Weak Remodeling Activity Weighs on Residential Construction Spending

Total private residential construction spending increased 0.4% on a month-to-month basis during March 2013. After data revisions, first quarter nominal spending levels came in 2.3% lower than the final three months of 2012. With that said, private construction spending has bounced back by 33% since its cyclical low from nearly two years ago and has advanced more than 18% compared to March 2012.

Spending on new single-family housing notched its 21st month-to-month gain over the last 22 months, increasing 1.6% versus February, which itself was revised higher from 4.6% to 5.4% growth. On a year-over-year basis the new single-family category has expanded 38% and has managed to rise 78% above the cyclical low observed back in mid-2009. With the current NAHB forecast projecting growth of 26% and 28% for single family housing starts in 2013 and 2014, respectively, we expect spending activity to continue rising over the next two years.

New multifamily construction spending registered a modest gain of 0.3% in March, but the initial estimate of a 2.2% drop for February was revised to a smaller decline of 1.4%. Despite these two lackluster months, the first-quarter average was a 12% improvement from the fourth quarter of 2012 and the nominal dollar value of spending has skyrocketed 111% in less than two years. The forecast calls for a modest decline in multifamily starts during the second quarter of 2013 after what was likely an unsustainably large increase during the first quarter (primarily in March). Multifamily starts are expected to increase in every quarter thereafter, albeit at a slower and steadier pace, which in turn will yield further growth in nominal spending levels.

While the other two categories improved, home improvement spending was a source of weakness for the residential construction sector. Remodeling expenditures have declined in each of the last five months, with the March 2013 estimate coming in at a drop of 1.4% compared to February. The 3-month moving average, which tends to smooth out the month-to-month volatility in reported home improvement spending, points to a noticeable dip in remodeling activity after a healthy surge between spring and fall of last year. The most recent forecast calls for remodeling activity to rise modestly over the remainder of the outlook period. However, this downward trend in spending data plus the latest edition of NAHB’s Remodeling Market Index point to some risk to projected home improvement activity over the near term.

Apartment Production Spikes to an Unsustainable Rate

The Census Bureau’s preliminary estimate for starts in buildings with five or more apartments in March came in at a massive (seasonally adjusted annual) rate of 392,000 units.  In the Census construction report, this shows up as a 27 percent increase over February.  However, the number for February was itself revised upward by 24,000—so the five-plus starts rate for March is actually 38 percent higher than the production rate we thought prevailed a month ago.

At 392,000, the five-plus starts rate is the highest it’s been since January of 2006 (a one-month anomaly that at the time was explainable as the industry’s response to changing building codes in some states).  Even if we smooth some of the volatility out of the five-plus starts series, the 3-month moving average is up to 325,000.  That’s above the annual number of five-plus starts in any year since the 1980s, so even the current moving average seems a bit too high to sustain going forward—a contention supported by the permit numbers in the latest construction report.

The report shows that, in March, the (seasonally adjusted annual) rate at which new five-plus permits were issued dropped 8 percent to 283,000, while the number of five-plus permits waiting in the pipeline (previously issued but not yet converted to starts at the end of the month) declined 19 percent, to 38,400 (not seasonally adjusted).

Residential Construction Spending Bounces Back in February

After three consecutive months of slight declines, private residential construction spending increased 2.2% on a month-to-month basis in February. Despite the sluggish readings from the prior 3 months, nominal spending on residential construction activity remained more than 20% above its year-ago level and roughly 36% higher than the cyclical low in mid-2011.

The new single-family home category continued to show strength in February, gaining 4.3% versus January. Compared to February 2012, spending on new single-family homes has risen 34%, but perhaps more importantly, the level of nominal construction spending has surged more than 73% since bottoming out in mid-2009. Spending activity will likely expand further over the next two years as the current NAHB forecast calls for single-family housing starts to increase 23% and 29%, respectively, this year and next.

The multifamily sector took a step back in February, with spending on new multifamily projects slipping 2.2% from January. In fact, this marks the first outright month-to-month decline for this category since September 2011. Still, the overall trend remains decidedly positive for new multifamily construction activity as the level of spending is 52% ahead of the pace in February 2012 and has more than doubled the August 2010 low point. After a likely modest retrenchment in the first quarter of 2013, the baseline forecast calls for consistent gains in multifamily starts through the end of 2014.

Home improvement spending improved slightly in February, gaining 0.5% versus the previous month and is 1.1% above the level from last year. Although this construction spending category is the most volatile and likely to be revised, the 3-month moving average suggests spending on remodeling activity has cooled over the past several months. Nonetheless, with existing home sales expected to register steady growth going forward, home improvement activity should see a similar pattern as sellers spruce up their homes for sale and/or buyers decide to make changes after they move into the home.

Multifamily Rental Properties: Would You Believe 2.25 Million?

According to a new survey sponsored by HUD and conducted by Census Bureau, there are 2.25 million multifamily rental properties in the U.S.  You may wonder if we really needed a new survey to tell us this.  The short answer is yes.

In the decennial Census and virtually all surveys of housing, the government goes to housing units and starts by asking questions of the occupants.  You can count most single-family properties this way, but not multifamily properties that, by definition, have more than one unit per property.

To fill the information gap, NAHB has been a strong advocate of something like the new Rental Housing Finance Survey (RHFS).   One advantage of the RHFS is that it goes to property owners and mangagers, and therefore can collect information about items like upkeep and financing that tenants of rental apartments typically don’t know.  But one of the reasons NAHB has long been advocating a property-level survey like this is simply to get very basic information on counts of buildings and properties.

According to the RHFS, the lion’s share of the 2.25 million multifamily rental properties in the U.S.—1.64 million—consist of a single apartment building.  There are, of course, properties with more than one building—nearly 100,000 properties have 20 or more.  On average, multifamily rental properties turn out to have 2.5 buildings, so the total number of multifamily rental buildings in the U.S. works out to 5.6 million.

A lot of the 2.25 million properties would be classified as small by most standards.  Over 1.4 million of them are valued by their owners at less than $500,000.  About 850,000 are even valued at less than $200,000.  Although a little over 6 percent of owners failed to report the current market value of their properties to the RHFS, that still leaves more than 2.1 million multifamily properties, and they have a total market value that adds up to roughly $3.8 trillion.

For readers who like more infomation, the Census Bureau has a number of additional statistics in tables posted on its RHFS website.  NAHB is also in the process of analyzing the new multifmaily rental data and will feature it in upcoming blogs.

Multifamily Starts: A Little Stronger than We Thought Last Month

For February of 2013, the Census Bureau’s preliminary estimate for starts in buildings with five or more apartments came in at 285,000  (at a seasonally adjusted annual rate).  In the Census construction report, this shows up as less than a 1 percent increase from January, but the January number itself was revised upward by nearly 9 percent—so 285,000 is  actually 9.6 percent higher than the preliminary starts rate for January originally reported in last month’s blog.

Although well below the anomalous spike of December, the February 2013 five-plus starts rate appears strong compared to any other month from recent history (the same general pattern seen in total housing starts).

Another interesting statistic in the February 2013 construction report was the (seasonally adjusted annual) rate at which new five-plus permits were issued during the month.  The new five-plus permit rate increased  7.5 percent to 316,000—which at first may not seem terribly dramatic, but is up nearly 55 percent year-over-year and the highest the five-plus permit rate has been since July of 2008.

The number of unused previously issued five-plus permits remaining in the pipeline at the end of the month also remained relatively healthy at 47,700 (not seasonally adjusted)—up 2.7 percent from January and 46.4 percent year-over-year.  Overall, the permit numbers have been strong enough to support a five-plus starts rate as high as February’s 285,000 over the next couple of months.

Multifamily Production Index Shows More Improvement

In the fourth quarter of 2012, NAHB’s Multifamily Production Index (MPI) increased two points to 54, marking the fourth straight quarter the index has been over the key break-even point of 50.  The MPI is an overall measure of builder and developer sentiment on current conditions in the apartment and condominium market.

The MPI is built from three components, capturing industry sentiment on production of low-rent, market-rate rental, and “for-sale” units (or condominiums). Each component lies on a scale of 0 to 100, where a number over 50 means more builders say conditions are improving than say they are getting worse.  The MPI typically functions as a leading indicator, turning one to three quarters ahead of the official series on multifamily starts.  After the latest downturn, for example, the zigzagging upward trend in the MPI began about three quarters before a similar pattern emerged in the starts series.

Although the MPI’s market-rate rental component dropped four points in the fourth quarter, it still remains well above the break-even point at 65.  Moreover, the market-rate rental component has now been above 60 for six consecutive quarters—the longest sustained period above 60 since NAHB launched its multifamily survey in 2003.

Meanwhile, the MPI’s condo component reached its highest point since the fourth quarter of 2005, increasing two points to 46, while the low-rent component increased seven points to 53.

The MPI is one of two major sentiment indices produced from NAHB’s quarterly multifamily survey.  The other is the  Multifamily Vacancy Index (MVI), which recently has shown ongoing strength in demand for existing apartments and is one of the reasons NAHB expects multifamily production to remain fairly strong.

However, builders and developers are starting to encounter constraints to their ability to keep up with increased demand—particularly emerging shortages and rising costs of building materials, labor and land.

A complete history of the MPI and each of its components is available on NAHB’s web page for the multifamily market survey.

Multifamily Vacancy Index Stays in the Low 30s

In the fourth quarter of 2012, NAHB’s Multifamily Vacancy Index (MVI), which measures property owners’ confidence in the strength of the market for existing rental apartments, improved slightly—falling two points to 31. Because the MVI captures the industry’s sentiment about apartment vacancies, lower numbers are better.

After peaking at 70 in the second quarter of 2009, the MVI declined consistently through 2010 and has remained at a fairly low level in the low to mid 30s throughout 2011 and 2012.  So, in this respect, the fourth quarter gave us more of the same.

Historically, the MVI has tended to foreshadow the Census Bureau’s measure of rental vacancies in buildings with 5 or more apartments.  When conditions are changing, the MVI generally turns at least one quarter before the 5+ vacancy rate.

Recently, both measures have been edging downward.  At 31, the MVI is currently as low as it’s been since NAHB initiated the survey in 2003, while the 5+ vacancy rate has dipped below 9 for the first time since 2000.

The MVI is one of two main sentiment indices produced from NAHB’s quarterly survey of multifamily developers, property owners, and managers; the other being the Multifamily Production Index (MPI). For more information, including a complete history for both indices and all of their components, see NAHB’s web page for the MPI & MVI.

Multifamily Production Falls Back to November Rate

The Census Bureau’s preliminary estimate of starts in buildings with five or more apartments for January came in at 260,000 (at a seasonally adjusted  annual rate).  As predicted in last month’s post, a rate well in excess of 300,000 proved too high to sustain.  In fact, the five-plus starts rate for December was revised upward, from 330,000 to 352,000—so the preliminary estimate for January shows up as a 26 percent decline, dropping the five-plus starts rate back to where it was in November.  Month to month fluctuations on this order of magnitude are not unusual in the multifamily construction series, however.

On a year-over-year basis, five-plus starts were still up 35 percent, reflecting the generally upward trend in multifamily production that has prevailed since the end of 2010.

Meanwhile, the rate at which new five-plus permits were issued remained relatively stable in January, increasing 1 percent to 311,000—the third straight month the five-plus permit rate has been slightly above 300,000.  The rate of new five-plus permits usually runs a little above the rate of new five-plus starts (partly because of the Census Bureau’s tendency to reclassify some units considered multifamily by local permitting offices as single-family attached).  Nevertheless, the five-plus permit numbers in recent construction reports have been strong enough to suggest that a five-plus starts rate at slightly above 260,000 is sustainable over the short run.

Confidence in New 55+ Home Sales Posts Another Year-Over-Year Gain

Builder confidence in the 55+ housing market improved the fourth quarter of 2012 compared to the same period a year ago, according to NAHB’s  latest 55+ Housing Market Indices (55+ HMIs).

There are separate 55+ HMIs for two segments of the 55+ housing market: single-family homes and multifamily condominiums.  Each 55+ HMI is based on a survey that asks if market conditions are good, fair or poor. An index number below 50 indicates that more builders view conditions as poor than good.

Although both 55+ HMIs remain below 50, both have improved significantly from a year ago.  The single-family index increased 10 points to a level of 28, the fifth consecutive quarter of year over year improvements.  Although multifamily condos remain the weakest segment of the 55+ housing market, the 55+HMI for condos also showed a substantial year-over-year increase, of six points to 19.

Meanwhile, the 55+ multifamily rental indices, which had already recovered substantially in 2011, remained relatively stable in the fourth quarter, although there was a slight pullback due to uncertainty about the low-income housing tax credit—the financial driver behind a significant portion of apartments built for this segment of the market. Present production dropped three points to 31, expected future production dipped one point to 34, current demand for existing units dropped four points to 38 and expected future demand fell five points to 39.

Like the overall housing market, the 55+ segment of the market is undergoing a slow but steady recovery, but there are some obstacles to a continued and stronger recovery.  While problems with tight credit conditions for buyers and obtaining accurate appraisals are still lingering, new problems like spot shortages and rising costs for labor, materials and lots are beginning to emerge.

For more information about NAHB’s 55+ HMI survey see www.nahb.org/55HMI

Positive Run Continues for Residential Construction Spending

Private residential construction spending jumped 2.2% on a month-to-month basis during December 2012. The initial estimate of a 0.4% gain for November was moved up slightly to a 0.6% increase, but the October number was pushed appreciably higher from 1.3% to 3.2%. Spending has registered nine uninterrupted months of growth, as well as 16 of the last 17 months showing expansion. The nominal dollar level of spending has now reached its highest point since late 2008 and the average from the last three months is 32% above the cyclical low.

Spending on new single-family homes decelerated to its slowest pace of month-to-month growth since the first quarter of 2012, rising 0.8% versus November. On a year-over-year basis, the nominal value of spending on new homes has risen over 28%. In addition, since bottoming out around the midway point of 2009, construction spending has surged 59%. The current NAHB forecast calls for single-family housing starts to expand for the entirety of the outlook period, but a slower pace of growth is anticipated during the first quarter of this year. They are expected to re-accelerate over the remainder of 2013, and thus we anticipate a similar pattern will likely occur for construction spending.

 

Construction spending on new multifamily projects jumped 6.2% during December 2012. Moreover, the initial estimate for November was revised higher from 0.5% to 1.8%, indicating spending activity finished the year strong. Of the three main categories of residential construction, multifamily has experienced the strongest rebound from its cyclical trough. Gains in spending have occurred in each of the last 15 months, with the latest month available representing the second largest percentage increase over this time period. On a year-over-year basis, the level of spending has skyrocketed more than 57% and has gained 97% from the bottom in August 2010.

Remodeling activity improved in December as spending climbed 2.9% from the prior month. Preliminary estimates for October and November were also revised higher, significantly higher in the case of October with a 1.9% decline turning into a 2.3% gain. The 3-month moving average points to a solid upward trend in home improvement spending and closed out 2012 at its highest nominal dollar value since September 2007. NAHB’s Remodeling Market Index (RMI) has offered a similar judgment on recent home improvement activity as the current and future market indicators have achieved their best readings since the first quarter of 2004.