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 improvement in housing markets over the last year has been a welcome, if long-awaited, change for the economy as a whole. Improvements in home prices and building are widespread, with the NAHB/First American Improving Markets Index now standing at a count of 274 of 361 MSAs. With 76% of markets now making the list, there is no doubt the housing economy is on more solid footing than a year ago.
However, the pace of that improvement appeared to slow in February. Recent data suggest that continued tight credit access for buyers has the market more dependent on cash and investor buyers than in years past. And on the supply side, growth is challenging the ability of the housing pipeline – workers, lots and building materials – to meet rising demand. Given that housing has been a bright spot amidst an otherwise stagnant economy, this slowing of improvement could have important macroeconomic impacts.
The NAHB/Wells Fargo Housing Market Index, which tracks home builder confidence, fell to a level of 44 in March, down from 47 in December. For the most recent report, the decline was due to a decrease for the gauge of current sales, most likely connected to concerns about home buyer access to credit.
Consistent with the NAHB survey, the Census Bureau reported new home sales in February were down 4.6% from the preceding month. While the month-over-month drop was notable, it remains the case that the pace of new home sales remains significantly higher (12.3%) than this time a year ago. The February sales pace of 411,000 is in line with expectations for the year. NAHB expects new home sales to average 449,000 for 2013 as more consumers regain the confidence to purchase a home. At that rate, the home building industry remains at less than two-thirds of what would be considered a normal market.
The inventory of newly built home inventory remains historically low. The current months’-supply measure of new homes stands at 4.4. Prices of newly built homes are expected to increase in the coming year for multiple reasons. One is low supply, but rising building costs for lots, materials and labor will also boost new home sales prices.
Similarly, pending sales of existing homes fell 0.4% in February, as reported by the National Association of Realtors (NAR). Existing home sales also showed relative weakness, remaining virtually flat with a 0.8% monthly increase. Nonetheless, existing sales remain strongly higher (8.7%) compared to a year ago.
However, recent price growth may be helping to add inventory to the existing home market. The Case-Shiller 20-city index measure of house prices was up 8.1% year over year for the January report. Likewise, the Federal Housing Finance Agency reported national home prices were up 6.5% from January 2012 to January 2013.
As a result, existing home inventory is on the rise. The total housing inventory at the end of February increased 9.6% from the previous month to 1.94 million existing homes for sale. Part of this rise was seasonal, but rising prices are also inducing more home owners to place their homes on the market. While inventory is rising, demand is rising faster. At the current sales rate, the February 2013 inventory represents a 4.7-month supply compared to a 6.4-month supply of homes a year ago.
Yet concerns remain about the mix of home buyers. NAR estimates that in February, all-cash transactions rose to 32% of all existing home sales. Investor buyers constituted 22% of sales. The number of first-time buyers remain historically low, at 30% of buyers in February, down from 32% from a year ago.
Other notes of caution come from the builder side of the supply equation. Due to the historic nature of the downturn in residential construction, it is not surprising that the infrastructure of building – buildable lots, workers with the right skills and a pipeline of building materials – will at times and in certain locations be insufficient to meet the demands of rising home construction.
NAHB survey data confirm that shortages of many types of labor are having an adverse effect for builders in some parts of the country. Between June 2012 and March 2013, the share of builders reporting at least some shortage increased in every category of labor. Averaged across all 12 categories, 27.8% reported a shortage of directly employed workers in 2013, up from 19.6% in 2012.
More than half of builders reported that labor shortages over the past six months have caused them to pay higher wages or subcontractor bids, and to raise home prices. Other effects include delays in completing projects on time, being forced to turn down some projects and lost or cancelled sales.
Additionally, building materials prices continue to rise. While overall producer prices have been relatively stable, the prices for certain building materials have risen rapidly as the housing recovery has gained momentum since the beginning of 2012. Overall producer prices are up less than 3% while softwood lumber, OSB and gypsum prices are 30%, 80% and 26% higher than at the start of 2012. According to data associated with the Consumer Price Index, gasoline prices were up 3.3% in February year over year.
Yet the long-term prospects of home building demand remain positive, with builders ramping up production despite the occasional monthly dips. Housing starts for February came in at a healthy pace for both single- and multifamily units according to Census data. Single-family housing starts in February ran at a 618,000 annual pace while multifamily starts came in at 299,000. This represents a continuation of the solid growth trajectory in single-family starts that began in earnest in late 2011 and carried through 2012. Issuance of new building permits is on track to sustain the current levels of production and NAHB expects that going forward, the pace of single-family production will accelerate, approaching 1 million starts by the end of 2014.
Looking at a particular submarket, Census data from the end of 2012 suggests that the market share of townhouses (single-family attached) continues to rise back after the Great Recession, with the current market share standing at around 12%.
In policy analysis news, NAHB recently examined state-level IRS data that maps the share of taxpayers who benefit from the mortgage interest deduction (MID) who earn less than $200,000 in adjusted gross income. Nationally, the data indicate that 91% of taxpayers who claim the MID make less than $200,000. Not surprisingly, the share tends to drop somewhat in high-cost states, such as New York and California, for which household incomes tend to be higher.
The Federal Reserve also recently affirmed its accommodative monetary policy stance, noting that it will keeping the federal funds target rate at the 0-25 basis point range, and asset purchases (QE3) totaling $85 billion per month ($40 billion in MBS and $45 billion in Treasury securities).
Finally, NAHB recently published its home buyer preference survey: What Home Buyers Really Want. Among the finding are data on desired home size. Among all home buyers, the median home size desired is 2,226 square feet. Age plays an important role, with the amount of space desired dropping steadily as the age of the buyer increases. Among those younger than 35, the size desired is 2,494 square feet, compared to 2,065 square feet among those 65 or older.