The September NAHB/Wells Fargo Housing Market Index held steady at 58, the same level as the one-point downwardly revised August reading. The underlying components of the HMI were mixed. Future expectations declined to 65 from 68 in August and traffic rose one point to 47 from an upwardly revised 46.
Housing starts have not improved as fast as the index in the past year, but that same disconnect occurred in 1991 when home builders’ sentiment doubled in four months while single-family starts rose by one-third. Currently, the HMI is about 50% greater than it was last year, while single-family starts are only 15% ahead of one year prior. Eventually, starts do catch up with builders’ sentiment if history is any indication.
The pause in sentiment in September is the result of continued headwinds of labor and lot availability, as well as credit and building material prices. For example, the count of unfilled construction sector jobs has equaled or exceeded 100,000 for six of the last seven months. Additionally, an NAHB survey found that 59% of builders reported that the supply of lots in their markets was low or very low, up from 43% in 2012. And after a slight pause in building material price increases, gypsum may see a rise in 2014.
Recent increases in mortgage interest rates add to the uncertainty for buyers and builders. The Conference Board, in its reporting of consumer confidence, noted that the share of individuals expecting higher interest rates over the next 12 months increased 5.4 points in August to 66.2%, as measured on a three-month moving average basis. This is the highest share since September 2006.
Nonetheless, housing construction continues to expand. As reported by the Census and HUD, housing starts rose 0.9% in August pushed by a solid 7% increase in single-family starts and tempered by an 11% fall in multifamily starts. The single-family increase was broad; all four Census regions showed increases ranging from 17.5% in the West to 2.3% in the South. This geographic spread matches the last edition of the NAHB/First American Improving Markets Index, which topped out at a count of 291 improving metro areas for September.
Going forward, permits suggested continued growth. August single-family permits reached a 627,000 pace and are the highest since May 2008. Pent-up housing demand will support additional gains. For example, an NAHB analysis estimated that even if half the difference between the level of 2000-2003 sales and the smaller 2010-2011 total were “unlocked,” there could be an additional one million existing and new home sales added to the current pace.
The solid single-family starts and permits report provides additional evidence of the slow but steady improvement in single-family owner-occupied construction that began in earnest in early 2012. The seasonally adjusted construction rate has increased 36% since January 2012. Even with the steady rise, single-family starts remain at less than half a normal rate of 1.4 to 1.5 million per year. NAHB is forecasting a 17% increase in single-family construction in 2013 over 2012 and a more robust 31% increase in 2014.
Monthly multifamily starts have saw-toothed for several months, with four up and four down months in 2013. Similar to starts, multifamily permits were down 15.7% to an annual level of 291,000. The three-month moving average, a more stable measure of multifamily, has remained above 300,000 since the middle of last year.
And while the pace of growth for multifamily development has cooled since the spring, absorption rate data suggest strong demand for apartments at the start of 2013. The three-month absorption rates (units rented after construction of the property is complete) for first-quarter completions ticked up to 61% from 58% for fourth-quarter 2012 completions. Real rents have risen 1.2% over the last 12 months, per CPI data from the Bureau of Labor Statistics. And while construction remains at low levels, the three-month absorption rate for for-sale multifamily has improved significantly, reaching 80% for first-quarter completions.
The changes in demand over the business cycle in for-sale and for-rent housing have left their marks on the types of homes being built. For example, the average size of a newly built single-family rose to 2,599 square feet (on a three-month moving average basis) during the second quarter of 2013, a new high. However, the rise in size is a reflection of a market that contains a relative larger share of high-end buyers and a lower share of younger, first-timers.
The average size of multifamily units (1,151 square feet in the second quarter, on a three-month moving average) is only 3% higher than cycle lows set at the start of 2012. The decline in the size of the typical multifamily unit is due to the continued low levels of for-sale multifamily completions, another subsector popular with first-time home buyers in urban areas.
Finally, a new index from academic economists ranks states by their relative levels of home construction regulations. The housing supply regulation index examines the scaled count of state appeals court decisions that mention “land use.” States with a higher share of court decisions mentioning “land use” are thought to have more restrictive housing supply regulations. The higher the index, the greater the share of court decisions mentioning “land use.” Pacific and New England states ranked relatively higher than other areas of the country.
Update: Existing home sales from the National Association of Realtors were published just a few hours after this post. Existing home sales increased 1.7% in August, and were up 13.2% from the same period a year ago to the highest level since February 2007. This increase surprised some analysts as these closings were contracted as interest rates began to rise.