Eye on the Economy: Slow Progress after a Tough Quarter

The overall economy slowed at the start of 2014, which took a toll on housing and economic activity. According to the Bureau of Economic of Analysis, real GDP contracted at a 1% seasonally adjusted annual rate during the first quarter. Growth would have been slightly positive absent a decline in business inventory investment. However, this drawdown sets the stage for more stable growth for the rest of 2014.

An example of improved economic news from the second quarter was the May employment report. According to the Bureau of Labor Statistics, payroll employment improved by 217,000 for the month. In fact, the month of May was the first time that total employment (138.365 million) surpassed the prior pre-recession peak. Of course, given population growth, the economy continues to suffer from a lack of jobs, which in turn is holding back housing demand.

Home builders and remodelers have added 106,000 jobs in the last 12 months. The seasonally adjusted construction sector unemployment rate now stands at 8.9%, down from 11.2% a year ago and 22% at the post-recession peak. Labor data from April indicate that the number of open construction sector jobs, which has been elevated for the last two years as construction expanded, has declined over the start of 2014 to a count of 94,000. Nonetheless, the open rate remains higher than any period prior to 2013.

In addition to labor shortages, an important industry headwind remains the lack of building lots. A recent NAHB survey indicates that 59% of builders report low or very low lot supplies in their market. This is the highest rate of “low” responses since the question was first posed in 1997 and is notable given that housing starts remain below normal levels of market production. NAHB surveys continue to suggest relatively tighter conditions for land acquisition and development loans (in contrast to construction loans) used to finance lot development, although recent FDIC data suggests that lending is increasing. For example, over the last four quarters the stock of residential AD&C loans has increased by 12%.

Overall, the housing market continues to improve, but progress is slow going. The NAHB/First American Leading Markets Index remained at .88 for the nation from May to June but was up 6 points from .82 in June 2013. The index measures progress back to and beyond normal economic and housing markets for 351 metropolitan areas. Three of 10 metros did see a monthly increase in their individual indexes and 83% have seen an increase in the past year.

Markets already past their last level of normal are concentrated in energy-producing markets and were more stable. At the other end of the spectrum, markets still only two-thirds of the way back to normal are the industrial Midwest or in the sand states most harmed by the boom and bust. Their slow progress is primarily the result of the slow single-family housing market. Single-family housing permits are only at 43% of their last normal market in the early 2000s.

Recent Federal Reserve data also reflect the progress in housing in recent years. According to the Flow of Funds data, home owner equity has reached a level last experienced in 2007. In the last quarter, home owner equity grew by $795 billion.

Despite low interest rates, housing demand has lagged in 2014. For example, the National Association of Realtors Pending Home Sales Index is down 9% on a year-over-year basis. However, new home sales have fared better than existing home sales in recent months. According to the Federal Housing Finance Agency, the average effective interest rate on new home sales was 4.33% in April.

Construction spending grew in April by a slight 0.1%. Single-family spending was up 1.3%, and multifamily increased 2.7% month over month. The relatively strong performance by the multifamily sector is consistent with the most recent NAHB Multifamily Production Index, which increased three points to 53 during the first quarter. This marks the ninth consecutive quarter of a reading above 50. Readings above a level of 50 indicate that more respondents report improving conditions than don’t. Market absorption data for rental and for-sale multifamily remained strong at the start of 2014 as well.

In analysis news, NAHB economists recently published membership census data investigating the characteristics of builder members. And a new tool was made available that allows access to the latest Census data by geographic areas that are consistent with local home builder association jurisdictions or market area.



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