*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.
Home building is expanding, and that is good news for housing and the economy as a whole. But the growth of the industry off the lows set in the wake of the Great Recession has raised new challenges alongside existing issues like access to credit and faulty appraisals.
Recently, overall economic news has been mixed. Growth of the economy in the final quarter of 2012, as measured by the change in Gross Domestic Product, actually came in negative (-0.1%) per the first estimate from the Bureau of Economic Analysis. More recent trade and economic data suggest this estimate will be revised up to slight growth. Regardless, the data reveal economic expansion stalled in the final three months of 2012.
Accordingly, measures of consumer confidence were mixed in the first month of 2013. The University of Michigan consumer confidence index rose slightly, while the Conference Board estimate fell somewhat. In fact, the Conference Board reading has now fallen for three consecutive months for a drop of nearly 20%. It appears that the recent decline may be related to consumer fears of lower income in the coming year.
Amidst this lackluster economic news, housing data continue to be positive. The National Association of Home Builders/ First American Improving Markets Index (IMI) rose to a count of 259 in February, up from 242 in the previous month. The recovery in housing is officially nationwide, as at least one market from every state now appears on the IMI list.
Builder confidence in the 55+ housing market improved in the fourth quarter of 2012 compared to the same period a year ago, according to NAHB’s latest 55+ Housing Market Indices (55+ HMIs). Although both 55+ HMIs remain below 50, both have improved significantly from a year ago. The single-family index increased 10 points to a level of 28, the fifth consecutive quarter of year over year improvements. Although multifamily condos remain the weakest segment of the 55+ housing market, the 55+HMI for condos also showed a substantial year-over-year increase of six points to 19.
Recent Federal Reserve survey data of bank senior loan officers suggest an improving lending environment is seen for 2013. In general, the respondents expect the quality of household debt to strengthen with residential mortgages continuing to report the greatest improvements in loan quality.
Private residential construction spending increased 2.2% during December 2012. Spending has now registered nine uninterrupted months of growth, as well as 16 of the last 17 months. The nominal dollar level of spending has now reached its highest point since late 2008 and the average from the last three months is 32% above the cyclical low. Spending in December on new single-family homes rose 0.8%, while multifamily increased 6.2% and remodeling grew 2.9%.
The increases in construction activity have been driving job growth, but at levels smaller than many observers expected. Some of the mismatch between the growth in housing and the anemic rise in construction employment may be due to measurement issues. In fact, that proved to be the case with the new benchmark adjustment from the Bureau of Labor Statistics (BLS). Using more accurate tax return data, the BLS reported an additional 20,120 jobs created in home building through the end of 2012 than was initially estimated and more than 400,000 jobs for the overall economy. Under the new tally, home building employment is up 4.7% from the cycle low as of December.
But the growth in building has raised new concerns, including rising building material costs and worker availability. According to an NAHB survey, more than three-quarters of builders expect building materials prices to be one of their significant problems in 2013, up substantially from 46% in 2012 and 33% in 2011.
A second issue is cost/availability of labor, with 51% of builders expecting to face this challenge in 2013, up from 30% who said they faced the problem in 2012 and only 13% in 2011. This result is consistent with BLS JOLTS data, which suggest relatively elevated levels of unfilled positions in the construction sector but weaker than expected hiring rates.
Nearly half of builders expect cost/availability of developed lots to be a significant problem. This is up from 24% who said they faced the problem in 2012 and 21% in 2011. Against the backdrop of impending health reforms scheduled to go into effect in 2014, 42% of builders expect costs of health insurance be a significant challenge in 2013.
New research from NAHB examined the characteristics of new and existing home buyers using the 2011 American Housing Survey (AHS). Among its findings, the research indicates home buyers overall had a median income of $64,998. The subset of home buyers that bought new homes had a median income of $81,715, about 26% more than the median income of all home buyers. This spread is the largest it has been since before the 2001 AHS.
Finally, new estimates of the budget size of various tax rules have been published by congressional staff economists. These numbers will help shape the tax reform debate that is expected in Congress this year. Due to policy and economic changes over the past year, the estimated size of the mortgage interest deduction (MID) is down considerably to $69.7 billion for 2013, much less than the $100 billion routinely cited in the press.