Eye on the Economy: Residential Construction Spending Up 18% in 2013

While the year 2013 ended on a weak note for housing, the statistics for year-end totals reveal a strong performance for home building. Census data for December indicate that on a three-month moving average basis, for the year 2013 single-family construction was up 20%, multifamily gained 34.5%, and remodeling was up 14%. Total residential construction spending increased 18.3% year over year.

However, data for the final months of the year suggest lingering impacts from the declines in consumer confidence associated with the political uncertainty of the partial government shutdown. New home sales were down 7%, reaching an annualized pace of 414,000 in December. And the National Association of Realtors Pending Home Sales Index, which is a good indicator of future closed existing home sales, was off 8.7% in December. Completed December existing home sales were up slightly from November, but down from December 2012.

There were a number of potential reasons for the slight declines at the end of the year, including weather and an earlier rise in interest rates. Looking forward, small increases in interest rates are expected as the Federal Reserve continues its ongoing tapering of its quantitative easing asset purchase program, which has held interest rates down. This development comes at a time in which Census data indicates a declining share of new home sales are due to FHA mortgages and cash sales.

Nonetheless, data from the Federal Housing Finance Agency indicates that typical contract interest rates on conventional mortgages for new homes remain low: 4.24% as of December.  Higher home prices have also reduced affordability in some markets.
Housing’s weakness at the end of the year held back GDP growth for the fourth quarter, which was up 3.2% after a growth rate of 4.1% in the third. More concerning was the fact that 1.7 points of the 3.2% growth was due to inventory investment (“restocking of shelves”), which will likely subtract a full percentage point from GDP growth in the first quarter of 2014.

With the NAHB International Builders’ Show under way in Las Vegas, now is a good time to review indicators that can help guide our expectations for 2014. For example, NAHB’s 55+ Housing Market Index, a measure of developer confidence in the senior housing market, was up sharply at the end of 2013. All segments of the market (single-family, condominium and multifamily rental) registered strong increases relative to the end of 2012.

On the other side of the age distribution, recent NAHB research found that the share of young adults living with their parents is up strongly in recent years. For individuals aged 25 to 34, the current share (19%) is almost double the historical average (approximately 11%).  The numbers suggest potential pent-up rental and owner-occupied housing demand for about 3 million young adults. To unlock this demand, job and income growth will have to increase for those under age 35, who have seen on average income declines in the past two years, compared to increases for older age cohorts.

The most recent Housing Vacancy Survey data provides good news for multifamily. According to the Census Bureau’s quarterly survey, rental vacancy fell 10 basis points to 8.2%, the lowest percentage since 2001. The tightening rental market is a reflection of an improving economy. This trend could also be an indication of future housing demand, as renting is typically a first step in household formation. The seasonally adjusted homeownership rate remained at 65.1% for the final quarter of 2013.

Recent remodeling data suggest a positive 2014. The fourth-quarter NAHB Remodeling Market Index held steady at 57. This matches the highest reading since 2004. A reading above a level of 50 means that more remodelers see good market conditions than poor ones.



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