GDP Growth, First Quarter, Third Estimate – Let’s Move On

June 25, 2014

The Bureau of Economic Analysis (BEA) released the third estimate of real GDP growth for the first quarter of 2014. Real GDP contracted at a 2.9% seasonally adjusted annual rate, down from +0.1% growth in the first (advance) estimate, and -1.0% in the second estimate.

The downward revision to the third estimate was concentrated in personal consumption expenditures (PCE) and trade. PCE grew at a 1.0% annual rate rather than the 3.1% in the second estimate, shaving 1.4 percentage points from growth. Exports contracted faster and imports expanded faster than previously estimated, reducing growth by an additional 0.5 percentage points in the third estimate.

Early indications are that the second quarter numbers will be much stronger. Let’s move on.

 blog gdp 2014_06

Eye on the Economy: Builder Confidence and Home Sales on the Rise

June 25, 2014

Housing news turned positive this week as spring gave way to summer. Future data will confirm whether the recent turn in momentum reflects a return to the improving trend that was in place before the end of 2013, but early signs are encouraging.

New single-family home sales reached their highest pace in six years in May. According to estimates from the Census Bureau and HUD, new home sales were at a seasonally adjusted annual rate of 504,000 in May, a gain of 18.6% over a slightly downwardly revised April (425,000). The May 2014 rate of sales is the highest since May 2008 and is a significant increase from the winter low point for sales in March (410,000).

The May pace of sales was certainly an improvement over the soft patch experienced from February through April. The most recent gains are likely due to a payback for weather-related declines during the winter, so future months will indicate whether a better trend has taken hold. But encouraging signs like better jobs numbers are consistent with this outcome.

Another improved indicator is the NAHB/Wells Fargo Housing Market Index (HMI), which rose four points in June to 49. This is just shy of the 50 mark, indicating at least as much optimism as pessimism among single-family home builders. The index dipped 10 points to 46 in February from a sustained above-50 mark for eight months and remained near there for four months. The June gains were experienced in all the components of the HMI: current sales, expected sales and traffic.

Alongside the positive new home sales report was the May existing home sales measure. The National Association of Realtors reported that existing home sales were up 4.9% from April to May. While still 5% lower year over year, the 4.89 million seasonally adjusted annual rate confirmed a turn in the decline that had been in place since the middle of 2013. Year-over-year declines in existing home sales, which distinguish this market from the growing new home market, are likely due to recent drops in distressed and investor purchases, as well as the 2014 expiration of a tax rule connected to short sales.

The one negative housing report in recent weeks was construction starts. The Census Bureau and HUD estimated that total housing starts declined 6.5% in May. Single-family starts were down 5.9%, while multifamily construction in properties with five or more units was down a larger 8.3%. The declines were a result, in part, to April’s numbers, where were among the highest since the end of the recession. On a year-over-year basis, the May pace of single-family construction was 4.7% higher and 19.2% higher for five-plus multifamily building.

Home price appreciation appears to be slowing after the strong gains of the past year or two, propelled by increases in areas that experienced some of the largest price declines during the recession. House prices grew by 10.8% between April 2013 and 2014, according to the S&P/Case-Shiller 20-City Composite Home Price Index, which was less than the 12-month growth rate of 12.4% seen in March. Similarly, the Federal Housing Finance Agency’s Purchase-Only Index rose 6% compared to 6.4% in March. Both indices show that annual house appreciation slowed from December to April and suggest the housing market may be returning to its long-run growth trend.

Consistent with the weak housing reports from the winter and early spring, the final estimate of first quarter GDP indicated that the economy contracted as a 2.9% rate, the worst quarter in five years. Besides disappointing investment numbers, personal consumption growth was anemic and exports displayed particular weakness. Part of the poor performance was weather related and other one-off factors. Second quarter GDP growth should reflect some payback for deferred economic activity and post a growth rate higher than 3%.

Common measures of general prices and inflation, moved in opposite directions in May. Producer prices declined 0.2%, after notable increases of 0.5% and 0.6% for March and April respectively. Among building materials, softwood lumber prices rose 1% in May from April. Prices are 28% above the average level over 2011. OSB prices have flattened out in 2014, declining 0.7% in May. Prices are 23% above the average level over 2011. Gypsum prices declined 0.7% in May, 41% above the average 2011 mark.

In contrast, consumer prices in May experienced the largest monthly increase since February 2013, rising 0.4% on a seasonally adjusted month-over-month basis and 2.1% year over year. The increase was broad, affecting many items found in the consumer basket such as energy, food and shelter. The NAHB constructed real rent index increased nominally in May. Over the past year, real rental prices rose by 1.1%.

The Federal Open Market Committee, the Federal Reserve’s monetary policy committee, announced this week that the pace of asset purchases (quantitative easing) will be reduced by another $10 billion to $35 billion per month. The federal funds rate will continue to remain at the current near zero level for a “considerable time” after asset purchases have concluded.

In analysis news, economists at NAHB mapped the change in county-level housing permit activity for 2013. Overall, 1,807 counties and county equivalents saw an increase in the number of single family permits issued over the prior year while 858 saw a decrease. According to data from Hanley-Wood, there was some movement among the rankings of the top ten publicly traded home builders in 2013, although D.R. Horton maintained the top spot with more than 25,000 closings.

Additionally, NAHB economists discussed land banking and new mortgage application data for new homes. Lastly, data for the first quarter of 2014 revealed that property taxes, the top revenue source for state and local government, made up 40.3% of receipts from major sources over the last four quarters – an important reminder of the role real estate plays in local economies.

State and Local Tax Receipts Continue to Improve

June 25, 2014

Property taxes are the largest single source of state and local tax receipts, according to NAHB tabulations of the Census Bureau’s quarterly tax data. At 40.3%, property taxes represent a significantly larger share than the next largest sources: individual income taxes (28.1%) and sales taxes (27.2%). From the second quarter of 2013 through the end of the first quarter of 2014, approximately $494 billion in taxes were paid by property owners. This was a small increase from the previous trailing four-quarter $492 billion.


Overall, state and local revenue in the first quarter of 2014 increased $7 billion over the first quarter of 2013. There were increases in all four of the major revenue sources; property tax, state and local individual income tax, corporate income tax, and sales tax.

State and local government individual income and sales tax revenue continue to experience the largest increases. From the second quarter of 2013 through the end of the first quarter of 2014, approximately $345 billion in individual income taxes were paid. This represents an increase in individual income tax revenue of nearly $20 billion or 6% from the one year ago. The increase in sales tax revenue for the same period was approximately $16 billion or 5%.

Although house prices experienced healthy increases over the last two years, one should not expect property tax collections to increase significantly. Instead, lagging assessments and the ability of local jurisdiction to make annual adjustments should lead to only modest increases. The S&P/Case-Shiller House Price Index – National Index grew by 2.5% on a not seasonally adjusted basis in the fourth quarter and 10.3% last year.


Property tax collections are not as prone to cyclical fluctuations as sales or income tax collections. Annual adjustments to tax rates and lagging property assessments smooth collections across business cycles. The relatively low volatility is reflected in steadily increasing nominal property tax collections.


* Data footnote: Census data for property tax collections include taxes paid for all real estate assets (as well as personal property), including owner-occupied homes, rental housing, commercial real estate, and agriculture. However, housing’s share is by far the largest when considering the stock of both owner-occupied and rental housing units.


Catch Me If You Can

June 24, 2014

House prices grew by 10.8% between April 2013 and 2014, according to the S&P/Case-Shiller 20-City Composite Home Price Index, which was less than the 12-month growth rate of 12.4% seen in March. Similarly, the Federal Housing Finance Agency’s Purchase-Only Index rose 6.0% compared to 6.4% in March. On a seasonally-adjusted monthly basis the 20-City Composite index increased by 0.2%, while the Purchase-Only index was virtually unchanged. Both indices show that annual house appreciation has slowed over the past five consecutive months ending in April and suggest the housing market may be returning to its long-run trend of growth.

Among the 20 metro areas, Las Vegas experienced the largest annual gains (18.8%), followed by San Francisco (18.2%) and San Diego (15.3%). Meanwhile, cities experiencing the smallest increases include Cleveland (2.7%), Charlotte (4.4%) and New York City (5.4%). In addition, some areas are exhibiting large price gains for lower-priced homes as the chart below demonstrates. In April, Atlanta saw a 35.8% annual increase in homes under $153,000 and San Francisco saw homes under $496,200 rise 30.6%. In contrast, New York City saw an increase of 4.8% and Boston a 9.7% gain.


The growth rates may be inflated, however, due to previously distressed homes being resold. For instance, CoreLogic provides a comparable house price index to the S&P/Case Shiller series and also has an additional one that excludes distressed homes. Foreclosed properties generally sell for a discount, currently at around 18 percent in April, according the National Association of Realtors, which suggests they would weigh down the overall market index. Yet since 2012, it appears distressed sales have added to the market’s growth, as seen the figure below.


What’s occurring is during the housing crisis, many homes were foreclosed upon. In fact, the number of homes in foreclosure eventually peaked in the first quarter of 2010 at over two million, based on data from the Mortgage Bankers Association. These foreclosed homes were bought at deep discounts, ranging up to 40 percent and even higher in certain areas by 2009, as the chart above indicates when distressed sales are included. However, once the homes were repaired and later sold again either in the near-term for profit or when the new homeowners decided to move, the sales price was dramatically higher than the original price, owing to those heavy discounts. And as house prices recovered in general, those who waited longer to sell saw even larger increases in their sales price relative to the original purchase price. For instance, over the 12-months ending in April of this year, the inclusion of distressed properties added over two percentage points to overall growth in the price index, but the actual sales price for those troubled homes was likely at or below those of comparable non-distressed homes. So, this is more of a catch up to the race than a grand spree in house prices.

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

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

New Home Sales Jump in May

June 24, 2014

New single-family home sales reached the highest pace in six years in May.

According to estimates from the Census Bureau and the Department of Housing and Urban Development, new home sales were at a seasonally adjusted annual rate of 504,000 in May, a gain of 18.6% over a slightly downwardly revised April (425,000). The May 2014 rate of sales is the highest since May of 2008 and is a significant increase from the winter low point for sales in March (410,000).

May new home sales

The May estimates represent a return to the improving trend that has characterized the recent recovery for the single-family sector. NAHB is forecasting that single-family new home sales will total 515,000 in 2014, a nearly 20% year-over-year gain.

New home inventories were flat in May, holding at the 189,000 revised level for April. Months-supply fell to 4.5 given the increase in the sales rate. Total inventory levels have remained in the 183,000 to 190,000 range since September 2013.

Regionally, the pace of sales in the South increased by 14% for the month, while the West was up 34%. Gains in the South may reflect payback for prior weather-related declines, while gains in the West could be due to improving job market and economic trends. The Midwest was effectively unchanged (1.4% increase) from April but has now experienced two solid months after weaker sales figures during the wintry first quarter. Sales in the Northeast were up 54.5%. It is important to keep in mind, however, that the regional numbers have large confidence intervals around the estimates.

sales by constr stage

The graph above presents monthly sales totals by stage of construction. Over the last year and a half, there have been gains in sales not-started-construction and sales currently under construction. In May, there was a 50% monthly increase in sales of homes not yet begun construction, rising from 12,000 for the month to 18,000.

Existing Sales Rebound

June 23, 2014

Existing home sales rebounded from the winter quarter with the highest monthly increase in almost three years, boosting prospects for homebuilders. Existing home sales increased 4.9% in May, although that rally still left existing sales 5.0% below the same period a year ago. The National Association of Realtors (NAR) reported May 2014 total existing home sales at a seasonally adjusted rate of 4.89 million units combined for single-family homes, townhomes, condominiums and co-ops, up from 4.66 million units in April.
Existing Home Sales May 2014

All four regions increased from the previous month, ranging from an 8.7% increase in the Midwest to 0.9% in the West. All four regions were down from the same period a year ago, ranging from a 0.5% decrease in the South to an 11.4% decrease in the West. Seasonally adjusted condominium and co-op sales remained unchanged both from last month and the same period a year ago.

The bad news is that the first-time buyer share dropped to only 27%, down from 29% in April and May 2013. The historical average first-time buyer share is about 40%. Tight lending conditions continue to buffet first-time buyers despite reports of easing standards, and a full recovery awaits their return.

Total housing inventory increased 2.2% in May to 2.29 million existing homes. At the current sales rate, the May 2014 inventory represents a 5.6-month supply, down from a 5.7-month supply in April and down from a 6.0-month supply a year ago. NAR also reported that the April median time on market for all homes was 47 days, down from 48 days in April but up from 41 days during the same month a year ago. NAR reported that 41% of homes sold in May were on the market less than a month, unchanged from last month.

There were further signs that the market is being embraced by home buyers. The share of distressed sales dropped to 11% in May compared to 18% in May 2013. Distressed sales are defined as foreclosures and short sales sold at deep discounts. All cash sales comprised 32% of May transactions, unchanged from April and down from 33% during the same period a year ago. Individual investors purchased a 16% share in May, down from 18% in April and 18% during the same period a year ago. Some 68% of May investors paid cash, down from 71% last month.

The May median sales price for existing homes of all types increased to $213,400 from $201,500 last month and is 5.1% above the May 2013 level. The median condominium/co-op price increased again to $212,300 in May, up from $205,500 in April, and is up 6.6% from May 2013.

The Pending Home Sales Index increased 3.2% in March and posted another slight increase in April. Therefore, May existing home sales were expected to increase from the very slow start at the beginning of the year. Higher existing home prices are making homes less appealing for investors. The increased inventory of existing homes coupled with increased new home construction will expand choices for first-time buyers, the missing link in this housing recovery.

This existing home sales report boosts prospects for homebuilders. May new home sales will be reported tomorrow.

Churning Among Top Ten Builders

June 20, 2014

The 2013 ranking and composition of the top ten publicly-traded builders changed as Hanley-Wood released its BUILDER 100 of 2013 builder closings. The previously stable order changed the ranking of the second and third largest builders, and one new entry broke through in 2013.

2013 BUILDER 100

We estimated the 2013 big builder share earlier in the year based on SEC 10K filings. BUILDER reported the 2013 builder closings and reconciled the differences for firms whose fiscal years do not align with the calendar year. Taylor Morrison broke into the 2013 top ten, and the 2013 top ten captured a 25.4% share of the new home sales market. Lennar jumped to number two ahead of Pulte. MDC dropped a notch out of the top ten, and Ryland moved ahead of Hovnanian to six as Beazer fell to ten.

During the Great Recession, there was concern among small builders that the large national builders would capture a much larger share of the homebuilding industry, primarily through acquisitions of firms and land in newly expanding markets. Large builders have used their access to the credit markets to acquire land and achieve economies of scale in building material purchases. Large builders continue to enter new markets and expand in growing markets, with the very recent example of D.R. Horton acquiring a top Atlanta builder.

However, as throughout the industry, firms move ahead at different speeds with strategies fit to meet their business plans. The result is that the top ten share has changed very little over the past four years. While that share fluctuated within a narrow range, the composition of the top ten changed in 2013.

Land Banking

June 19, 2014

Property tax delinquency increased dramatically during the great recession in many cities. In 2011, for example, the percentage of property taxes that went unpaid by the end of the year (same-year delinquency rate) was 20.2% in Cleveland, 20.1% in Detroit, 9.9% in St. Louis, and 9.0% in Philadelphia. By comparison, the 2006 same-year delinquency rate was just 7.6% in Detroit.

Yet tax foreclosure is problematic for local governments. Tax foreclosure is the process whereby local governments force the collection of delinquent property taxes through the transfer of ownership.

Tax foreclosure policies vary by state and sometimes within a state. Lax tax foreclosure policies that permit lengthy delinquency such as Philadelphia are particularly problematic. In a recent study by Pew Charitable Trusts, the author found that the city of Philadelphia was owed $515.4 million in delinquent taxes on 102,789 properties. It was estimated that $360 million would never be collected.

The problem is not unique to Philadelphia. Whenever delinquent property balances exceed the market value of the property, the property is financially abandoned. At that point, it is highly unlikely that the delinquent property owner will pay the taxes owed or that a second party would be willing to purchase the property and repay the outstanding tax balance.

Land banks have developed as a policy tool local governments can use to deal with vacant and abandoned properties, such as tax foreclosed properties. The Center for Community Progress, a nonprofit organization that helps communities deal with blighted and vacant property, estimates that there are approximately 120 land bank programs in 24 states. The number has grown dramatically since 2005, when there were only a handful of land banking programs nationwide. The most recent additions include Missouri, Nebraska, New York, and Pennsylvania.

Land banks allow local governments to acquire and develop vacant and abandon properties. The goal of a land bank is to return problem properties back to productive use. Their capacity to do that depends on state and local statute, land bank governance, inventory, and market conditions.

For example, since being formed in 2004, the Genesee County (Michigan) Land Bank, has taken responsibility for more than 10,000 properties. Of these properties, more than 1,000 abandoned houses were demolished, more than 1,000 were conveyed as “side-lots” to next-door homeowners, and hundreds of homes were rehabilitated.

Disposition policies for rehabilitated properties vary by location. The primary focus of the Louisville and Jefferson County (Kentucky) Land Bank is returning properties to residential use. Other land banks give priority to developers interested in providing low-income housing. The Atlanta Land Bank gives first priority to non-profit entities that rehabilitate properties for low-income housing.

The most comprehensive examination of Land Banks and Land Banking to date was conducted by Frank S. Alexander at Emory School of Law. Although the study does not evaluate the programs currently in use, the study does discuss the challenges and opportunities posed by land banks. Challenges include lack of awareness, disputed titles, and inadequate code enforcement. Opportunities include removal of blighted properties, community involvement, and new development.

Land banks and builders share a common goal of returning property to productive use. Land banks provide builders with a source of properties that were previously undesirable due to disputed titles or delinquent taxes. In turn, builders can provide the labor, capital, and knowledge necessary to successfully redevelop the properties. As the use of land banks grows, builders are encouraged to reach out to local government officials to help design and implement a more effective program.

Federal Open Market Committee Meeting Concludes – Meeting Expectations

June 18, 2014

The Federal Open Market Committee (FOMC) concluded its June meeting. The standard summary statement, Chairwoman Yellen’s press conference, and the economic projections of the meeting participants contained no real surprises.

The statement expressed the committee’s confidence that economic activity is rebounding and the labor market is improving, although the unemployment rate remains elevated. The pace of asset purchases will be reduced by another $10 billion increment, to $35 billion per month, based on this continuing progress, with similar future reductions predicated on the economic recovery meeting expectations. The federal funds rate will remain at the current level for a “considerable time” after the end of asset purchases.

The economic projections of GDP growth in 2014 were reduced sharply compared to the projections at the March meeting, but growth was maintained in 2015 and 2016. Chairwoman Yellen explained at her press conference that this was basically incorporating the contraction of the first quarter rather than a loss of confidence in future growth. The projections of the unemployment rate were modestly lower while inflation projections were largely unchanged.

At the press conference Chairwoman Yellen emphasized that the first quarter contraction was based on transitory factors and early indications suggest that the economy is rebounding in the second quarter but underutilization in the labor market continues to be an issue of concern. Overall the committee remains confident enough in the outlook to continue reducing the asset purchase program.

Chairwoman Yellen also used the press conference to stress that the Fed’s policy stance has been and would continue to be data driven. The pace of asset purchase reductions and the timing and duration of increases to the federal funds rate are conditional on continuing improvement in the economic recovery. Neither of these policy tools is on a preset course.

Overall, the results of the meeting met expectations.


Consumer Prices Increase Broadly in May

June 17, 2014

Consumer prices in May experienced the largest monthly increase since February 2013. According to data released by the Bureau of Labor Statistics (BLS), consumer prices increased 0.4% on a seasonally adjusted month-over-month basis. Year-over-year, before seasonal adjustments, prices on expenditures made by urban consumers increased 2.1%. The increase was broad, affecting many items found in the consumer basket such as energy, food, and shelter.

Over the past twelve months, the shelter index increased 2.9% before seasonal adjustments. The shelter index rose 0.3% month-over-month in May after increasing 0.2% month-over-month in April.

NAHB constructs a real 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 and provides insight into the supply and demand conditions for rental housing, after controlling for overall inflation. When rents are rising faster (slower) than general inflation the real rent index rises (declines). However, given that the price index for overall inflation has been reflecting the recent volatility in energy prices using the core index, which excludes food and energy prices, may provide a more reliable comparison between rents and overall inflation.

The NAHB constructed real rent index increased nominally in May. Over the past year, real rental prices rose by 1.1%.


With respect to other consumer prices, the food index continued its ascent, rising by 0.5% in May on a seasonally adjusted basis. Over the past twelve months the food index increased by 2.5% before seasonal adjustments. The index for meats, poultry, fish, and eggs, a component of the food index, experienced an increase of 1.4% in May after a 1.5% increase in April.

In May, the energy index increased by 0.9% before seasonal adjustments. The increase was driven largely by a monthly increase of 2.3% in the electricity index. Over the past twelve months the energy index increased by 3.3% before seasonal adjustments. The gasoline index, a component of the energy price index, also increased in May, by 0.7% for the month.

The core CPI rose by 0.3% on a seasonally adjusted month-over-month basis and 2.0% for the year before seasonal adjustments. The Core CPI excludes more volatile food and energy prices.