Eye on the Economy: Builder Confidence Flat As Winter Ends

April 16, 2014

Single-family Starts and NAHB

An unseasonably cold winter took its toll on economic activity at the start of 2014, causing many key market measures to fall short of initial forecasts. For example, first quarter GDP growth will likely prove to have been less than 1%. However, as winter turns to spring, we can expect a rebound as consumers undertake activities that may have been deferred at the start of the year.

Consistent with this situation, the NAHB/Wells Fargo Housing Market Index (HMI) was effectively flat in April, rising one point from a downwardly revised March level. At 47, the HMI has now been below the key level of 50 for three consecutive months.

The essentially unchanged index is the result of builders waiting on expected spring demand while holding any further optimism until actual sales occur. Many of the individual comments mentioned stronger traffic or more serious buyers, but the interest has yet turned into contract signings. Builders continue to meet some supply constraints as buildable lot supply either is not available or is priced beyond what the builder feels can be recaptured in a sale.

Housing starts for the month of March, as reported by the Census and HUD, indicated a 2.8% increase from the upwardly revised February numbers. On a seasonally adjusted annual basis, total single-family starts rose 6% to a 635,000 annual rate. The increase was particularly strong in the Northeast and Midwest, where building was down during recent winter months.

Builder hiring increased in March. According to data from the Bureau of Labor Statistics (BLS), the residential construction sector added 9,100 jobs on a seasonally adjusted basis in March. Total industry employment now stands at 2.242 million. And over the last 12 months, builders and remodelers have created 103,000 jobs.

Worker shortages remain an issue in some markets. However, the count of unfilled construction-sector jobs fell at the start of 2014. As of February, data from the BLS JOLTS survey indicate there were 120,000 open positions at construction firms, down from 165,000 in November. Nonetheless, the February open rate (2%), as measured as a percent of total industry employment, remained the fifth-highest mark since the recession ended.

The general improvement for housing markets can be tracked using the NAHB/First American Leading Market Index (LMI). The index, which measures how close markets are to their normal levels of activity, increased from 0.87 to 0.88 in April. The index measures single-family permits, home prices and employment in the past 12 months and divides that by the last normal annual level. For permits and prices, the last normal period is 2000-2003 and for employment 2007.

The LMI has been moving steadily upward for two years from a low of .78 in April 2012. At the same time, the number of markets at or above their last normal level of activity increased from 34, with 19 in energy-producing states, to 59, with 30 in energy-producing states (Texas, Louisiana, Montana, North Dakota, Oklahoma and Wyoming). The slight broadening into states with other economic bases is consistent with broader economic growth in the U.S.

March BLS producer price data signals building material cost concerns as the housing recovery continues. Gypsum prices were effectively flat in March (0.9% decline), after a significant increase at the start of the year — the third year in a row of such prices increases. Gypsum prices are up 9.5% year over year. Softwood lumber products increased 1.7% in March, while OSB prices were effectively flat.

Over the past 12 months, prices on consumer expenditures increased 1.5%. Consumer prices increased in March by 0.2% on a seasonally adjusted month-over-month basis. The real rent index increased in March by 0.1% month over month and 1.2% for the year.

In analysis news, NAHB economists continued their look at home buyer preferences. The last review found that buyers of all backgrounds possess strong preferences for energy-efficient products.

Using IRS and Census data, economists examined the rising – although still small – market share of individuals who work at home, which represents a potential market opportunity for builders and remodelers. The data indicate clear geographic clustering of home office use among states and industries.

Finally, wrapping up NAHB’s ranking of metropolitan housing markets, American Community Survey data indicate the top markets in terms of share for new construction, home values and median income.


Working at Home: Who Claims the Home Office Deduction?

April 10, 2014

Often cited as a “red flag” for audits, the home office deduction is in fact a legitimate business deduction with particular importance for certain careers and small business owners. Moreover – from the housing economics perspective – IRS data concerning the deduction, along with Census data reporting who works at home, can shed light on an important and growing role for homes: workplaces for business owners and telecommuters.

There’s no doubt that the practice of working at home is on the rise. According to data from the Survey of Income and Program Participation, in 1997 7% of workers (9.2 million individuals) reported working at home at least one day a week. By 2010, that total had grown to 9.4% (13.4 million), an increase of more than four million or 35%.

WorkAtHomeMap1

The geographic distribution of those workers who primarily work at home (most days) shows interesting geographic clustering. Using data from the 2012 Census Bureau American Community Survey, the map above charts the share of the workforce (age 16 and over) who report working at home. The highest shares are found in the West, the Northwest, the Upper Midwest and New England. The state of Vermont has the highest share (7.1%), followed by Montana (6.5%), Colorado (6.5%), and Oregon (6.3%). Louisiana has the lowest share at 2.3%.

The reasons behind this geographic distribution are not immediately clear. Potential explanations include the geographic distribution of jobs that are more likely to include or allow at-home employment, weather, age/education differences in the workforce, and less quantifiable differences in workplace culture across states. Regardless, the growth of working-at-home represents a business opportunity for both remodelers and builders to help accommodate homes for this growing purpose.

The most recent industry-specific IRS data available (2010) for the home office deduction for independent contractors and sole proprietorships (Form 8829) (not telecommuters) provides a sense of who is using space in their home for a dedicated office.

home office deduction

Not surprising, workers in industries that involve more individual independence or technology tend toward greater use of the deduction. For example, educators, the information technology sector, professional services (lawyers, accountants, architects, etc.), and those in the arts and entertainment sectors are all more likely to claim the home office deduction. The real estate sector is in the middle category, with many Realtors reporting home office expenses. Home office deductions are less common in the construction sector, although many small construction firms do have home office expenses.

Specific sectors with high levels of home office deduction use include textile producers, electronics producers, nonstore based retailers, publishers, video/audio producers, broadcasters, internet based workers, certain financial workers, real estate brokers, appliance and video rental services, CPAs, architects, engineers, drafters, building inspectors, designers, science and business consultants, advertisers, marketers, business administrators, educators, doctors, social workers, actors, and religious and professional organization workers.

Overall, according to IRS data for tax year 2011 $9.8 billion in home office expenses (insurance, rent, repairs and utilities) were claimed on IRS Form 8829. The deduction is split into two classes: direct expenses related to the actual officer and indirect expenses that apply to the home as whole and are only partially deductible. Approximately 6 out of every 7 dollars claimed as a deduction originate from this indirect class. An additional $1.3 billion in home office related depreciation deductions was claimed in 2011.

Taxpayers who are likely to claim the deduction, including small business owners (builders and remodelers) and Realtors, should be aware of the rules. The IRS has a good summary page on the deduction. More details can be found in IRS Publication 587, which includes the following useful flowchart regarding qualifying.

IRS Figure A_Pub587

From a tax law perspective, two key changes are worth noting. First, in 2013 the IRS provided a simplified method for claiming the deduction, which can save taxpayers time in filing the required form. Under this approach, taxpayers may claim a $5 per square foot of home office space (up to a maximum of 300 square feet), other expenses such as mortgage interest and real estate taxes are claimed on Schedule A, and no depreciation deduction (or future recapture) is allowed.

Second, for those who have often heard about strict tests connected to the deduction, do keep in mind tax law changes made in 1997 that went into effect in 1999. Under the Taxpayer Relief Act of 1997, a residence can qualify as a principal place of business when it is used to conduct administrative or management activities if there is no other fixed business location. This change clarified a lot of uncertainty regarding the deduction for many classes of workers. However, for all taxpayers (homeowners and renters), the office space must be exclusively used for business purposes.

Telecommuting employees are less likely to be able to claim the deduction (they must itemize for example), and should consult IRS Form 2106 for additional detail.


Eye on the Economy: Existing Home Sales Down, New Home Sales Flat

April 2, 2014

In many parts of the country, spring began with winter-like conditions persisting. Without a doubt, unseasonably cold temperatures reduced economic activity during the first quarter of 2014, including home sales and construction. However, housing demand also weakened due to recent changes on the demand side of the market. Such changes can be seen in the contrasting data concerning new and existing home sales.

EOE gaph_Apr 2

New home sales remained effectively flat for the first two months of the year. According to the Census Bureau and HUD, new home sales declined 3.3% in February, yet the January-February average sales pace was approximately the same as the fourth-quarter 2013 seasonally adjusted annual rate of 447,000. New home inventories are rising in anticipation of a better spring, up 3,000 homes in February compared to December.

In contrast to new homes, existing home sales experienced a significant decline in recent months. Since July 2013, the pace of new home sales increased 18%, while existing single-family home sales declined 15%. February existing home sales, according to the National Association of Realtors (NAR), were down 0.4% for the month and off 7.1% from a year ago.

Aside from weather factors, part of the recent decline is due to a slackening of volume in distressed sales, which are off from 25% of the market a year ago to 16% in February. All-cash sales continue to play a dominant role in the existing home market (35% of transactions), while the first-time home buyer share rose from 26% in January to 28% in February.

This weakness in existing home sales can be expected to continue. The NAR Pending Home Sales Index — a useful indicator of future sales volume — decreased 0.8% in February, marking eight straight months of decline.

Despite these declines, home prices are rising, albeit at a slowing rate. For example, January’s Case-Shiller 20-city index showed a 0.8% monthly increase, marking the 23rd monthly increase. Consumer confidence indicators continue to show high levels of interest in purchasing a new home, although overall levels of sentiment have been mixed due in part to recent weather impacts.

The softness in recent housing data also appeared in construction spending data from the Census Bureau. Total private residential construction spending declined in February after three consecutive months of increase. The reading was down 0.8% from January, but still 13.5% higher than a year ago. Month-over-month single-family spending decreased by 1.1%, while the home improvement category decreased by 1.3%. Multifamily construction rebounded from a drop in January with a strong month-over-month increase of 2.6%.

In analysis news, NAHB continued its review of home buyer preferences, with new survey data indicating ethnic differences in preferences for items like kitchens and bathrooms. And NAHB economists used American Community Survey data to track the top metro areas by single-family housing market share and lowest home owner vacancy rates.

In tax analysis, NAHB reported that property taxes continue to be the primary revenue source for state and local governments. And new IRS data shows that the volume of remodeling activity generated by the 25C tax credit experienced a significant drop after 2010 policy changes.


Energy Tax Credits: Large Impacts After 2010 Rule Changes

March 21, 2014

In 2005, Congress established a number of energy-efficiency tax incentives related to housing. These policies include the tax code section 45L credit for the construction of energy-efficient homes, the 25C credit for retrofitting existing homes, and the 25D credit for the installation of power production property in new and existing homes.

Using earlier IRS data for tax year 2009, we previously examined who benefitted from the 25C and 25D credits, as well as how homeowners used the credits. Last year, we examined the 2010 data for these credits.

With the publication of the tax year 2011 IRS data for 25C and 25D, significant reductions in use are clearly seen due to the rule changes that occurred at the end of 2010.

For example, from 2009 through the end of 2010, the 25C credit for existing homes was available as a 30% credit and $1,500 limit. After the extension of the “tax extenders” legislation at the end of 2010, those rules were pared back and retained when the credit was extended again as part of the Fiscal Cliff deal. Among those rule changes, the credit was reduced to a 10% rate and a $500 lifetime cap was imposed. It is worth noting that this version of the credit, along with many other tax extenders, expired at the end of 2013.

25C_2011

The 2011 IRS data show significant declines in 25C use as a result of the 2010 changes. The largest impact came from energy-efficient windows, for which the total dollar volume of installed qualified property fell from about $7.8 billion to approximately $1.4 billion. Qualified furnace installations declined by more than $5 billion, reaching a 2011 total of about $180 million.

Tax credit qualified insulation installations fell by more than $1.5 billion but was the largest category in 2011 at a total of $1.87 billion. Roofing retrofits were second with a tally of $1.4 billion.

In total, more than $6 billion of qualified improvements were made in 2011 in connection with the 25C credit. These expenditures resulted in more than $750 million in tax credits for just shy of 3.5 million homeowners.

25D_2011

 

In contrast, tax credit use under section 25D of the code expanded in 2011 from 2010 levels. The 25D credit is for installation of qualified power production property in both new and existing homes. The credit is equal to 30% of expenditures, including certain labor costs and is claimed by the homeowner. Unlike the 25C credit, the 25D program remains in law and is scheduled to sunset at the end of 2016.

The most popular 25D investment in 2011 was the installation of residential solar panels. 25D qualified solar electric property investments totaled almost $1.5 billion in 2011 for more than 100,000 taxpayers. It is worth noting that these solar installations reflect credits claimed for electrical system integrated panels that provide power for the home, as well as panels used to power stand-alone property like attic fans.

The second largest category was geothermal heat pumps, with $1.2 billion of installations claimed by more than 70,000 homeowners. The geothermal category experienced the largest growth in 2011 in terms of tax credit claims, up almost $300 million in total installations over 2010 totals.

In total, for 2011 there were $3.03 billion of qualified power production investments yielding about $921 million in 25D credits.

Given the rising popularity of items like solar panels, builders are well advised to examine the 25D program for prospective homeowners. The 25D credit can be awarded in new construction by providing the eventual homeowner an itemized breakout of material and labor costs associated with qualified property installation, so that the homeowner can claim the credit on their income tax return. An IRS Q&A on 25D and 25C can be found here.


Eye on the Economy: February Construction Holds Steady

March 19, 2014

As the unusually cold winter continued in many parts of the country, March builder confidence remained steady. The NAHB/Wells Fargo Housing Market Index came in at a level of 47, one point lower from February’s 46. Ongoing weather challenges and increasing concern among builders about supply chain issues have held builder confidence down in recent months.

Census reported housing construction starts were virtually unchanged from slightly upwardly revised January figures. Total housing starts were 907,000 on a seasonally-adjusted annual basis, nearly identical to 909,000 in January. Single-family starts were 583,000, up 2,000 from January.

Regionally, single-family starts remained well below 2013 totals in the Northeast and Midwest, while above last year’s in the South and West. The regional differences match the location of the worst below-average temperatures and above-average snow falls and support the explanation of a weather effect rather than a shift in the housing market.

The pace of multifamily starts came in at a 324,000 annualized rate in February, down 4,000 from January but above the one-year average of 313,000. Other multifamily market data indicate that this sector continues to have room to grow. According to Consumer Price Index data, real, inflation adjusted rents have increased 1.2% from last year. And three-month apartment absorption rates for for-sale and for-lease unit rates remain near post-recession highs.

Local conditions remain positive for housing across the country. The March NAHB/First American Leading Markets (LMI) Index remained unchanged in March at .87 from February, but the number of markets considered at or above their last normal periods increased from 58 to 59 from February to March and from 47 to 59 year over year. In addition, the number of markets doing better than the national market rose from 147 to 152 month over month.

The LMI measures proximity to a normal market by comparing the last 12 months of activity in three indicators (single-family permits, home prices and employment levels). The gradual, persistent increase in the number of markets improving is further indication of the slow but steady process of resolving the economic and housing problems that developed during the Great Recession.

NAHB survey data suggest that in addition to the weather, lots, labor and building material costs remain top industry challenges. For example, recent Bureau of Labor Statistics data indicate that there were 156,000 unfilled construction sector positions in January of 2014, the second highest count since May 2008. Overall employment growth remains lackluster, with the economy creating only 175,000 jobs in February after disappointing reports in January and December. And recent Producer Price Index data show that in February softwood lumber prices rose 2.2%, OSB prices declined 0.7%, and gypsum prices rose 4.1%.

In housing market analysis news, NAHB recently published information regarding housing preference among various ethnic groups. The study examines breakdowns of preferred housing items among these groups, as well demographic and income differences.

In addition, NAHB economists also examined local variations of homeownership rates and counts of owner-occupied homes. This review used data from the 2012 American Community Survey.

Finally, with respect to housing policy, NAHB’s Economics group published three summaries of key advocacy efforts underway on behalf of the home building sector: worker shortages, housing finance reform, and the prospect for comprehensive tax reform. Each one analyzes the data and draws economic conclusions in connection with ongoing efforts by NAHB and its membership.


The Future of the Housing Finance System

March 13, 2014

The future of the housing finance system is a key issue for the housing industry as well as the economic makeup of the middle class, given the importance that housing wealth and access to rental housing plays in our economy. These factors and the policies that shape them are of such significant importance that this topic has been selected as a primary issue for NAHB’s 2014 legislative conference, “Bringing Housing Home,”which takes place March 17-21 as home builders and other members of the residential construction industry meet federal lawmakers. As part of this event, this week we have examined labor issues and housing-related tax policy. In this last post, we examine housing finance.

The housing Government Sponsored Enterprises (GSEs) — Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLBanks) — have been, and remain, critical components of the U.S. housing finance system. They were created by Congress to support mortgage market liquidity and help address affordable housing needs.

With Fannie Mae and Freddie Mac still operating under conservatorship, serious housing finance reform policy discussions are underway in Congress. While many approaches exist that would determine the future of the system, nearly everyone agrees that reform is critical for housing and the economy. NAHB has made recommendations to Congress outlining a plan by which Fannie Mae and Freddie Mac would gradually be phased into a private-sector-oriented system, where the federal government’s role is clear, but its exposure is limited. Federal support should be limited to catastrophic situations where carefully selected levels of private capital and insurance reserves are depleted before any taxpayer funds are employed to shore up the mortgage market.

The future of housing and the middle class are at stake. For example, while significant declines for the nation’s homeownership rate – 65.1% for 2013 - may have ended, the impacts of the Great Recession on younger homebuyers is clear. The homeownership rate of those aged 35-44 today, a key group in terms of housing demand, has fallen below the overall homeownership rate. Today’s 35-44 cohort has a homeownership rate of 60.9% as of the fourth quarter of 2013, compared to approximately 65% for the overall population. And this marks a significant decline from the 70% rate for those aged 35-44 in 1982.

These trends are consistent with more recent housing data suggesting declines and delays of first-time homebuyer purchases. Rising interest rates have reduced affordability for some of these buyers, which means having to increase downpayments or alter home price budgets. Policy changes that would further increase the cost of purchasing a home would further set back these younger buyers, as well as have broader impacts for the overall housing market and the economy as a whole.

It is important to remember the importance that housing provides, not just as a source of shelter, but also a key component of household and national wealth. Housing is a capital good and part of the nation’s capital stock and infrastructure. And as prior NAHB research has demonstrated, primary residences represent the largest asset category on the balance sheets of households. At $20.7 trillion, primary residences accounted for almost one-third, 30%, of all assets held nationally by households in 2010. Policy changes that would harm the housing market would have significant impacts for the economy as a whole. It would take only a 6% decline in housing prices to eliminate $ 1 trillion in national wealth.

Primary residences represented 62% of the median homeowner’s total assets and 42% of the median home owner’s wealth. In addition, the median value of the primary residence across all households (including renters, so the median household is not the median owner-occupier) was $100,000. In contrast, the median values of financial assets and vehicles were only $17,000 and $12,200 respectively across all households.

Housing wealth is also a widely held asset. Two out of every three households, 67%, owned a primary residence in 2010 while just over half of households, 50%, held a retirement account. Meanwhile, 16% of households owned either stocks or bonds.

Equity in residential property tends to be a particularly important component of wealth for lower-income, older households. For 75+ households with incomes under $35,000, the median share of net worth held as equity in a primary residence is 60 percent.

For these reasons, the future of the federal housing finance system, and by extension homeownership, is a key issue going forward for housing and the residential construction sector.


Tax Policy and Housing

March 12, 2014

Tax policy plays a key role in shaping housing demand, determining business conditions and deterring or fostering economic growth. Housing-related tax policy is of such significant importance that it has been selected as a primary issue for NAHB’s 2014 legislative conference, “Bringing Housing Home,” which takes place March 17-21 as home builders and other members of the residential construction industry meet federal lawmakers. As part of this event, yesterday we examined labor issues and tomorrow we will look at the future of the housing finance system.

The mortgage interest deduction (MID) is a cornerstone of housing tax policy. Deductions for mortgage interest have been permitted since the establishment of the income tax in 1913. Broadly claimed, the deduction facilitates homeownership by reducing the after-tax of purchasing a home with a mortgage. The MID also creates parity with other forms of investment for which interest expense is deductible.

MID_200K (2)

According to 2012 data from Congress:

  • The MID benefitted 34.1 million homeowning households for a total savings of $68.2 billion in that year alone
  • Two-thirds of the tax benefit was collected by households earning less than $200,000 in economic income
  • For households earning between $100,000 and $200,000 (e.g. married couple each earning $55,000), the average tax savings was more than $2,000 for just a single year

Historically more than 85% of mortgage interest paid is claimed as a deduction on Schedule A. That is, most people paying a mortgage are in fact itemizing taxpayers. And the largest benefits as a share of household income, are typically for younger households, who are paying mostly interest in the early years of a mortgage.

The rules for second homes are also critically important for homeowners who change principal residences within a tax year, traditional seasonal residence markets, and custom home construction in which the eventual homeowner takes out a construction loan. This broad use of the second home MID rules is illustrated by examining the geographic distribution of the second home housing stock.

Vacancy_cty_totals2

Public opinion polling consistently reports that homeowners and renters – prospective homebuyers - favor retaining present law rules concerning the MID and defending our nation’s commitment to homeownership. For example, a 2013 United Technologies/National Journal Congressional Connection Poll asked respondents to rate the importance of various tax rules. The results indicated that 61% of respondents said that it was ”very important” to keep the MID, with 86% of individuals saying it was either “very important” or “important.” This placed the MID second in their list, falling behind only tax preferred retirement accounts, such as 401(k)s, which scored a 63% “very important” ranking.

Recent economic research has linked the use of the MID with intergenerational income mobility. And macroeconomic modeling by the Tax Foundation found that repealing the MID to lower-income tax rates would reduce GDP growth.

Another important tax program on the rental housing side of the industry is the affordable housing credit or LIHTC. Created as part of the last major tax reform effort in 1986, the Low-Income Housing Tax Credit (LIHTC) replaced previous policies with a successful private-public partnership that ensures the development of housing for low- and moderate-income Americans. Since its inception, the program has financed the construction of more than 2.5 million affordable homes.

The LIHTC allows equity investments to be raised at lower cost, which makes the production of affordable housing possible. The LIHTC sustains 95,000 new full time jobs per year across all U.S. industries—generating $2 billion in federal tax revenue. No other housing program has been as successful as the LIHTC in producing safe, high quality, affordable rental housing. While the program has been producing approximately 75,000 new homes a year, the need for affordable housing remains strong given rent burden levels across the nation.

Rent Burden

For these reasons noted above, the future of the MID, the LIHTC, and other housing related tax provisions should be watched carefully in any future tax reform effort. A recent discussion draft of a comprehensive tax reform proposal from House Ways and Means Chairman Dave Camp would, for example, make significant changes to these and other tax rules.


Apartment Absorption Rates Remain High

March 12, 2014

Absorption rates for new rental and for-sale multifamily homes remained near post-recession highs in the fourth quarter of 2013.

According to data from the Survey of Market Absorption of Apartments (SOMA), completions of privately financed, unsubsidized, unfurnished rental apartments in buildings with five or more units were up strongly for the four quarter period ending with the third quarter of 2013. A total of 129,200 such apartments were completed for those four quarters, compared to 88,700 a year earlier.

Non-seasonally adjusted three-month absorption rates (units rented after construction of the property is complete) for third quarter completions (rented during the fourth quarter) remained steady at 66% compared to 65% a year earlier. Absorption rates for rental apartments have been generally rising since late 2008 as rental demand increased as a result of the housing downturn.

Apts_4q rentals

In contrast, condo and co-op completions remain at historically low levels, with 1,700 for-sale multifamily homes completed during the third quarter. While construction remains at low levels, the 3-month absorption rate for for-sale multifamily has improved significantly, reaching 90% for third quarter completions.

Condos_4q sales

The SOMA data also reveal that for properties with five or more units approximately 10,900 Low-Income Housing Tax Credit or other federally subsidized units were completed in the third quarter of 2013. This is down slightly from the 11,600 affordable units estimated completed during same quarter in 2012. The affordable share, LIHTC and other subsidized units, of multifamily completions was 19% for the third quarter.

3q completions by type


Labor Shortages Are A Key Issue for Housing

March 11, 2014

According to NAHB industry surveys, finding and hiring workers is a key challenge for home builders as construction activity grows. This issue is of such significant importance that it has been selected as a primary issue for NAHB’s 2014 legislative conference, “Bringing Housing Home,” which takes place March 17-21 as home builders and other members of the residential construction industry meet federal lawmakers.

According to the most recent NAHB survey, 65% of builders reported the cost and availability of labor is expected to be a significant challenge in 2014, up from 53% for 2013. And survey data from 2013 indicated that the limited availability of workers has produced higher construction costs (54% of builders), higher prices for new construction (54%), and created difficulties in completing projects on time (46%).

cosntr labor market

The challenge associated with hiring or contracting with workers is clear in government data. For example, in the Bureau of Labor Statistics Job Openings and Labor Turnover Survey (JOLTS), the number of unfilled jobs in the construction sector rose 38% from January 2013 to January 2014, increasing from 113,000 to 156,000.

Home building can be an engine of job creation. As of January 2014 total employment in home building stands at 2.227 million, broken down as 648,000 builders and 1.579 million residential specialty trade contractors. Over the last year the home building sector has added 101,000 jobs. And since the point of peak decline of home building employment during the recession, 243,000 positions have been added to the residential construction sector.

And this employment is spread across the nation.

Builder employment map

The issues of housing demand and labor availability are closely tied to our nation’s immigration policy. Foreign-born workers account for 22% of the construction labor force nationally. Immigration is also a key driver of housing demand. For example, over ten years, 1.2 million immigrants (annual low-end Census projection) could generate 3.4 million households, occupying more than 2 million multifamily homes, 1.2 million single-family homes, and yielding 900,000 homeowners.

For these reasons, policy debates concerning fair employer verification rules (E-Verify), market-based visa systems, and comprehensive immigration reform more generally will have direct impacts on home builders and other housing stakeholders in the years ahead.

Tomorrow we will examine tax issues and housing and on Thursday the future of the housing finance system.


Eye on the Economy: New Home Sales Bounce Back in January

March 6, 2014

The housing market and the broader economy shivered at the end of 2013 as weather-related factors held consumers back and generated production delays. These impacts should prove temporary and our forecast remains positive for housing and home building for the year to come. Indeed, reports from January suggest some improvement over disappointing December data.

New home sales in January, as estimated by the Census Bureau and HUD, were up 9.6% over the December pace, coming in at 468,000 seasonally adjusted annualized rate. This pace is 2.2% higher than the January 2013 measure. The month-supply measure of inventory fell to 4.7, with the count of new homes for sales standing at 184,000. Only 45,000 of those were completed, ready-to-occupy new homes.

New home sales_Jan

The National Association of Realtors (NAR) Pending Home Sales Index (PHSI), a measure of existing home sales that is determined on a contract basis similar to new home sales, was up marginally January (0.1%) after a 5.8% decline in December. Despite the January reading, the pace of existing home sales has slowed significantly, with the most recent PHSI down 9% year-over-year. The NAR measure for existing home sales was down 5.1% in January and was 5.1% lower compared to a year prior.

The combination of weaker starts and sales was due to some weather delays but also reflects some slackening of housing demand at the start of 2014. Nonetheless, the overall pace of residential construction remains positive. According to the Census, private residential construction spending – measured on a put-in-place basis – was up 1.1% from December and 14.6% from one year ago. The January reading marked the third consecutive month of increase.

The improvements in housing over the last two years are also apparent in the balance sheets of home builders. According to NAHB industry surveys, average builder net profit margins (4.9%) in 2012 were higher than prior readings in 2010 (0.5%) and 2008 (-3%) but still lower than 2006 (7.7%).

Current sector headwinds include continued tight credit access for building. NAHB survey data indicates tight but improving acquisition, development and construction (AD&C) loan conditions. FDIC data reveal multiple quarters of expansion of the outstanding stock of AD&C loans, but a lending gap persists between the demand for building and available credit.

Rising building material prices represent another challenge for builders. Data from the Bureau of Labor Statistics Producer Price Index showed a significant increase from December to January in gypsum prices (7.4%). Softwood lumber prices moved up modestly in January after softening at the end of 2013. OSB prices firmed slightly after steep declines from early 2013 peaks.

Despite some declines in housing affordability due to rising interest rates, conditions remain positive. According to the NAHB/Wells Fargo Housing Opportunity Index, 64.7% of new and existing homes sold between the beginning of October and the end of December of 2013 were affordable to families earning the U.S. median income of $64,400. This is virtually the same as the 64.5% of homes sold that were affordable to median-income earners in the third quarter.

Multifamily developers experienced a pullback in market sentiment at the end of 2013. The NAHB Multifamily Production Index (MPI) showed a slight weakening as the index declined four points to 50 in the fourth quarter of 2013. It is, however, the eighth consecutive reading of 50 or above. The index and all its components are scaled so that a number of 50 indicates that the same number of respondents report conditions are improving as report conditions are getting worse.

This quarter’s MPI results are in line with NAHB’s forecast of increased apartment production in 2014 but at a slower pace than last year. The results are also in line with recent downturns in other economic indicators, due to unusually severe weather in parts of the country that disrupted supply chains and affected confidence in several sectors of the economy.

The slowing of the pace of improvement for housing at the end of 2013 was mirrored by changes in overall macroeconomic conditions. The Bureau of Economic Analysis second estimate of real GDP growth for the fourth quarter was revised down to a 2.4% seasonally adjusted annual rate, from 3.2% in the advance estimate and down from the 4.1% in the third quarter.

With respect to consumer confidence, February was a month of mixed results, as the Consumer Sentiment Index increased while the separate Consumer Confidence Index decreased slightly. After a slide in late 2013, both measures have shown resilience in the face of extreme weather and high utility bills.

At the start of the year, NAHB economists published a number of reports concerning the type of housing being built in 2014. For instance, single-family home size increased in 2013, with the impact due to a market tilted more to high-end buyers. Top features in new single-family homes include walk-in closets, low-E windows, laundry rooms and a great room.

The size of typical multifamily units also increased, albeit off of cycle lows set in 2012. Apartment sizes can be expected to increase in the years ahead as the for-sale multifamily sector recovers.

Quarterly data from the end of 2013 indicate that the market share of owner- and contractor-built homes was relatively flat as the overall single-family market expanded. The market share of townhomes was down over the course of 2013 as the first-time home buyer market sagged. However, the share of single-family built-for-rent construction appears to be declining off recent highs as investors pull back. This market remained a niche segment even during cycle highs, peaking just below 6% one year ago.

Finally, in policy news, the chairman of the House Ways and Means Committee recently published a comprehensive tax reform draft bill that would have significant impacts for home buyers and home owners, builders and multifamily developers and property owners. In general, the plan provides for lower tax rates, while trimming or eliminating many existing rules. NAHB will examine the bill in its entirety to help determine possible impacts on housing. While there is no expectation that the bill will move in the House in this election year, the draft will likely serve as a rough draft for future tax policy debates


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