*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.
This has been a good year for home building. Home prices are showing gains and household balance sheets continue to improve. Those developments have spurred increases in home sales and home construction.
But these improving trends have not resulted in significant increases in home building employment thus far. That disconnect is likely to change in the coming year, as construction sector job openings grew dramatically in October.
Overall, the housing market recovery is growing in geographic scope. For example, the number of metropolitan areas designated as improving by the NAHB/First American Improving Markets Index leapt to 201 in December. The index measures the number of markets that have seen an improvement in three primary market indicators: single-family building permits, home prices and employment, for at least six months. The increase in the number of markets satisfying the criteria now places at least one MSA in 44 states and the District of Columbia on the list.
As a result of growing breadth of the housing recovery, private residential construction spending increased 3% on a month-to-month basis in October, reaching its highest dollar value since late 2008. New single-family homes continued to post solid rates of growth, increasing 3.6% on a month-to-month basis and up 55% since bottoming out in mid-2009. Home improvement activity expanded 1.8% during October 2012, with nominal remodeling spending reaching its highest point in five years.
The positive momentum continued for the multifamily sector, marking its 13th consecutive monthly increase with a 6.2% gain over September 2012. Overall, the dollar value of multifamily construction activity has increased more than 82% from its cyclical low. These increases are roughly consistent with the 2012 improvements for both the NAHB Multifamily Production Index (MPI) and Multifamily Vacancy Index (MVI). The MPI edged down in the third quarter but has now been above a neutral level of 50 for three quarters. And the MVI continues to hover around historic low levels of vacancy rates.
Moreover, data from the Survey of Market Absorption of Apartments indicated that in the third quarter, the three-month absorption rate for unfurnished apartments increased to 70% in third quarter after posting a reading of 59% during the second quarter. The condo and co-op sector has seen the three-month absorption rate trend higher from the cyclical lows observed between late 2008 to mid-2010. The three-month absorption rate for units completed during the second quarter of 2012 and sold during the third quarter inched higher from 65% to 66%.
Finally, existing home sales continue to trend better. The National Association of Realtors (NAR) reported that the Pending Home Sales Index (PHSI), a leading indicator of home buying, accelerated by 5.2% in October to settle at 104.8. An index of 100 coincides with a level that is considered historically healthy. The recent PHSI release suggests that home sales should accelerate in November and December.
The reasons for these widespread improvements in housing activity include slow but steady growth in economic output, household balance sheet repair and job creation. The Bureau of Economic Analysis released the second estimate of real GDP growth for the third quarter of 2012. Growth was revised upward to a seasonally adjusted annual rate of 2.7%, up from 2% in the advance estimate last month after a 1.3% pace in the second quarter.
Household balance sheets improved in recent months with significant declines in mortgage debt outstanding. The Federal Reserve Bank of New York recently reported that aggregate household debt outstanding was $11.31 trillion on a not seasonally adjusted basis in the third quarter of 2012, $74 billion less than the amount outstanding in the second quarter. Outstanding debt secured by real estate fell by $135 billion. However, according to the Federal Reserve Board, consumer credit outstanding increased at a seasonally adjusted annual rate of 6.2% in October. The increase reflects growth in both revolving (i.e. credit cards) and non-revolving credit (student and auto loans).
More robust job creation is critical for supporting renter and owner-occupied housing demand. And Bureau of Labor Statistics (BLS) data for November offered continued weakly positive news. The establishment survey indicated payroll employment increased by 146,000, with private sector payrolls up by 147,000 and a loss of 1,000 in the government sector. The household survey indicated the unemployment rate moved down to 7.7% from 7.9% in October. However, the decline in the unemployment rate is based on a decline in the labor force.
Given the gains in housing activity, it is surprising that the BLS data do not show significant gains in construction sector employment. For example, the monthly BLS net employment count for November indicated that total employment in home building stood at 2.027 million, broken down as 553,000 builders and 1.474 million residential specialty trade contractors. And over the last 12 months, the home building sector had added only 5,000 jobs.
This is broadly consistent with another BLS labor report, the Job Openings and Labor Turnover Survey (JOLTS) which indicates low levels of construction employment growth for 2012. However, the JOLTS data for October indicated a surge in construction sector open positions. The total number of open positions (130,000) was the highest since November 2007. And the open position rate (2.3%), measured as a percentage of total employment for the sector, was the highest since April 2007. These open jobs could indicate a significant pickup in home building employment in the months ahead.
One factor that has held back home building growth in recent years has been tight lending conditions for acquisition, development and construction (AD&C) loans. However, recent information from NAHB surveys and FDIC banking data suggest that the AD&C environment is improving.
According to NAHB’s survey on AD&C financing for the third quarter of 2012, the overall net bank tightening index dropped from +6.0 in the second quarter down to -4.3. Negative numbers indicate easing of credit; positive numbers reflect a tightening. At -4.3, the index is now lower than it has been at any time since 2005. Slight improvement in one quarter, of course, is not enough to undo all the cumulative adverse effects of the persistent and often massive tightening that occurred quarter after quarter from 2007 through 2011.
And these impacts can also be seen in the FDIC data. As of the third quarter, the stock of existing residential AD&C loans of $43.5 billion now stands 79% lower than the peak level of AD&C lending of $203.8 billion reached during the first quarter of 2008. However, the data for the third quarter marks four consecutive quarters of the outstanding stock of residential AD&C loans standing at either $43 or $44 billion, suggesting that new loans are being made at the same levels at which old debt is retired. However, the data also suggest that a lending gap persists between the demand for home building and available credit, even as credit conditions improve.
Finally, a new NAHB analysis shows how home operating costs varies with home age. The findings indicate that operating costs as a fraction of home value decline as the structure becomes newer, from nearly 5% of the home’s value for structures built before 1960 to just under 3% for homes built after 2008.