Eye on the Economy: Home Construction Rebounds in July

After a disappointing June report, housing starts rebounded to an annual rate of 1.093 million for a 15.7% increase over the upwardly revised June level. The substantial June dip, caused by a fall in single-family construction in the South, was eliminated as single-family construction rose 8.3% with increases in three of the four regions. Midwest single-family starts were down 6.8% to a 109,000 rate, but remain at about the same level as the second quarter average.

The Census and HUD data also indicated that multifamily starts increased to a 437,000 annual rate, the highest since February 2006. This increase was also spread across three of the four regions. Rental demand should continue to be strong, with recent CPI data and NAHB calculations showing inflation-adjusted rents up 1.4% over the last 12 months.

July’s home construction rebound mirrored rising home builder confidence. The August NAHB/Wells Fargo Housing Index rose two more points to 55, approaching the 2014 high in January of 56. All three index subcomponents also increased. Expectations for the next six months increased by two points to 65, the highest since August 2013 and the index for traffic rose three points to 42, the highest since December 2013. The current sales index rose two points to 58.

A key question going forward is the degree to which the mix of buyers may change. The share of first-time home buyers remains weak, with a May NAHB survey showing only a 16% market share, compared to 25% to 28% between 2001 and 2007.

One consequence of this mix of buyers has been a rising trend in new single-family home size. However, this increase appeared to cool during the second quarter. Census data and NAHB analysis indicate that the median new single-family home size was 2,478 square feet, unchanged from the first quarter but 18% higher than cycle lows. More first-time buyers in the future will hold back growth in median new single-family home size.

Builder confidence in the single-family 55+ housing market was up again on a year-over-year basis in the second quarter, according to NAHB’s 55+ Housing Market Index.  Compared to the second quarter of 2013, the 55+HMI for new single-family housing increased three points to 56–the highest second-quarter reading since the inception of the index in 2008 and the 11th consecutive quarter of year-over-year gains. One of the factors contributing to the positive outlook for new single-family 55+ housing is the slow but steady increase in existing home sales in the last three months.

The NAHB/First American Leading Markets Index advanced one point in the second quarter of 2014 to .89 from a June level of .88. The index measures the nation’s and 351 metropolitan markets’ proximity to normal economic and housing market activity. A value of one or more means the market is back to or above a normal level with an average of three components at or above one: single-family housing permits, house prices and employment levels. Over one-third (36%) of the metropolitan areas measured improvement since June and 78% of them improved since August 2014.

Consumer debt positions continue to improve, which should be a net positive for housing demand. Mortgage Bankers Association data indicate that mortgage delinquencies decreased to a seasonally adjusted rate of 6.04% at the end of the second quarter, 92 basis points below a year prior. And while total consumer credit, including auto and student loans, has expanded (by $62 billion in the second quarter), consumer debt service ratios remain low despite disappointing income growth.

However, home price gains, which improved consumer balance sheets, have taken a small toll on housing affordability. The NAHB/Wells Fargo Housing Opportunity Index reached a level of 62.6 for the second quarter, meaning 62.6% of new and existing homes sold during the quarter were affordable to a family earning the U.S. median income of $63,900—down from the first quarter reading of 65.5.

Besides housing demand concerns, recent industry headwinds have included rising building material prices and scarcity. July producer price index data from the Bureau of Labor Statistics reveal that softwood lumber prices declined from June but remain above late 2013 prices. OSB prices dipped in July and added production capacity has kept price pressures in check. Gypsum prices are below 2014 highs but remain above their 2006 housing boom peak.

This more positive news concerning material prices matches a July NAHB industry survey that shows that shortages of key building materials have eased in 2014. Only 15% of builders reported some or serious shortages of trusses or clay bricks, the highest incidence among the more than 20 materials builders were asked about. Fourteen percent reported shortages of windows and doors, gypsum wall board, and cabinets.

Nonetheless, other headwinds persist. The count of unfilled construction sector jobs increased in June to 127,000, the fourth highest tally since the end of the recession. The number of job openings has grown significantly since 2011 as the housing industry has recovered. Since the point of peak job losses during the recession, the industry has added more than 301,000 jobs and the unemployment rate has fallen from 22% to 8.8% in July.

In analysis news, NAHB economists recently examined some of the consequences and factors determining homeownership for immigrant households. Analysts also looked at Census data concerning how people commute to work. The estimates show that from 2000 to 2012, the largest increases in total commuting were for driving alone, with working at home coming in second. Carpooling was down. Finally, NAHB examined recent global home price data.



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