The NAHB/Wells Fargo Housing Market Index (HMI), a measure of home builder confidence, reached a milestone in June. Coming in at a level of 52, the HMI recorded its highest level since April 2006 and its largest monthly jump since 2002.
The index compares the share of builders who believe market conditions are positive with those who believe they are negative. With the index rising above 50, the HMI now indicates that builders seeing a better market outnumber those judging it as poor.
The price of building materials is beginning to come down, and that is one factor lifting builders’ spirits. In addition, home builders are seeing increasing numbers of prospective home buyers, attracted to new construction in part due to low existing home inventories as well as historically low interest rates. Rising home prices are also providing home buyers with confidence in the investment value of a home purchase.
According to the Census and HUD, the pace of housing starts in May (a 914,000 seasonally adjusted annual rate) rose 6.8% as apartment construction rebounded from an unusually low April and single-family construction remained virtually even. Regionally, the South was the only region with an increase in single-family starts (12.2%) while the Northeast dropped 20%, the Midwest dropped 15% and the West dropped 4%.
Single-family permits increased by 1.3% to a pace of 622,000, the highest since May 2008. No region experienced a decline. Issued but unused single-family permits were up by double-digit percentages in all three regions with a drop in starts. Stockpiling permits along with above-average precipitation in those same regions suggest single-family starts were held back by wet weather.
Total permits were down 3.7% due to a decline for multifamily permits from an elevated pace in April to a more normal rate of 352,000 for May. This normal level of multifamily construction is sustainable, as absorption rates from the Census Bureau’s Survey of Market Absorption of Apartments suggest continued demand for rental properties. Averaged over 2012, apartment three-month absorption rates reached 64% for the year, a level not seen since 2001.
Despite the regional variations in housing construction activity, the recovery for housing continues to be broad based. According to the June NAHB/First American Improving Markets Index, the number of metros continuing to show improvement increased to a count of 263 or 73% of all markets measured. The index is up five markets from May, which had dropped 15 markets from April, the first significant drop since the same time last year.
As noted above, one potential reason for a rise in builder confidence, and one with impacts for all segments of the residential construction industry, is an easing of building material prices.
Per the Bureau of Labor Statistics, the Producer Price Indexes for framing lumber and OSB declined from April to May, -7.7% and -10.9% respectively. Increased production in both the U.S. and Canada combined with favorable trade developments, lower exports to China and higher imports from other markets contributed to the declines. Early indications are that the June numbers will add to May’s declines.
While welcome relief, these generally lower prices still leave wood product prices at elevated levels. The 67% rise in framing lumber prices from their housing bust lows has been reduced to 54%, but prices are still at 89% of their housing boom peaks. The 151% rise in OSB prices has been reduced to 124%, but prices are still at 62% of their peaks.
Another headwind – worker availability – continues to challenge. At 108,000 in April, the number of open, unfilled positions in the construction industry remains near post-Great Recession highs. This marks four consecutive months for which the total number of open positions was greater than 100,000, the first time this has occurred since a stretch that began in 2007.
Despite the headwinds, underlying the growth in housing construction are slow but steady financial improvements for households. During the first quarter of 2013, household balance sheets improved with increases in home values and reductions in mortgage debt, thereby boosting household net worth. Over the last five quarters household real estate values have risen by more than $2 trillions.
Supported by recent increases in consumer confidence, consumer credit continues to expand. The amount of consumer credit outstanding increased at a seasonally adjusted annual rate of 4.7% in April, reflecting an expansion in the outstanding amounts of both non-revolving credit (auto loans and student loans) and revolving credit (credit cards).