New Homes are Less Expensive to Maintain

April 17, 2014

April is new homes month. And one of the virtues of a newly constructed home is the savings that come from reduced energy and maintenance expenses.

In a previous analysis, we used data from the 2009 American Housing Survey (AHS) to offer proof. The AHS classifies new construction as homes no more than four years old.

For routine maintenance expenses, 26% of all homeowners spent $100 or more a month on various upkeep costs. However, only 11% of owners of newly constructed homes spent this amount. In fact, 73% of new homeowners spent less than $25 a month on routine maintenance costs.

monthly maint costs

Similar findings are available for energy expenses. According to the 2011 AHS, on a median per square foot basis, homeowners spent 81 cents per square foot per year on electricity. Owners of new homes spent less: 68 cents per square foot per year. For homes with piped gas, homeowners spent on average 50 cents per square foot per year. Owners of new homes spent just 34 cents per square foot per year.

The 2011 data show similar results for various other utilities. For water bills, homeowners averaged 28 cents per square foot per year, while owners of new homes averaged 22 cents.  For trash bills, the median for all homeowners was 15 cents per square foot per year, while for new construction the median was 13 cents per square foot per year.

These data highlight that a new home offers savings over the life of ownership due to reduced operating costs. And in fact, these reduced costs result in lower insurance bills as well. The median cost for all homeowners of property insurance is 39 cents per square foot, while it is only 31 cents per square foot for owners of new homes.

These reduced expenditures represent one of the many reasons that the current system of appraisals needs updating to reflect the flow of benefits that come from features in a new home.


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.


Housing Starts Reverse Winter Slump

April 16, 2014

Census and HUD reported March housing starts were up 2.8% from an upwardly revised February. Single-family starts accounted for all of the increase, rising 6% to 635,000 on a seasonally-adjusted annual basis. The increase was particularly strong in the hardest hit northern US of the Northeast and Midwest regions where single-family starts increased 39% and 29% respectively.

Housing permits dropped 2.4% virtually all in the multifamily apartment sector. Multifamily permits (in buildings with 2 or more units) were 398,000 (on a seasonally-adjusted annual basis), about the same as the fourth quarter of 2013. February was unusually high at 425,000 so the fall in March was an adjustment to an unsustainable level than a reversal in apartment construction.

The modest recovery in single-family construction after an unusual winter reflects builders continued caution as the overall economic expansion moves slowly forward. Housing conditions are right for continued growth in housing construction and sales. But consumers’ economic condition and expectations remain uncertain enough that committing to a large and long-lasting purchase like a home remains tentative. Builders, consequently, are reflecting that same caution.

In an April survey, the leading reason builders gave for consumer hesitancy was buyers worried about their employment and economic situation at 47% of all builders. The share is down from over 70% in 2009. The second leading reason for consumer hesitancy is that the prospective buyer cannot sell their existing home, also down significantly from over 80% in 2009 but still high. These top reasons are somewhat circular in that the likely reason current home owners feel they will have trouble selling their home is their prospective buyer is uncertain about their economic future.

Hence, as the employment market continues to improve (NAHB forecasts 1.6% increase this year) and consumer confidence continues to improve, these hesitancies will dissipate and housing sales and construction will move forward at a modest pace. NAHB expects a 17% increase in construction in 2014.

Housing Starts


Builder Sentiment Steady

April 15, 2014

The March NAHB/Wells Fargo Housing Market Index rose one point from a one-point downwardly revised February to 47. This is the third consecutive month with the index below 50, the point where more builders see the market improving rather than getting poorer. Two of the three components of the index remained unchanged; the current sales index was at 51, the same as the one-point downwardly revised February index and the traffic index was 32, which is the same as the one-point downwardly revised February component. The heaviest weighted sub-index is the expectations for the next six months, which was up four points to 57.

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.

Access to credit continues to be a concern across all parts of the country as builders search for credit to buy land and build homes and consumers apply for mortgages. A recent NAHB survey of builders found some improvement in builders’ access to capital and FDIC quarterly reports finally show some increase in bank holdings of AD&C residential credit. Lot supply will take longer to solve but access to credit is a critical first step. The housing recovery is likely to be hindered by these limitations just as demand begins to resurge.

NAHB expects 1.1 million housing starts in 2014 primarily driven by the pent up demand of existing home owners. The first-time home buyer will return more gradually as mortgage credit standards become more rational and young adults’ incomes stabilize and grow.

Single-family Starts and NAHB


Producer Price Index Up for March

April 11, 2014

The Producer Price Index (PPI) – a broad measure of the prices received by domestic producers of goods and services – increased in March, according to data from the Bureau of Labor Statistics.

The overall PPI increased 0.46% on a seasonally adjusted basis for the month of March, higher than analyst expectations. The PPI for goods was flat, with the increase in the headline PPI due to a month-over-month 0.65% for the PPI for services. On a non-seasonal adjusted basis, producer prices have increased 1.37% over the last 12 months, which while currently tame may suggest higher prices ahead.

March_PPI_v2

Among home building materials, gypsum prices were down 0.9% for the month of March, after significant increases in February (4.1%) and January (7.4%).  Softwood lumber products increased 1.7% in March, while OSB prices were effectively flat.

On a year-over-year basis, gypsum prices are up 9.5%, while softwood lumber prices are down slightly from a price peak set at the beginning of 2013. OSB prices are down nearly 40% from a significant run-up in price that began in 2012 but subsided at the end of 2013.

One conclusion that can be reached from recent years’ data is that the prices of major building materials tend toward volatility as home building expands. Rising and unpredictable building material prices represent yet another potential headwind along the overall path of recovery for the residential construction sector.

 


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.


Construction Job Openings Cool at the Start of 2014

April 8, 2014

The number of open, unfilled construction sector jobs declined at the start of 2014, according to the BLS Job Openings and Labor Turnover Survey (JOLTS). While the February open rate is the fifth highest since the end of the recession, the count of open construction jobs fell during a period when unseasonably cold weather took a toll on numerous parts of the economy.

For the construction sector, monthly gross hiring declined slightly, falling on a seasonally adjusted basis from 281,000 to 273,000 from January to February. Over the same period, the hiring rate, as measured on a 3-month moving average basis, fell from 4.7% to 4.5%.

JOLTS_Feb 2014 data

Measured as a three-month moving average, the construction openings rate (the blue line above) has declined since December, inclusive of a significant downward revision for the preliminary January data. As of February 2014, the three-month moving average stood at 2%, a rate higher than any data reporting prior to October 2013 but lower than the December 2013 peak of 2.33%.

Two other changes in the construction sector are worth noting. First, the layoff rate for the sector (graphed above as a 12-month moving average) has continued to fall. Second, the sector hiring rate has fallen noticeably since the fall of 2013. The trend lines over the last two years – a falling hiring rate, an increasing opening rate, and a declining layoff rate – are consistent with some construction firms having trouble contracting with workers for specific projects. However, future employment reports will indicate whether recent hiring weakness is mostly due to weather effects or reflects new baselines for construction activity.

Monthly employment data for March 2014 (the employment count data from the BLS establishment survey are published one month ahead of the JOLTS data) indicate that total employment in home building stands at 2.242 million, broken down as 650,000 builders and 1.592 million residential specialty trade contractors.

res construction employment

According to the BLS data, over the last year the home building sector has added 103,000 jobs. Since the point of peak decline of home building employment, when total job losses for the industry stood at 1.466 million, 257,500 positions have been added to the residential construction sector. As of March, over the last six months the home building and remodeling industry has added on average more than 10,000 jobs per month.

For the economy as a whole, the February JOLTS data indicate that the hiring rate was constant at 3.3% of total employment. The hiring rate has been in the 3.1% to 3.4% range since January 2011. The current overall job openings rate (2.9%) has been in the 2.7% to 2.9% range since the start of 2013.


Metropolitan Markets Improve Slightly

April 7, 2014

The April NAHB/First American Leading Market Index rose one point to .88 from .87 in March. The index measures how close individual markets and the US market are relative to their last normal market activity. A total of 153 markets or about half of all markets were at or above the national index and 59 markets’ indexes were at or above one, meaning those markets had met or exceeded the last period of normal market activity.

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 index 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 US.

Most markets (308 or 88%) have seen a recovery back to normal in home prices but employment lags,; 40 markets or 11% are back or above normal employment levels. Housing is even further behind; only 24 markets or 7% are back to or above normal levels of single-family permit issuance.

LMI April


Residential Construction Employment Up 9,100 in March

April 4, 2014

Solid job growth for home builders and remodelers was recorded in March, according to data from the Bureau of Labor Statistics (BLS). The residential construction industry added 9,100 jobs for the month on a seasonally adjusted basis, 3,100 working for builders and 6,000 residential specialty trade contractors.

res constr employment

 

Total industry employment now stands at 2.242 million, broken down as approximately 650,000 builders and 1.592 million residential contractors. For 2014, the residential building industry has been averaging 10,000 jobs created per month. Over the last year, 103,000 jobs were created, and the home building workforce has gained 257,500 jobs since the post-recession low point set in January 2011.

home building employment share

Over the last year and a half, the share of jobs being created by the sector has outpaced the share of industry employment. For example, in March 2014, industry employment represented 1.63% of total nonfarm jobs. However, residential building was responsible for 4.74% of total jobs created. Home building typically provides an outsized boost to economic growth and job creation as a recession ends. In the last year or two, home building has finally assumed this typical economic role.

Overall, the establishment survey from the BLS indicated that 192,000 jobs were created on a seasonally adjusted basis in March. This was slightly below expectations, but on net a positive indicator for the economy. Previous months reporting was also revised up by 37,000 jobs.

The March data is also consistent with the claim that unseasonably cold weather in much of the U.S. held back economic growth during the end of 2013 and the start of the new year.

The separate household survey reported that the unemployment rate held steady in March at 6.7%. In a positive sign for household formations and housing demand, the labor force participation rate increased 0.2 percentage points to 63.2%. The size of the labor force increased by 503,000 in March.

 


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.


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