*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 year 2012 was a promising one for housing. With consistent improvements in housing construction and prices, home building is once again contributing to economic growth. And the December housing starts report capped off the year with confirmation of these trends.
Per Census data, solid gains in both single-family and multifamily production resulted in nationwide housing starts rising 12.1% to a seasonally adjusted annual rate of 954,000 units: the highest level of new home production since June 2008. Single-family starts rose 8.1% to a seasonally adjusted annual rate of 616,000 units in December, while multifamily production jumped 23.1%, to 338,000 units.
Combined single-family and multifamily starts activity was up across all regions in December. The Northeast posted a gain of 21.4%, the Midwest was up 24.7%, the South posted a 3.8% increase and the West was up 18.7%.
Permit issuance, which can be a harbinger of future building activity, held virtually steady at a 903,000-unit rate in December. Single-family permits rose for a fourth consecutive month, by 1.8% to 578,000 units while multifamily permits declined 2.1% to 325,000 units.
As an aside, according to data from the Census Bureau, the market share of single-family homes built for rent stands at 5.1% for the third quarter of 2012. This is only slightly lower than the recent peak of 5.35% set at the beginning of 2011, and is considerably higher than the 20-year average of 2.7%. Clearly there has been an increase in single-family development with an eye toward rental demand.
The December increase in starts is consistent with the upward path of builder confidence over the last few months, as measured by the NAHB/Wells Fargo Housing Market Index (HMI). The index held steady at a level of 47 in January, after increasing from 25 to its current level over the course of 2012. The January reading represents a pause in the rise of builder confidence and is perhaps related to policy uncertainty in the wake of the fiscal cliff debate and the impending decisions regarding big-picture issues like tax reform and the future of the housing finance system.
Nonetheless, the economic improvements witnessed in 2012 – at least compared to the terrible years that preceded it – manifested themselves in ongoing good news for housing. For the January reading, the NAHB/First American Improving Markets Index (IMI) increased to 242, adding a net 41 more markets to the 201 in December. The total represents two-thirds of all the eligible metropolitan areas. All but two states have at least one metro on the list (Wyoming and New Mexico). A metropolitan area makes the IMI list if three indicators of economic and housing health improve for at least six months: single-family housing permits, employment and home prices.
The improvement in home building in 2012 has boosted construction spending. Spending on private residential construction activity ticked 0.4% higher on a month-to-month basis during November 2012 per Census data. Spending has increased in each of the last eight months (and 15 of the last 16), rising to a 4-year high and nearly 33% above the trough during the third quarter of 2010.
New single-family home construction led the way in terms of spending growth among the private residential categories during November, posting a 1.3% increase versus October. Spending has climbed more than 29% above its nominal level of a year ago and stands 57% higher compared to the trough in mid-2009.
The multifamily construction sector registered its slowest rate of month-to-month growth in nearly a year, but November’s 0.5% still marked the 14th month in a row spending activity has increased. In the past year, nominal spending on multifamily projects has jumped 46% and stands nearly 83% higher than the low posted in August 2010.
Spending on home improvements dipped 0.7% in November, adding to the 1.9% contraction (revised downward from a 1.8% gain) reported for October. Expressed as a 3-month average, nominal spending on remodeling activity has hovered around a 5-year high for the past few months. Going forward, as part of the fiscal cliff deal, the tax code section 25C retrofit tax credit was extended for 2013, which may help boost remodeling spending in the near-term.
The overall improvement for house prices may also be partly responsible for an uptick in property tax receipts for state and local governments. According to the latest data from the Census Bureau, over a one-year period spanning the fourth quarter of 2011 to the third quarter of 2012, approximately $475 billion of tax was paid by property owners, a slight increase.
As state/local income and corporate tax receipts recovered in recent years, the share of local tax collections due to property taxes fell from recession highs. However, according to the most recent data, the share has stabilized and is on the rise again. The average share of total state and local tax receipts for property taxes since 2000 is 32.3%, while the current share stands at 34.3%. Consequently, housing and other real estate owners are still paying a higher-than-average percentage of state and local taxes.
Despite the improvements for housing, there has not yet been a surge in residential construction employment. For the construction sector, Bureau of Labor Statistics data indicate that hiring levels picked up in November after a slight slowing in the fall. November hiring for the construction sector totaled 351,000, marking the seventh month in a row of hiring in the construction sector above a 300,000 level. The significant month-over-month gain in hiring was consistent with the October data, which showed an increase in job openings for the sector. But recent gains in housing have led, for the most part, in fuller employment of existing workers, rather than gains to total employment.
Job openings in construction remain elevated despite a downward revision for October’s spike in openings. The number of open positions for October (99,000) and November (93,000) marks the highest two-month total in a year and a half. These data lend evidence of increased demand for construction workers and future growth in construction sector employment.
The lack of significant uptick in construction hiring matches the overall job market picture. The BLS establishment survey indicated payroll employment increased by only 155,000, with private sector payrolls increasing by 168,000 and of the government sector losing 13,000. The household survey indicated the unemployment rate held steady at 7.8% in December after revising the November figure up to 7.8% from 7.7%. A more robust recovery would have job creation at twice this pace.