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.


Mixed Signals from Housing

June 17, 2014

Census and HUD reported a decline in May housing starts and permits, but the headline numbers do not tell the whole story. First, the driver in the declines in both starts and permits was multifamily apartment construction, which was down to 376,000 starts (-7.6%) and to 372,000 permits (-19.5%). But the three-month moving average for multifamily starts is still the best since February 2006 and the decline is more the result of an extraordinarily high April. The same trend was evident in the multifamily permits, which adjusted downward after scoring a seven year high in April.

Second, single-family permits were up 3.7% to 619,000 (seasonally-adjusted annual rate), the highest since November 2013 and roughly equivalent to the output for all of 2013. The increase in single-family permits was true for all four regions adding support to the continued modest single-family expansion forecasted by NAHB.

The decline in single-family starts is likely a combination of factors including general conservative behavior of the builders that remains after a six year decline in housing production. Builders also continue to find low supplies of developed lots and construction crews. The supply chain difficulties have caused builders to postpone and lengthen construction schedules.

The number of single-family homes under construction has remained relatively steady at 340,000 for the past six months and the number completed just above 600,000 for the same period. The steadiness is evidence of builders continued conservative approach to adding inventory and the builders’ read of the same conservative nature of potential home buyers. As the economy continues to expand, consumer confidence in housing will return and the housing market will continue its modest expansion.


Single-family Homes Under-Construction and Completed

Builders Sentiment Recovers

June 16, 2014

The NAHB/Wells Fargo Housing Market Index for June rose four points to 49, 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 8 months and remained near there for 4 months.

Builders are beginning to see customer confidence return but buyers do remain hesitant until their jobs are more secure and their home equity improves enough to make a down payment on a new home. The 4-month consecutive 200,000+ monthly increase in national job formations has and will continue to help consumes believe the economic recovery for the nation and for them individually will continue.

Builders remain cautious because of the consumers’ caution and because construction crews are difficult to find and keep. Builders will add homes when they are most secure that the home can be completed on time and that a buyer will be ready and able to purchase.

The June recovery was evident in all three components. The current sales index increased 6 points to 54, the expected sales for the next 6 months increase 3 points to 59 from a one point downwardly revised 56, and the traffic index increased 3 points to 36 from a 2-point upwardly revised May of 33. The three-month average regional indexes were mixed with the Northeast and South up one point to 34 and 49 respectively, the Midwest down one point to 46 and the West even at 47.

June HMI

Inflation at the Producer Level in May – Little Changed

June 15, 2014

The Bureau of Labor Statistics (BLS) released the Producer Price Indexes (PPI) for May. Inflation in prices received by producers (prior to sales to consumers) fell 0.2% in May from April. This follows increases of 0.5% and 0.6% in March and April. On an unadjusted basis, prices were up 2.0% over the last 12 months.

Among building materials, softwood lumber prices rose 1.0% in May from April. Prices are currently 28% above the average level over 2011, down from 38% above that level at the recent peak in April 2013.

OSB prices have flattened out in 2014, declining 0.7% in May. Prices are currently 23% above the average level over 2011, down from 107% above that level at the recent peak in March 2013.

Gypsum prices declined 0.7% in May. Prices are currently 41% above the average level over 2011, down from 49% above that level at the recent peak in February 2014.

blog ppi 2014_06


Eye on the Economy: Slow Progress after a Tough Quarter

June 12, 2014

The overall economy slowed at the start of 2014, which took a toll on housing and economic activity. According to the Bureau of Economic of Analysis, real GDP contracted at a 1% seasonally adjusted annual rate during the first quarter. Growth would have been slightly positive absent a decline in business inventory investment. However, this drawdown sets the stage for more stable growth for the rest of 2014.

An example of improved economic news from the second quarter was the May employment report. According to the Bureau of Labor Statistics, payroll employment improved by 217,000 for the month. In fact, the month of May was the first time that total employment (138.365 million) surpassed the prior pre-recession peak. Of course, given population growth, the economy continues to suffer from a lack of jobs, which in turn is holding back housing demand.

Home builders and remodelers have added 106,000 jobs in the last 12 months. The seasonally adjusted construction sector unemployment rate now stands at 8.9%, down from 11.2% a year ago and 22% at the post-recession peak. Labor data from April indicate that the number of open construction sector jobs, which has been elevated for the last two years as construction expanded, has declined over the start of 2014 to a count of 94,000. Nonetheless, the open rate remains higher than any period prior to 2013.

In addition to labor shortages, an important industry headwind remains the lack of building lots. A recent NAHB survey indicates that 59% of builders report low or very low lot supplies in their market. This is the highest rate of “low” responses since the question was first posed in 1997 and is notable given that housing starts remain below normal levels of market production. NAHB surveys continue to suggest relatively tighter conditions for land acquisition and development loans (in contrast to construction loans) used to finance lot development, although recent FDIC data suggests that lending is increasing. For example, over the last four quarters the stock of residential AD&C loans has increased by 12%.

Overall, the housing market continues to improve, but progress is slow going. The NAHB/First American Leading Markets Index remained at .88 for the nation from May to June but was up 6 points from .82 in June 2013. The index measures progress back to and beyond normal economic and housing markets for 351 metropolitan areas. Three of 10 metros did see a monthly increase in their individual indexes and 83% have seen an increase in the past year.

Markets already past their last level of normal are concentrated in energy-producing markets and were more stable. At the other end of the spectrum, markets still only two-thirds of the way back to normal are the industrial Midwest or in the sand states most harmed by the boom and bust. Their slow progress is primarily the result of the slow single-family housing market. Single-family housing permits are only at 43% of their last normal market in the early 2000s.

Recent Federal Reserve data also reflect the progress in housing in recent years. According to the Flow of Funds data, home owner equity has reached a level last experienced in 2007. In the last quarter, home owner equity grew by $795 billion.

Despite low interest rates, housing demand has lagged in 2014. For example, the National Association of Realtors Pending Home Sales Index is down 9% on a year-over-year basis. However, new home sales have fared better than existing home sales in recent months. According to the Federal Housing Finance Agency, the average effective interest rate on new home sales was 4.33% in April.

Construction spending grew in April by a slight 0.1%. Single-family spending was up 1.3%, and multifamily increased 2.7% month over month. The relatively strong performance by the multifamily sector is consistent with the most recent NAHB Multifamily Production Index, which increased three points to 53 during the first quarter. This marks the ninth consecutive quarter of a reading above 50. Readings above a level of 50 indicate that more respondents report improving conditions than don’t. Market absorption data for rental and for-sale multifamily remained strong at the start of 2014 as well.

In analysis news, NAHB economists recently published membership census data investigating the characteristics of builder members. And a new tool was made available that allows access to the latest Census data by geographic areas that are consistent with local home builder association jurisdictions or market area.