The housing market and the broader economy shivered at the end of 2013 as weather-related factors held consumers back and generated production delays. These impacts should prove temporary and our forecast remains positive for housing and home building for the year to come. Indeed, reports from January suggest some improvement over disappointing December data.
New home sales in January, as estimated by the Census Bureau and HUD, were up 9.6% over the December pace, coming in at 468,000 seasonally adjusted annualized rate. This pace is 2.2% higher than the January 2013 measure. The month-supply measure of inventory fell to 4.7, with the count of new homes for sales standing at 184,000. Only 45,000 of those were completed, ready-to-occupy new homes.
The National Association of Realtors (NAR) Pending Home Sales Index (PHSI), a measure of existing home sales that is determined on a contract basis similar to new home sales, was up marginally January (0.1%) after a 5.8% decline in December. Despite the January reading, the pace of existing home sales has slowed significantly, with the most recent PHSI down 9% year-over-year. The NAR measure for existing home sales was down 5.1% in January and was 5.1% lower compared to a year prior.
The combination of weaker starts and sales was due to some weather delays but also reflects some slackening of housing demand at the start of 2014. Nonetheless, the overall pace of residential construction remains positive. According to the Census, private residential construction spending – measured on a put-in-place basis – was up 1.1% from December and 14.6% from one year ago. The January reading marked the third consecutive month of increase.
The improvements in housing over the last two years are also apparent in the balance sheets of home builders. According to NAHB industry surveys, average builder net profit margins (4.9%) in 2012 were higher than prior readings in 2010 (0.5%) and 2008 (-3%) but still lower than 2006 (7.7%).
Current sector headwinds include continued tight credit access for building. NAHB survey data indicates tight but improving acquisition, development and construction (AD&C) loan conditions. FDIC data reveal multiple quarters of expansion of the outstanding stock of AD&C loans, but a lending gap persists between the demand for building and available credit.
Rising building material prices represent another challenge for builders. Data from the Bureau of Labor Statistics Producer Price Index showed a significant increase from December to January in gypsum prices (7.4%). Softwood lumber prices moved up modestly in January after softening at the end of 2013. OSB prices firmed slightly after steep declines from early 2013 peaks.
Despite some declines in housing affordability due to rising interest rates, conditions remain positive. According to the NAHB/Wells Fargo Housing Opportunity Index, 64.7% of new and existing homes sold between the beginning of October and the end of December of 2013 were affordable to families earning the U.S. median income of $64,400. This is virtually the same as the 64.5% of homes sold that were affordable to median-income earners in the third quarter.
Multifamily developers experienced a pullback in market sentiment at the end of 2013. The NAHB Multifamily Production Index (MPI) showed a slight weakening as the index declined four points to 50 in the fourth quarter of 2013. It is, however, the eighth consecutive reading of 50 or above. The index and all its components are scaled so that a number of 50 indicates that the same number of respondents report conditions are improving as report conditions are getting worse.
This quarter’s MPI results are in line with NAHB’s forecast of increased apartment production in 2014 but at a slower pace than last year. The results are also in line with recent downturns in other economic indicators, due to unusually severe weather in parts of the country that disrupted supply chains and affected confidence in several sectors of the economy.
The slowing of the pace of improvement for housing at the end of 2013 was mirrored by changes in overall macroeconomic conditions. The Bureau of Economic Analysis second estimate of real GDP growth for the fourth quarter was revised down to a 2.4% seasonally adjusted annual rate, from 3.2% in the advance estimate and down from the 4.1% in the third quarter.
With respect to consumer confidence, February was a month of mixed results, as the Consumer Sentiment Index increased while the separate Consumer Confidence Index decreased slightly. After a slide in late 2013, both measures have shown resilience in the face of extreme weather and high utility bills.
At the start of the year, NAHB economists published a number of reports concerning the type of housing being built in 2014. For instance, single-family home size increased in 2013, with the impact due to a market tilted more to high-end buyers. Top features in new single-family homes include walk-in closets, low-E windows, laundry rooms and a great room.
The size of typical multifamily units also increased, albeit off of cycle lows set in 2012. Apartment sizes can be expected to increase in the years ahead as the for-sale multifamily sector recovers.
Quarterly data from the end of 2013 indicate that the market share of owner- and contractor-built homes was relatively flat as the overall single-family market expanded. The market share of townhomes was down over the course of 2013 as the first-time home buyer market sagged. However, the share of single-family built-for-rent construction appears to be declining off recent highs as investors pull back. This market remained a niche segment even during cycle highs, peaking just below 6% one year ago.
Finally, in policy news, the chairman of the House Ways and Means Committee recently published a comprehensive tax reform draft bill that would have significant impacts for home buyers and home owners, builders and multifamily developers and property owners. In general, the plan provides for lower tax rates, while trimming or eliminating many existing rules. NAHB will examine the bill in its entirety to help determine possible impacts on housing. While there is no expectation that the bill will move in the House in this election year, the draft will likely serve as a rough draft for future tax policy debates
Posted by Robert Denk 
