share of the last two decades for townhouse construction was set during the first quarter of 2008, when it reached 14.6%. This high point was set after a fairly consistent increase in share since the early 1990s.

Despite the drop in market share during the Great Recession, I expect the share for townhouse construction to increase in coming years with occasional ups and downs. We may be approaching a dip in market share given the rise in single-family detached starts.

Nonetheless, the prospects for townhouse construction are positive given large numbers of homebuyers looking for medium density residential neighborhoods, such as urban villages that offer walkable environments and other amenities.

Student Loans Conditions Vary Across the Country

Student loan debt reflects the cost of an investment in human capital. The typical return on this investment is characterized by both higher wages and a more stable employment. College graduates and those with some college experience tend to have higher wages and lower unemployment rates than their counterparts with a high school degree or less. However, failure to repay student loan debt could impair a borrower’s access to other forms of credit restricting their ability to buy a home or a car.

Recent research from the Federal Reserve Bank of New York focuses on the geographical distribution of student loan debt. Higher than average student debt per borrower typically occurs in states along the coastal states of the country, while the majority of the country, especially those located in the middle of the mainland, tend to have lower than average student debt. The one exception is Illinois (i.e. Chicago).

Counter-intuitively, with the exception of Florida, Mississippi, and Louisiana, states with higher than average student debt per borrower tend to also have an average or below average percent of student loan balance that is seriously delinquent (90 or more days late). The majority of the states that have above average serious delinquency rates are also states with lower than average student debt per borrower.

Earlier research by the Federal Reserve Bank of New York illustrates that borrowers who are seriously delinquent on student loan are less likely to secure mortgage credit. However, the underlying reasons behind serious delinquency in student loan debt are not immediately clear. Some states that have a high share of seriously delinquent student debt also have an elevated unemployment rate or low employment growth. Conversely other states with strained employment indicators have below-average student delinquency rates. At the same time, some states with higher than average seriously delinquency rates also suffered the worst of the housing bust, but this is not the case across the 50 states, the District of Columbia and Puerto Rico. Moreover, the link between student loan delinquency and access to mortgage credit may not be causally related if those that are seriously delinquent on student debt tend not to apply for mortgage credit. Given the potential implications of student loan debt repayment for future housing demand, additional research on this topic should seek to establish the sources of student loan delinquency.

House Prices Continue to Rebound

Nationally, house prices continued to rise in March, contributing to the overall recovery currently underway in U.S. house prices. According to the most recent release by the Federal Housing Finance Agency (FHFA), U.S. house prices rose by 1.3% on a month-over-month seasonally adjusted basis in March and 1.9% on quarter-over-quarter basis. This is the fourteenth consecutive monthly rise and the seventh consecutive quarterly increase for the House Price Index – Purchase Only (HPI). Over the past year house prices have risen by 6.7%.

The March increase in house prices was geographically widespread, increasing in every division of the country. The Census Bureau uses divisions to segment the four major regions of the country; Northeast, Midwest, South, and West. As Chart 1 illustrates, every division experienced a month-over-month increase in house prices, furthering the price recovery underway in each division.

Although house prices have extended their gains, they have not fully recovered their pre-bust peak. However, it’s clear from the chart that price appreciation accelerated during the boom compared to earlier years. In hindsight those gains were unsustainable and the declines represent a correction, purging the speculative bubble. The recent increases are based on a return to a fundamental balance between house prices and incomes. According to the HPI, house prices are now on par with those that prevailed in November 2004.

For full histories of the FHFA US and 9 Census divisions, click here.

Eye on the Economy: Housing Starts Fall Back on Volatile Multifamily Data

The pace of total housing construction fell back in April due to a large swing in the rate of multifamily development. From the March annualized rate of 1 million starts, April saw a drop to an 853,000 annualized pace.

Single-family construction declined only a small amount, however, with starts down from a 623,000 rate in March to 610,000 in April. NAHB expects single-family production to continue to make steady gains over the next two years, rising to more than 1 million units annually.

For multifamily, the starts rate fell significantly from an unsustainably high level of 398,000 in March to 243,000 in April. Neither number is representative of the underlying trend, however. Since December, the average starts rate for multifamily has been 321,000. Multifamily housing starts are likely to exhibit continued volatility as the sector finds a sustainable annual level of production between 350,000 and 400,000. Continued growth in rent should support this trend. For example, April Consumer Price Index data indicate that real rents have now risen for three consecutive months.

Home builder confidence is rising once again after three months of decline. The May NAHB/Wells Fargo Housing Market Index rose three points to 44 from a downwardly revised April level of 41. All three components increased: current sales increased four points to 48, expected sales increased one point to 53, a seven-year high, and traffic increased three points to 33. 

One factor that held back builder confidence at the start of 2013 was rising building material prices. New data suggest that it is possible that this upward pressure on prices may be ending. While the monthly Producer Price Indexes (PPI) for framing lumber and OSB increased from March to April, 3.2% and 6.5% respectively, weekly data from Random Lengths indicate April may be the beginning of a reversal of the steep increases that have accompanied the housing market recovery. Such easing, if confirmed, will be reflected in May PPI data.

Other data indicate also offer good news and confidence with respect to the long-run increasing trend for housing starts. Nationwide housing affordability held near historic highs in the first quarter of 2013, according to the NAHB/Wells Fargo Housing Opportunity Index (HOI). The index came in at 73.7%, down slightly from 74.9% in the final quarter of 2012.

The HOI is the share of new and existing homes sold in a quarter affordable to a family earning the median income. An HOI of 73.7 means that 73.7% of all homes sold in the first three months of 2013 were affordable to families earning the national median income ($64,400).

In the first quarter of 2013, NAHB’s 55+ single-family Housing Market Index increased 19 points on a year-over-year basis to 46, which is the highest first-quarter number recorded since its inception in 2008 and sixth consecutive quarter of year-over-year improvements. The index is up on increases in consumer demand for homes and communities designed to address the specific needs of mature home buyers. 

The overall foreclosure situation continues to improve, per data from the Mortgage Bankers Association. The seasonally adjusted mortgage delinquency rate increased 16 basis points over the first quarter of 2013. Even with this quarterly increase, the current share of mortgages at some stage of delinquency still ranks as the second-lowest reading since 2008.

Foreclosure starts remained unchanged at 0.7% of all first-lien mortgages during the first quarter of 2013. A total of 15 states registered a quarter-to-quarter drop in new foreclosure activity, but the overall downward trend in foreclosure starts remains in place as 45 states saw a year-over-year decline.

The foreclosure inventory continues to shrink across much of the nation. During the first quarter, 3.55% of all loans were at some stage of foreclosure, a 19 basis point drop from the last three months of 2012 and an 84 basis point decline compared to the same period a year ago. This metric now stands at its lowest point since the end of 2008.

Against this broader housing market backdrop, new and existing home sales continue to improve. New home sales rose in April to a seasonally adjusted rate of 454,000, up 2.3% from the March pace. The sales level of January and April are the two highest months of new home sales since 2008. Completed, ready-to-occupy inventory fell to 39,000, matching a post-Great Recession low. As a result, the median price for new homes reached a record high ($271,600). However, this mark is as much due to the mix of buyers (more at the high end) as it is a function of improving housing markets. 

Similar to the new home market, existing home sales posted a small increase in April. According to the National Association of Realtors (NAR), total existing home sales increased slightly in April to a 4.97 million annual rate, up 9.7% as measured on a year-over-year basis.

At the end of April, total housing inventory increased 11.9% from the previous month to 2.16 million existing homes for sale. At the current sales rate, the April 2013 inventory represents a 5.2-month supply compared to a 4.7-month supply in March, and a 6.6-month supply of homes a year ago.

Rising housing inventory is consistent with rising prices. The median sales price for existing homes of all types in April was $192,800, up from $183,900 in March, and up 11% from $173,700 during the same period a year ago. NAR reported that April represented the 14th consecutive monthly year-over-year price increase.

However, a concern regarding the improvement in the housing market is the degree to which it is dependent on non-traditional buyers. In April, all-cash sales were 32% of transactions and investors accounted for 19%. However, first-time buyers accounted for 29% of April sales, down from historic norms of around 40%.

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.