Eye on the Economy: Home Construction Continues to Recover

*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.

Recent housing construction indicators continue to point to ongoing expansion.

The NAHB/Wells Fargo Housing Market Index (HMI) rose another five points to a 6-year high of 46 in November. The HMI measures builder confidence for the single-family market.

The component measuring traffic remained unchanged at 35; the component measuring current sales rose eight points to 49 while the component measuring future demand rose two points to 53. The expectation component has been above the tipping point of 50 for three consecutive months.

Consistent with the November HMI reading, the Census Bureau reported housing construction increased to another post-2008 high. Housing starts for October were up 3.6% from their elevated September level to a seasonally adjusted annual level of 894,000, the highest since July 2008. On an annual basis, starts increased 41.9% from October 2011. Housing permits, a signal of future construction activity, were down 2.7%, but single-family permits rose 2.2% to a 562,000 level.

The upward trend in multifamily production continued as starts in buildings with five or more apartments came in at a seasonally adjusted annual rate of 285,000, up 10% from September and up 63% year over year. The October multifamily permit level is virtually the same as the third-quarter average, suggesting no significant increases for multifamily production are on the horizon.

Townhouse construction, a submarket of the single-family sector, was up in the third quarter per Census data, rising from 12,000 starts in the third quarter of 2011 to 21,000 starts during the same period of 2012. Using a four-quarter moving average, the market share of townhouses now stands at 12.1% of all single-family starts, up from 11.2% for the second quarter of 2012.

The pace of expansion for new and existing home sales has slowed in recent months, but the volume of transactions remains strongly higher as measured on a year-over-year basis. The Census Bureau and HUD reported October new home sales at a seasonally adjusted annual level of 368,000, which is virtually the same as the three previous months. A noticeable 32% drop in sales in the Northeast was likely a result of the threat and ultimate impact of the storm named Sandy.

On an annual basis, October new home sales were up 17.2% from one year earlier and are in line with an expected 22% increase in annual sales for 2012 over 2011. New home sales will continue to rise at this modest pace as the pent-up demand is released and as the policy uncertainties at the end of 2012 are resolved.

New home inventories rose 2,000 to 147,000, remaining at a very low level but showing some promise that builders are able to begin restocking. The month’s supply of new homes was 4.8, well below an industry standard of six months.

Existing home sales increased 2.1% in October from a downwardly revised level in September, but were up 10.9% from the same period a year ago. The National Association of Realtors reported that October 2012 total existing home sales were at a seasonally adjusted rate of 4.79 million units combined for single-family homes, townhomes, condominiums and co-ops.

The October 2012 level of single-family existing sales increased to a seasonally adjusted 4.22 million sales, up 1.9% from September, but up 9.6% from a year ago. Seasonally adjusted condominium and co-op sales rose 3.6% to a seasonally adjusted 570,000 units in October 2012. This level is up 21.3% from the 470,000 units a year ago.

The total existing housing inventory at the end of October decreased 1.4% from the previous month to 2.14 million existing homes for sale. At the current sales rate, the October 2012 inventory represents a 5.4-month supply, down from a revised 5.6-month supply in September. The October supply was the lowest since the 5.2-month level in February 2006.

Supporting growth in home sales has been an increase in consumer confidence. However, while measures of consumer confidence have experienced sustained improvement in 2012, the level of growth has slowed, according to recent readings. For example, prior to a 0.6 point increase in the Conference Board’s Consumer Confidence Index in November, the Index rose by 4.7 points between September and October, which in turn was slower than the 7.1 point increase experienced between August and September.

Home sales have also been held back by ongoing tight lending conditions. In fact, no less a figure than Federal Reserve Chairman Ben Bernanke made the case for this argument recently. Chairman Bernanke’s comments contained a clear message: Tight lending standards that emerged after the housing boom are now holding back the housing market recovery and the economy as a whole. “It seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery,” Bernanke said in prepared comments in Atlanta.

As the fiscal cliff debate continues, which could involve the future of the mortgage interest deduction and other important housing tax incentives, Bernanke’s comments highlight the role that policy could play in holding back the ongoing recovery in housing.

Another factor that was holding back the housing market in recent years – mortgage delinquencies – continues to show improvement. The Mortgage Bankers Association reported the seasonally adjusted delinquency rate fell 18 basis points during the third quarter of 2012 to 7.4%. In addition, the foreclosure inventory rate contracted 20 basis points to 4.07%. Foreclosure starts declined to 0.9% of all first-lien mortgages during the third quarter of 2012: the lowest reading since the end of 2007.

Measures of producer prices showed little change in October, although home building costs remain higher for the year. The Bureau of Labor Statistics (BLS) Producer Price Indexes for finished goods declined by 0.2% from September, while the index for energy goods declined by 0.5%.

With respect to inputs for home building, prices for gypsum declined slightly in October but are 13.8% higher than at the start of the year. Prices for softwood lumber have been volatile in recent months, declining in October but averaging roughly 10% above last year’s levels. Prices for OSB continued their climb and now stand 52.1% above levels at the beginning of the year.

With respect to consumer prices, growth of the BLS Consumer Price Index slowed in the month of October to 0.1% on a seasonally adjusted basis, with the deceleration largely reflecting a 0.2% decline in energy prices.

Finally, a recent NAHB analysis looked at who is most responsible for choosing items that go into a new home or home renovation. The results show that builders and remodelers have the greatest influence on product selection. Exceptions exist for products like appliances, flooring, lighting, countertops and cabinets, which are often chosen directly by the consumer, particularly in remodeling projects. Meanwhile, products chosen most often by subcontractors are limited to electrical and HVAC equipment and ducts.



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  1. In my opinion, recovery will be confirmed only when the majority of new home sales are to move-up buyers who have sufficient equity in their existing home to cover the down payment and closing costs on a bigger and better new home. Until that happens, your membership would be well advised to learn how to expand the first-time homebuyer market by introducing innovative marketing programs dealing directly with the main obsticle to buying a first home, the up-front costs (down payment and closing costs). Those who adapt to what is now will be in position to prosper when a more normal market is achieved.

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