Eye on the Economy: Mixed Signals as Spring Data Bloom

With the unseasonably cold winter now finally over, the spring home building and selling season has begun. Economic data thus far presents mixed news. For example, new home sales disappointed for the month of March. The U.S. Census Bureau and the Department of Housing and Urban Development reported that March new home sales were down 14.5% in March to a seasonally-adjusted annual basis of 384,000, the lowest pace since July 2013 and down 13.3% year-over-year.

Nonetheless, despite significant headwinds first quarter home sales numbers were only slightly lower than NAHB’s forecast: 434,000 annualized average pace of sales versus a 438,000 forecast. And as detailed at NAHB’s bi-annual Construction Forecast Webinar, NAHB expects the housing recovery to continue on improved economic trends.

Existing home sales decreased 0.2% in March, according to the National Association of Realtors (NAR). However, the level of activity was down 7.5% from March 2013. Potential reasons for this year-over-year decline is the fall in distressed sales (down from 21% to 14% of the market year-over-year) and ongoing weakness in demand among first-time home buyers. The current share of first-time home buyers is 28%, compared to a historical average of about 40%.

A positive future note was found in the NAR Pending Home Sales Index for March, which increased 3.4%. While the index remains 7.9% lower year-over-year, the bump up in pending existing home sales contracts is a hopeful sign for the spring selling season.

Among positive factors for the short-term for housing are ongoing historically low mortgage interest rates. For example, data from the Federal Housing Finance Agency (FHFA) indicate that the average contract interest rate on conventional mortgages was 4.21% in March. This is higher than rates experienced for the first half of 2013 but remains low by historical standards. On the other hand, affordability has been challenged by rising home prices. The FHFA Housing Price Index has risen by 15% over the last 25 months.

Another indicator reflecting lingering winter effects is the NAHB Remodeling Market Index (RMI). The RMI declined from 57 to 53 for the first quarter of 2014. While still above the key level of 50, the economic impact of the winter likely affected the RMI at the start of the year.

A persistent headwind for the residential construction sector has been access to credit. Recent Federal Deposit Insurance Corp. (FDIC) data and NAHB industry surveys suggest that credit conditions for acquisition, development and construction (AD&C) loans are improving slightly, but a lending gap remains. With this in mind, a recent NAHB analysis examined the most common sources of AD&C lending for home builders. The analysis found that 62% of home building AD&C was held by community banks – financial institutions with less than $10 billion in assets. This concentration among smaller banks was lower prior to the Great Recession.

In other analysis news, NAHB economists used the American Community Survey to contrast income, age and household size characteristics among renters and owners. Not surprisingly, the numbers reveal that home owners tend to be older, have higher income and reside in larger households. For example, the average household income of a homeowning married couple with children was just over $98,000 in 2012. A separate analysis examined car ownership by home owner/renter status, including geographic differences across markets.

Finally, as April marked New Homes month, NAHB updated an analysis contrasting maintenance, utility and other housing costs between owners of new construction and other homes. The data reveal that new homes are less costly to maintain, insure, and operate on a per square foot basis than other owner-occupied homes.



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