Eye on the Economy: Builder Confidence Declines in October

With the government shutdown and debt ceiling debate resolved – for the next three months – it is clear that the political drama in Washington caused a drop in consumer confidence, which in turn added another headwind to the housing sector and the overall economy.

This in turn affected builder confidence. The October NAHB/Wells Fargo Housing Market Index fell two points to 55 from a one-point downwardly revised September level of 57. The decline was broad-based with a two-point fall in all three components: current sales from 60 to 58, expected future sales from 64 to 62 and traffic from 46 to 44. The index has remained above the tipping point of 50 for five consecutive months.

The survey was taken in the first 10 days of the month when Washington remained mired in complete disagreement over the debt and budget deadlines. Consumer confidence indicators and builders’ comments in this survey suggest that the uncertainty caused buyers and builders to pause on some economic decision-making.

As noted at NAHB’s Fall Construction Forecast Webinar, despite the recent pause for housing, the long-term trends remain positive. In absence of Census/HUD data for housing construction, NAHB estimates that the pace of September housing starts approached 900,000.

Single-family starts should have remained in the August range of 620,000 to 630,000. Multifamily starts bounced around in 2013 in a monthly seesaw effect typical of the more volatile series. NAHB expects multifamily to range at the lower end of this years’ span at between 255,000 and 270,000.

It is worth noting that one benefit of the end of the government shutdown is the return of the flow of data we use to examine the housing markets and the economy. An outstanding question is whether the missed data reports of the last two weeks (including construction spending, housing starts and employment) will be reported, albeit late. For most reports, the expectation is that this will occur.

In the meantime, NAHB/First American unveiled a new index to analyze local housing markets. Replacing the Improving Markets Index, the Leading Market Index shifts the focus from identifying markets that have recently begun to recover to identifying those now approaching and exceeding their previous normal levels of activity.

More than 350 metro areas are scored by taking their average permit, price and employment numbers for the past 12 months and dividing each by their annual average over the last period of normal growth. The three components are then averaged to provide an overall score for each market; a national score is calculated based on national measures of the three metrics. An index value above 1 indicates that a market has advanced beyond its previous normal level of economic activity.

According to the first release of the LMI, 52 metro areas have housing markets that have returned or exceed their pre-recessionary levels of activity. The October national index score of 0.85 indicates that the nationwide housing market is running at 85% of normal activity.

Expanding housing activity contributes to economic growth. As of the second quarter of 2013, housing’s share of GDP stood at 15.6%. Over the last year, expansion of home building, multifamily development and remodeling was responsible for 25% of net GDP growth.

The reason that housing can yield an outsized contribution to economic growth is the combination of direct and associated impacts. In addition to the jobs, taxes and growth created by construction itself, the purchase of a home generates a set of ripple effects. For example, NAHB analysis has shown that the typical buyer of a newly built home will spend about $3,000 more on home furnishings during the first two years of ownership compared to non-moving homeowners.

Strong housing markets also produce property tax revenues for state and local governments. A new NAHB analysis of 2012 American Community Survey data from the Census Bureau reports the average effective property tax rates by state. The data indicate the highest average rates are in the Northeast, while a majority of the states with the lowest are in the South.

Finally, with some of the usual sources of periodic data closed due to the government shutdown, NAHB examined a number of data items in from the 2012 Survey of Construction (SOC) from the Census Bureau. In a study of how space is allocated in newly built homes, NAHB found that bedrooms account for just under 29% of floor space in new homes. Bathroom space is second, accounting for 12.3% of total floor area on average. Kitchens are a close third at 11.9%.

A second analysis examined the most common forms of exterior wall covering in homes built in 2012. Vinyl siding was the most common at 32%, followed by brick at 25%. Stucco came in at 20%, although it accounted for 46% of homes in the Pacific Census division and 57% in the Mountain division.

The last analysis examined the average lot size for new construction. New homes in New England had the largest average lot sizes at approximately 3/4 of an acre. This average was significantly larger than the rest of the nation.



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