Homeownership Rate Inched Lower During the First Quarter

The homeownership rate declined slightly during the first quarter of 2013, falling to a seasonally adjusted reading of 65.2%. This marks the lowest reading since the end of 1995 and a 4.2 percentage point drop versus the peak observed in mid-2004. While the homeownership rate is somewhat lower than its 20-year historical average, the rate has not fallen as low as some analysts anticipated, due in part to a sluggish pace of new household formations. In other words, though the numerator (owner-occupied households) has fallen, still-slow growth in the denominator (total occupied households) has kept the homeownership rate from falling lower.

Across age groups, homeownership rates either remained flat or declined versus the first quarter of 2012. The largest percentage point decline in the homeownership rate occurred within the group of households headed by someone aged between 35 and 44 years (1.3 percentage points), followed by a 0.8 percentage point decline within the 55-64 householder cohort. Each of the householder cohorts have registered declines in the homeownership rate since peaking around the mid-2000s, but the relative degree of contraction across cohorts has been evident.

Householders aged between 35 and 44 years have experienced the largest decline in homeownership rates, falling ten percentage points in the past eight years and reaching an all-time recorded low of 60.1% during the first quarter of 2013. By contrast, the homeownership rate for households headed by someone 65 years or older is currently 1.4 percentage points below its peak and has remained above 80% in all but two quarters since the second half of 2007.

The continuing slide in homeownership rates among the 35 to 44 and under 35 householder age groups are a concern for longer-term housing demand going forward, fluctuations within the 45-54 and 55-64 cohorts will affect the outlook with greater immediacy. Combined, these cohorts are the largest groups of homeowners and represent a primary source of “move-up” demand, whereby current owners trade their existing homes for newer and/or larger living spaces. The rate at which householders in these age groups become homeowners (again, in most cases) will be an important part of the housing market’s overall recovery.

The Census Bureau’s quarterly survey also provides estimates of vacancy rates among the stock of owner and rental housing. The rental vacancy rate continued its downward trend during the first quarter of 2013, declining 20 basis points from a year ago to 8.6%. In addition, on a 4-quarter moving average basis, the rental vacancy rate dropped to its lowest reading since the end of 2001. The homeowner vacancy rate dipped 10 basis points compared to the first quarter of 2012 and has held steady at a 4-quarter moving average of 2% in each of the last two quarters. In addition, the homeowner vacancy rate has trended significantly lower since the toughest days of the housing market downturn and remains in range of levels occurring prior to the boom and bust period.

Newly Proposed Rules Could Raise Rates on Consumer Mortgages and Price Out Households

On balance, the residential housing market has been improving in recent months, but the pace of recovery is partly restrained by frictions in the mortgage market.

Against this backdrop, U.S. regulators have proposed comprehensive new regulatory capital requirements for U.S. banking organizations.  These newly proposed rules will serve to implement Basel III, the most recent revision to international bank regulatory capital standards, in the U.S. They also reflect the implementation of certain aspects of the Dodd-Frank Act, excluding the Dodd-Frank Act’s language addressing qualified mortgages and qualified residential mortgages, which was signed into law during the summer of 2010.

The Basel III regulations directly address single family residential loans that are made to consumers and remain on bank balance sheets.  They will also target the loans made to builders of these homes as well as off-balance sheet loans.  The analysis described below focuses on Basel III’s impact on single family residential loans that are made to consumers and remain on bank balance sheets. Future work will assess the impact of newly proposed regulations on builders of single family homes and on the residential mortgages that are moved off of a bank’s balance sheet.

If adopted as proposed by the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, the U.S. version of Basel III would require banks to increase the amount of capital used to fund the single family residential real estate loans that remain on the balance sheet of banks by assigning these loans a greater risk weighting. The risk weight identifies the amount of an asset, in percentage terms, which must be backed by at least 8.0% of capital. In addition, the FDIC would separate single family residential mortgages into two risk categories, category 1 and category 2. The proposed definition of category 1 residential mortgage exposures would generally include traditional, first-lien, prudently underwritten mortgage loans. The proposed definition of category 2 residential mortgage exposures would generally include junior-liens and non-traditional mortgage products.

Raising the risk weight as described above increases the cost of consumer loan funding by both increasing the amount of relatively more expensive capital funding required and lowering the amount of relatively less expensive deposit funding needed. As a result, by raising the total cost of funding, implementation of the newly proposed rules directly addressing on-balance sheet mortgage purchase loans for single family homes could further restrict the supply of mortgage credit. In a competitive market, higher funding costs would produce a matching increase in consumer mortgage rates and price some households out of a real estate market

Recent calculations made by the Mortgage Bankers Association (MBA) demonstrate how these new regulations will likely raise funding costs and mortgage rates for some consumers. According to the MBA, a category 1 mortgage with both a loan-to-value ratio (LTV) of 95.0 and mortgage insurance would cost 2.52% under current capital requirements. However, under the proposed Basel III risk weights, that same mortgage would cost 3.04%, an increase of 0.52 percentage points. The increase in cost, and by extension the mortgage rate faced by these consumers, reflects an increase in risk assigned to these mortgages. Under current capital requirements, these loans are assigned a risk weight of 50.0%, while under Basel III rules, the risk weight would be 100.0%.

Research by NAHB illustrates the effect that higher mortgage rates would have on housing affordability. This research indicates that an increase in mortgage rates from 2.5% to 3.0% would leave more than 2.2 million households priced out of the market for a median-priced new home.  The decline in housing affordability that results from increased consumer mortgage rates reflects an increase in both the monthly mortgage payment and the minimum income needed to purchase a home. NAHB estimates that an increase in mortgage rates from 2.50% to 3.00% would raise monthly mortgage payments by $56 per month and raise the minimum income needed by $2,373 to $51,871.

Residential Construction Spending Surges on New Construction and Remodeling

Private residential construction spending jumped 2.8% on a month-to-month basis during September 2012. The preliminary estimates for July and August were revised higher as well, from previous prints of -0.1% and 0.9% to 1.3% and 1.2%, respectively. Nominal spending activity on private residential construction has expanded in 13 of the last 14 months, putting it nearly 21% above September 2011 and at its highest dollar value since the end of 2008.

The new single-family homes spending category saw growth accelerate in September, gaining 3.9% from the previous month and 26% from last year. Save for a one month downward blip in March 2012, construction spending on new single-family housing has increased solidly since last summer and risen more than 50% since hitting rock bottom during the second quarter of 2009. Data sources such as housing starts and NAHB’s own HMI continue to offer evidence that construction of new single-family homes is on the mend and given that building permits are at their highest level since mid-2008, construction activity is expected to rise for the foreseeable future.

Multifamily construction spending registered its 12^th consecutive month-to-month increase, gaining 1.3% over August 2012. Although the multifamily sector has posted the largest percentage increase in spending activity compared to its cyclical low (73%), the overall trend in spending growth has slowed in each of the last three months. While this might represent a lull, spending should continue to expand over the near term as multifamily starts have exceeded 200,000 units in 8 of the last 9 months and permits for 5+ units surged to a four-year high in September.

Nominal spending on home improvement activity increased 2%, more than recouping the 1.1% month-to-month drop that was reported in August. While remodeling has bounced around for much of the past two years, the level of spending activity has trended appreciably higher over the past few months and is now sitting at a 4-year high. Indeed, NAHB’s Remodeling Market Index (RMI) indicated professional remodelers’ perceptions of current market conditions are at their highest levels since 2005.

Homebuilders Struggle to Add to Payrolls

Starts of new single-family homes have jumped approximately 26% since May 2011 (and more than 46% since bottoming out in early 2009). Unfortunately, the rebound in starts does not appear to have bolstered job creation within the residential construction sector as payrolls have inched 1% higher in the past year. The homebuilding industry as a whole, which includes building contractors and specialty trade contractors, was the hardest hit segment of the construction sector during the economic downturn as employment tumbled by 1.5 million on net (or 42%) from the peak. By comparison, the nonresidential and nonbuilding (e.g. highway and street) saw total payrolls decline by 23% and 18%, respectively.

While payrolls in the overall homebuilding industry have increased only modestly off their trough, there have been some glimmers of improvement within the industry. For example, a rising pace of apartment construction has yielded an appreciable gain in job growth, with employment levels averaging 3.7% higher through the first 4 months of 2012 compared to 2011. Remodeling employment has also held up quite well, increasing 5.7% on the same basis. The traditional reasons for remodeling such as repairing/replacing old components, adding newer amenities and expanding the living space continue to drive activity; however, tax incentives for energy efficient equipment have also moderately bolstered remodeling activity. Falling home prices have impacted the remodeling decision for homeowners. As prices have fallen, many homeowners have lost a sizable share (in some cases all) of the equity in their homes and selling could result in a potential loss. Consequently, households seeking to avoid moving have instead opted to remodel their current home rather than risk a potentially unfavorable outcome from selling.

Note: Data for 2nd chart seasonally adjusted by NAHB

Townhouse Market Share Growing Off Recent Lows

When we last reported on townhouse construction (attached single-family housing), townhouses had reached a decade low in terms of share of the total single-family construction market. We expected this short-run decline to end and the share of construction for townhouses to rise to its historically increasing long-run trend.

Census data from the fourth quarter of 2011 suggests that this is happening. While the nominal rate of construction of attached single-family starts remains low, 13,000 at seasonally adjusted annual rates for the end of 2011, townhouse construction increased in each quarter of last year.

Moreover, the share of single-family starts consisting of townhouses now stands at 20%. This level was last experienced briefly at the end of 2010 (related to total starts declines at the end of the homebuyer tax credit program) and was last exceeded at the end of 2008.

The Great Recession interrupted the increasing long-run trend for townhouse construction. From 1990 to 2007, the share of townhouses constructed grew from 11% to 20% of single-family housing starts, as reported by the Census Bureau. Recent increases in market share suggest a return to this long-run trend.

This path is likely to hold, as increasing numbers of homebuyers seek higher density and inner suburb locations.

Regionally, townhouses retain a larger share in markets in the Northeast. At the beginning of 2008, townhouses were 21% of single-family starts. As of the end of 2011, that share had increased to 27%. A slight increase in concentration has also been seen in the Midwest, where the market share over the same period increased from 11% of single-family starts to 15%.

On the other hand, a small decline was seen in the South, where the share fell from 14% to 12% from the beginning of 2008 to the end of 2011. Nonetheless, as the South remains the largest home building region, the absolute number of townhouses started remains highest in the South at about 6,000 units for the final quarter of 2011 (compared to 2,000 in the West and 3,000 in the Northeast and Midwest respectively).

The largest market share decline was in the West, where the townhouse share fell from 21% at the beginning of 2008 to 11% at the end of 2011.

Private Residential Construction Spending Hits a Two-Year High

The Census Bureau reported that private residential construction spending activity increased 1.8% during January. The preliminary estimate for December was boosted higher to show a 1.5% gain, versus the originally reported increase of 0.8%. After falling in July 2010 to its lowest reading since mid-1995, spending on private residential construction projects has increased in each of the last six months—rising to its highest dollar value since January 2010.

Spending on new single-family home construction climbed 2.5% versus December 2011. In addition, the level of spending activity has increased in each of the last eight months and on a year-over-year basis this category has registered a gain of 5.5%. Although this improvement is modest, the sustained period of growth corroborates the mounting evidence from indicators such as the Wells Fargo/NAHB HMI, new construction starts and home sales that the housing market might have found that elusive recovery. The recent quickening in the pace of new job growth and still-high levels of housing affordability should only bode well for additional growth in single-family construction activity over the near term; however, tight mortgage lending standards and competition from distressed property sales will remain a limiting factor going forward.

Multifamily construction spending ticked higher by 0.7% in January. While month-to-month fluctuations for this category have been more volatile, the level of spending has certainly trended higher during the past year with a 20% increase versus January 2011. Authorized multifamily (5+ units) building permits remained above 200,000 annualized units for the third consecutive month in January 2012, pointing to likely gains in spending over the near term.

The home improvement component of construction spending increased for the sixth consecutive month during January, gaining 1.3% on a month-to-month basis. Overall, remodeling did not endure the same degree of decline in activity when compared to new construction for single-family and multifamily projects. In fact, during 15 of the last 16 months, the level of home improvement spending has exceeded that of new single-family homes. A combination of tax credits for retrofitting homes with energy efficiency equipment and rehabilitation/repair work on distressed properties has likely bolstered demand for home improvement spending.

Beige Book: Modest Growth Continues, but Some Optimism Emerges for Residential Real Estate

The latest issue  of the Federal Reserve’s Beige Book portrayed modest economic growth across all 12 Fed Districts. This particular theme of “modest” or “moderate” growth has been for most districts in each of the past several releases. Consumer spending, outside of some seasonal items hurt by low snowfall totals, remained solid during January and early February. Major winter tourist stops have struggled somewhat as a direct result of subpar snowfall amounts, but tourism activity in general was reported as strong in several areas. Manufacturing remained one of the economy’s strongest performing sectors thanks to expanding auto and tech equipment production, as well as solid gains in capital equipment demand; however, manufacturers in Fed Districts within the Northeast and Midwest noted some concern for export demand stemming from the ongoing fiscal crises in Europe.

Increased multifamily/rental property demand has been a key driver behind most of the reported improvements in real estate activity found in recent Beige Book releases. While participants in several districts continued to emphasize the contribution of multifamily demand, reports from several Fed Districts pointed to some new-found optimism for the single-family market.

Residential real estate activity increased modestly in most Districts. Boston, Cleveland, Richmond, Atlanta, Kansas City, and Dallas reported growth in home sales, while New York noted steady to slightly softer home sales. Philadelphia reported strong residential real estate activity. In contrast, home sales declined in St. Louis and San Francisco noted that home demand persisted at low levels. Contacts’ outlooks on home sales growth were mostly optimistic. Contacts in Boston, Philadelphia, Atlanta, and Dallas expect home sales to rise further.

Moderate Growth in Existing Home Sales in November ….. Benchmark Revisions Released

Existing home sales continued to grow at a moderate rate on a month-to-month basis in November and also improved upon their year ago level. The National Association of Realtors (NAR) reported sales of existing homes, completed transactions of single-family, townhomes, condominiums and co-ops rose 4.0% in November to a seasonally adjusted annual rate of 4.42 million. This follows a modest increase of 1.4% in October, and a decline of 3.0% in September. On a year-over-year basis, existing home sales are 12.2% higher than the 3.94 million unit level in November 2010.

Single-family home sales increased 4.5% to a seasonally adjusted annual rate of 3.95 million units and were 12.9% above the 3.50 million-unit level in November 2010. Condominium and co-op sales remained unchanged at 470,000 units and are 6.8% higher than their year-ago pace of 440,000 units. Gains were observed across all regions, with the Northeast jumping 9.8% to an annual pace of 560,000 units, the Midwest rising 4.3% to 960,000 units, the West up 3.6% to 1.16 million units and the South increasing 2.4% to 1.74 million units.

The housing inventory at the end of November fell 5.8% to 2.58 million existing homes for sale. At the current sales level, this represents a 7.0-months supply, down from 7.7-months supply in October. The investor share of sales inched back up to 19% (from 18% in October) and the share of first-home buyers also ticked higher to 35% (from 34% last month).

Contract failures, which have been elevated in recent months, remained high in November with 33% of NAR members reporting cancellations caused by declined mortgage applications and failures in loan underwriting from the appraised value coming in below the negotiated price. The cancellation rate is considerably higher than a year ago when it was 9%.

 

After months of anticipation, the NAR released the benchmark revisions to the existing home sales data. This follows concerns raised earlier this year that the NAR’s existing home sales data was showing much stronger gains in the second half of 2010 than other comparable data. The NAR subsequently reviewed their sampling and methodology used for the existing home sales survey. The new benchmark estimates are based on the one-year estimates of the American Community Survey (ACS) from the Census Bureau. Previously the decennial Census data was used as the benchmark. The month-to-month changes will continue to be based on the shift in sales of a 40% sample of the Realtors® multiple listing service (MLS) data.

The benchmark revisions extend back to 2007 and result in an average downward adjustment to sales and inventory data of approximately 14%. In volume terms, this equates to a downward adjustment to existing home sales by an average annual rate of almost 720,000 units (between 670,000 and 760,000 units) per month over the past year, with single-family down 600,000 units (580,000 to 640,000) and condominium and co-ops down by around 120,000 (110,000 to 130,000). The largest revision was to November 2009, with a downward shift from the previous estimates of 1.11 million units (930,000 single-family and over 180,000 multifamily).

The NAR note that, “Although rebenchmarking resulted in lower adjustments to several years of home sales data, the month-to-month characterization of market conditions did not change. There are no changes to home prices or month’s supply.”

The NAR attribute the divergence in their sales projections mainly to a decline in for-sale-by-owner (FSBO) properties. These are not reported in the multiple listing service (MLS) data on which their calculations are based, so were included in the model as a fixed market share. The NAR note that “NAR consumer survey data in 2000 showed FSBOs accounted for 16% market share, which fell to a record low 9% in 2010.” They also suggest that some new home sales were inadvertently included in the calculation, as “more builders began marketing new properties through the real estate brokers that weren’t completely filtered from the existing-home data.”

 

Single-Family and Multifamily Starts: Long-Run Trends

Growth in multifamily construction is leading the recent increase in housing starts. And with many analysts focusing on multifamily development, we thought it would be useful to consider the long-run relationship between single-family and multifamily housing starts.

Over the last 40 years, a discernible trend has emerged with respect to the ratio of single-family to multifamily housing starts. Overall, both types of starts have been subject to considerable variation due to business cycle events and/or housing policy changes.

For example, multifamily starts were lifted in the early 1970′s thanks to the promotion of the Section 8 program, but in turn fell dramatically once the Baby Boom generation entered its prime homeownership years. After the Tax Reform Act of 1986, which increased the cost of ownership of multifamily rental properties, multifamily starts again declined.

Despite these ups and downs, a long-term trend is present in the ratio of single-family to multifamily starts. In the graph below, the blue line plots this ratio, with higher values corresponding to larger multiples of single-family starts compared to multifamily starts. The black line plots the long-run linear trend, which clearly has been increasing. Several reasons explain this particular trend.

One such explanation is plotted on the graph: the aging of the United States. The red line below tracks the median age of the U.S. population, which has been growing as the size of the Baby Boomer cohort overwhelms the smaller numbers found within Generations X and Y. An aging population is one factor that will yield a higher homeownership rate over the long-term and because single-family housing units are the preferred structures of homeowners, this demographic effect has increased the ratio of single-family to multifamily starts.

However, an aging population, as measured by the median, does not reveal all the information about the distribution of various age cohorts. So another proposed explanation for the differences in single-family and multifamily construction is the share of the U.S. population in their 20′s. In general, individuals in their 20′s have a higher propensity to rent, as they build savings for a down payment for a home purchase. Therefore, since renters are more likely to live in multifamily apartment buildings, a larger share of the population in their 20′s should mean a higher level of multifamily development. This is graphed as the red line below (the share of the U.S. population above the age of 15 that are in their 20′s).

Putting these possible explanations together, we estimated a simple regression model to determine the specific impacts. The results indicate that a 1 percentage point increase in the share of the population in their 20′s decreases the single-family /multifamily starts ratio by 0.17. As the ratio currently stands at 2.33 (for October 2011), this would represent a more than seven percent decrease.

The regression model results also indicate that an increase of 1 year for the median age of the U.S. would increase the starts ratio in favor of single-family construction by 0.2 or about 9%.

What does this tell us about the future? Without a doubt, the median age of the U.S. will increase, and as aging-in-place becomes more common, the demand for single-family starts will be supported by an aging population. However, as the remainder of the Echo Boom generation (born 1982 to 1995) enters their 20′s, this will in turn support multifamily development. And in the short-run, housing policy changes, such as those that would require or necessitate larger down payments to purchase a home, mean that multifamily rental demand will be strong.

Taken together, this suggests that the ratio of single-family to multifamily starts in home building will fall in the short-run (e.g. over the next two years) before returning to its upward trend over the long-run.

 

Residential Construction Spending Rises in October

Spending on private residential construction projects jumped 3.4% during October. The initial estimate for September was also revised higher, shifting from a gain of 0.2% up to 0.6%. Even with these recent improvements, total private residential construction spending has failed to gain any considerable forward momentum in the past year, with modest growth of only 1.7% rate versus October 2010.

New single-family housing notched its fifth consecutive month-to-month increase in spending with a 0.6% gain in October. In addition, this category registered a 1% improvement over October 2010 levels, representing — the first year-over-year increase in 13 months. This improvement is consistent with recent data pointing to stabilizing house prices and improving homebuilder optimism. However, the single-family housing market continues to struggle, constrained by tight mortgage loan standards, still-high competition from distressed properties and a meager job market recovery.

Multifamily construction spending took a step back for the second consecutive month, posting a 0.8% decline in October after recording a 4.2% drop during September. Nevertheless, multifamily construction spending is 6.7% above its year-ago level and the recent performance of multifamily starts and permits point to additional increases in spending on apartments and other multifamily projects. The home improvement component of construction spending registered its third month-to-month gain in a row, climbing 6.7% in October. From a longer-term perspective, however, activity in the home remodeling market, like the new home market, has shown no appreciable gain over the past two years.

Private nonresidential construction activity jumped 1.3% during October, but the initial September estimate was revised downward from a 0.3% gain to a modest 0.1% decline. Commercial buildings and manufacturing facilities have experienced a steady recovery in spending activity over the course of 2011, but outlays on lodging and office properties continue to hover near cyclical lows. Public-sector construction spending declined 1.8% in September, with the most notable decline occurring in the educational buildings category. Outlays on highway and street projects fell slightly, but on a year-over-year basis spending has declined more than 8%, possibly as a result of budgetary strains at the state and local government level.