*Eye on the Economy is an NAHB newsletter that is published every two weeks and takes a larger view of recent economic and housing policy news.
The jobs market report for May, showing only 69,000 net jobs created, continues to stand out as a sign that labor markets slowed in the spring. Other recent data illustrate that housing faces multiple headwinds as it struggles to maintain a recovery.
For example, the Federal Reserve recently examined the “wealth hit” that American households experienced from 2007-2010. As a result of the housing crisis and the Great Recession itself, households saw a nearly 40% decline in median net worth. Housing price declines were responsible for approximately three-quarters of that decline.
Amid this challenging economic backdrop, housing conditions remain steady. Single-family starts continued their improving trend, increasing 3.2% in May to annual rate of 516,000. This improvement is consistent with the NAHB/Wells Fargo Housing Market Index, which after revisions were made to the April reading, rose one point in June to 29. This marks the highest level of builder confidence in five years.
Nonetheless, local housing and economic conditions continue to vary. For example, the NAHB/First American Improving Markets Index (IMI) fell to a count of 80 in May, primarily due to falling house prices in certain markets. The long-run trend for the IMI has been positive, so future months will indicate whether the May retreat represents a blip or simply a pause in improvement for local housing conditions.
Despite the increases in single-family starts, total housing starts in May were down 4.8% to a rate of 708,000, but this was caused by a more than 20% drop in multifamily apartment construction. Given the nature of this market, the rate of starts for multifamily has a great deal of volatility. Using a three-month moving average, which can smooth out some of the month-to-month noise, multifamily starts properties with five or more units reveals a more accurate picture. The decline in May was large enough to show a drop in the rate of starts, but May still markets the third consecutive month under which the multifamily moving average starts exceeded a 200,000 rate.
NAHB survey data concerning the multifamily market suggest that the drop in May does not reflect a new trend. The Multifamily Vacancy Index is signaling continued decline in multifamily vacancy rates, having fallen to 31 in the first quarter, the lowest level since the inception of the index in 2003. And the Multifamily Production Index also shows continued strength for multifamily construction, rising slightly from 49 to 51 at the beginning of 2012.
Among macroeconomic factors influencing housing demand, data on household wealth suggest deleveraging and household balance sheet repair have made significant strides in patching up the damage realized a few years ago. Data for the first quarter of 2012 indicate that household net worth, as a share of disposable personal income, has risen back to near its 25-year average, with much of the increase due to decreases in outstanding debt and increases in financial wealth.
This in turn has significantly lowered the savings rate, from a high of 6.2% in 2009 to 3.6% today. A declining savings rate should support consumption and investment growth for households. However, household balance sheet repair is not yet complete, and if current trends hold, the process will continue into 2013. This in turn will act as a break on factors that can contribute to a recovery in housing, such as household formation and home buyer demand.
As illustrated by the May employment news, recent macroeconomic reports describe an economy that is having trouble producing jobs. The Bureau of Labor Statistics Job Openings and Labor Turnover Survey (JOLTS) data for April confirm this. The hiring rate fell after eight consecutive months of flat or increasing rates of job creation. Moreover, the job openings rate fell to its lowest level since last fall.
Hiring in the construction sector found its lowest levels in more than a year in April. And despite increases in housing starts, the number of construction jobs is relatively unchanged thus far for 2012, increasing on net by only 17,000 positions.
Overall, the data from the last few weeks, combined with the ongoing European debt crisis and fear of the “fiscal cliff” and other policy uncertainty in the United States, illustrate the growing headwinds that threaten the improving trend for housing that appeared to be set in place during recent quarters. For housing, access to credit and job creation remain the most important factors for a robust and sustainable recovery.