The economy is beginning to emerge from the shadow of uncertainty created by the partial government shutdown of October and the temporary jump in mortgage rates earlier in the year. As a result of these factors, combined with a persistently underperforming labor market, the housing sector entered a soft patch during the fall. However, recent permit data suggests that the recovery in building continues despite headwinds in housing and the overall economy.
The weakness is most apparent in the resale housing market. As reported by the National Association of Realtors (NAR), existing home sales in October were down 3.2% from September. While still up 6% from a year earlier, the pace of existing sales has declined over the last two months as a drop in affordability reduced the volume of home purchases. NAR’s Pending Home Sales Index was down slightly in November, suggesting that the future existing sales reports will show weakness before moving back to the long-term, post recession improving trend.
The NAHB/Wells Fargo Housing Opportunity Index – a measure of housing affordability – is consistent with these changes. As of the third quarter of 2013, 64.5% of new and existing homes were affordable to families earning the U.S. median income. This is down from 69.3% in the second quarter, and the biggest decline in affordability since the second quarter of 2004.
Nonetheless, builder confidence remains solid. The November NAHB/Wells Fargo Housing Market Index (HMI) held steady at 54 from a one-point downwardly revised October level. The HMI has remained above 50 for six consecutive months, the first time since early 2006.
Builders remain modestly optimistic (when the index is above 50, more builders rate the market good rather than poor) but express their continuing concerns about rising costs of land, labor and building materials.
Recent labor market data from the Bureau of Labor Statistics indicates that unfilled construction sector jobs total 113,000 as of September, marking seven out of the last nine months for which that count exceeded 100,000. Producer Price Index data for October show that wood prices edged up for the month. And builders should be on guard for potential 2014 price increases in gypsum products.
Part of the shadow produced by the partial government shutdown cloaks certain data, such as Census reported housing starts. Starts data for September and October will be published in December.
However, housing permit data from the Census published this week confirms the HMI report that builders are holding steady in the face of headwinds. For October, total housing permits were up 6.2% from September (to a 1.034 million-unit annualized pace). Much of that growth came from the volatile multifamily five-plus unit category, up almost 17% for the month to hit a post-recession monthly high. Single-family permits were up slightly by 0.8% and have grown 8.8% from September 2013.
The permits data and the HMI suggest that the recovery in housing has resiliency even in the face of broader economic turbulence.
For multifamily, the NAHB Multifamily Production Index fell to a level of 54 in the third quarter, but registered the seventh consecutive quarterly reading above the break-even point of 50. The continuing health of the multifamily sector, as demonstrated by the October strength in multifamily permits, has been driven by post-recession growth in rental demand. Consumer Price Index data indicate that inflation-adjusted real rents have increased 1.1% from October 2012 to October 2013 except in the West, where they have surged by 1.6%.
Despite the recent slowing in the housing sector, all three segments – single-family, multifamily, and remodeling – have been contributing to economic growth. As of the third quarter of 2013, housing’s share of GDP was 15.6%, with 3.2 percentage points directly attributable to residential investment.
In analysis news, NAHB economists recently examined the legal and economic implications of a business tax proposal published by Senate Finance Chairman Max Baucus. The proposal would lengthen depreciation periods for residential rental housing from 27.5 years to 43 and make other unfavorable tax accounting changes for real estate stakeholders.
Additionally, NAHB economists examined alternatives to property taxes, how long it takes to build multifamily properties, and the makeup of the rental housing stock, of which about a third consists of single-unit homes.