Eye on the Economy: Rising Home Prices and Construction

Rising home prices and increasing residential construction have been the clearest signs of the housing rebound that took hold in 2012 and continues into 2013. Data from the start of the summer are consistent with these long-run trends, offering a bright spot in otherwise lackluster economic environment.

Total private residential construction spending increased to a seasonally adjusted annual rate of $328.6 billion in May 2013, the fastest pace of residential construction since October 2008. The reading is 1.2% above the positively revised April estimate and 22% higher over a year ago.

All three components of residential construction spending registered gains. New multifamily construction spending showed the largest increase, rising 2.5% since April and 51.7% since May 2012.  Demand for multifamily remains strong, with real rents up 1.1% over the past year.

Spending on new single-family homes increased to an annual rate of $166.3 billion, a rate unseen since August 2008. On a year-over-year basis, new single-family construction spending increased 33.2%.

Breaking the decline that started in January 2013, home improvement spending also registered gains. Remodeling spending increased to an annual rate of $124.2 billion, 1.9% above the April reading, 7% above the year ago, but still below the spending rate registered during the first quarter of 2012.

The expansion of residential construction spending has benefitted most housing markets across the nation. The July NAHB/First American Improving Markets Index (IMI) dropped slightly to 255 from 263 in June. The number of markets that are improving remains at more than 70% of all metropolitan areas with sufficient data (361). The stabilizing of the IMI for the past six months is a natural outcome of a full national recovery with some local variation in price growth.

For May, the Census Bureau and HUD reported that newly constructed single-family homes sold at a seasonally adjusted annual rate of 476,000 in May. This is a 2.1% increase from the pace in April and represents steady progress from the housing bust lows.

Supporting new home sales are continued low interest rates for new construction. For example, in May the Federal Housing Finance Agency reported the average contract rate for newly built homes was 3.41%, the lowest rate since February.

The inventory of new homes for sale edged up to 161,000 from 157,000 in April, but this level of inventory is still historically low and represents roughly one-third of the units sold, well below the more normal inventory level of half of units sold.

Existing homes sales, as reported by the National Association of Realtors (NAR), were also up in May, a 4.2% monthly increase and up 12.9% from May 2012. The total housing inventory at the end of May increased 3.3% from the previous month to 2.22 million existing homes for sale. At the current sales rate, the May 2013 inventory represents a 5.1-month supply.

In May, all-cash sales were 33% of transactions. Investors accounted for 18% of home sales. First-time buyers accounted for 28% of May 2013 sales. Looking forward, the NAR Pending Home Sales Index was up sharply in May, increasing 6.7% from April.

Rising housing demand and limited inventory have resulted in rising home prices. According to the Federal Housing Finance Agency, U.S. home prices rose by 0.7% on a month-over-month seasonally adjusted basis in April. This is the 15th consecutive monthly increase, with prices up 9.9% since January 2012. Standard and Poor’s reported that its house price index also rose in April, increasing by 12.1% on a year-over-year not seasonally adjusted basis.

Rising home values have in turn helped improve state and local property tax collections. Widely expected to fall in the wake of the housing crisis, during the last four quarters, state and local government property tax collections reached a historic high on a nominal dollar basis. According to the Census, from the second quarter of 2012 through the end of the first quarter of 2013, approximately $478 billion of tax was paid by property owners. This exceeds the previous trailing four-quarter record of $476.5 billion, set at the end of the third quarter of 2010.

Supporting the continued improvements for housing are generally favorable macroeconomic conditions with one exception. Gross domestic product growth for the first quarter was a weak, albeit positive, 1.8%. Other indicators support a more positive outlook: June employment data from the Bureau of Labor Statistics indicated that payrolls grew by 195,000, slightly ahead of the 191,000 average for the past year.

Consumer confidence surveys indicate optimism about current conditions, although with some concerns about future improvements for personal finances. Perhaps most important for housing, the Federal Reserve continues to pursue accommodative monetary policy that helps keep interest rates low.

Recent NAHB surveys have spotlighted other topics of interest for housing. One survey conducted with the National Lumber and Building Material Dealers Association detailed shortages of key building materials. Among builders, the highest incidence of shortages was reported for oriented strand board (OSB), with 22% of builders reporting shortages, followed by gypsum wall board (20%), framing lumber (18%) and plywood (also 18%). 

Except for wall board, the incidence of shortages for these products was higher among the lumber dealers, with 27-28% of dealers reporting shortages of OSB and plywood, and 36% reporting a shortage of framing lumber.

With an eye toward home buyer preferences, NAHB also recently published a study identifying the top features that buyers of upscale homes seek. Among these features are kitchens with a warming drawer and wine cooler, two-story family rooms and outdoor kitchens.

Finally, NAHB analysis recently examined means to identify whether proposed building code changes are economically efficient. The study finds evidence that a change in energy-related codes can be classified as cost effective if it returns at least 10% in energy savings the first year.