Pending Sales Down

March 27, 2014

The Pending Home Sales Index (PHSI), a forward-looking indicator based on signed contracts, decreased 0.8% in February to 93.9 from a downwardly revised January level of 94.7. The PHSI now has declined eight straight months, and is at the lowest level since the 92.2 reported in October 2011. The February 2014 PHSI reported by the National Association of Realtors (NAR) was 10.5% lower than the same period a year ago.
Pending Home Sales February 2014


The February PHSI increased in the Midwest and West by 2.8% and 2.3% respectively, and fell in the Northeast and South by 2.4% and 4.0% respectively. All regions fell year-over-year, ranging from 7.4% in the Northeast to 16.5% in the West.

Two days ago Census reported a 3.3% decrease in February new home sales. For the second consecutive month, the unusually severe winter has slowed the housing market. However, the growth in household formations and strong pent-up demand will move the market forward later this year. The downward slide in the PHSI indicates existing home sales will remain flat over the next two months.

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.


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.



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.

Existing Sales Flat

March 20, 2014

Existing home sales decreased 0.4% in February, and fell 7.1% from the same period a year ago. The National Association of Realtors (NAR) reported February 2014 total existing home sales at a seasonally adjusted rate of 4.60 million units combined for single-family homes, townhomes, condominiums and co-ops, down from 4.62 million units in January.

Existing Home Sales February 2014

The West and South increased by 5.9% and 1.5% respectively from January, while the Midwest and Northeast decreased 3.8% and 11.3% respectively. Year-over-year, all regions decreased, ranging from a slight 0.5% in the South to 12.7% in the Northeast. Seasonally adjusted condominium and co-op sales fell 1.8% in February, and were down 8.2% from the same period a year ago.

First-time buyers comprised 28% of February 2014 sales, up from 26% in January, but down from 30% last February. The January first-time buyer share of 26% was the lowest since NAR began reporting that share monthly in October 2008. The historical average first-time buyer share is about 40%. Tight lending conditions continue to buffet first-time buyers, and NAR points to high levels of student debt as an important factor.

Total housing inventory increased 6.4% in February to 2.0 million existing homes. At the current sales rate, the February 2014 inventory represents a 5.2-month supply compared to a 4.9-month supply in January, and a 4.6-month supply of homes a year ago. On a positive note, NAR also reported that the February median time on market for all homes was 62 days, down from 67 days in January and 74 days during the same month a year ago. NAR reported that 34% of homes sold in February were on the market less than a month, compared to 31% of all homes sold in January.

As the market heals, the share of distressed sales increased for a second consecutive month to 16% in February from 15% in January, but was down from 25% a year ago. Distressed sales are defined as foreclosures and short sales sold at deep discounts. All cash sales were 35% of February transactions, up from 33% in January and 32% the same period a year ago. Individual investors purchased a 21% share in February, down from 20% in January and 22% a year ago. Some 73% of February investors paid cash, up from 70% last month.

The median sales price for existing homes of all types increased to $189,000 in February from a downwardly revised $187,900 in January, but was up 9.1% from a year ago. The median condominium/co-op price was $187,900 in February, down from a revised $187,900 in January, but up 9.8% from February 2013.

The December Pending Home Sales Index fell sharply by 8.7% in December, and then ticked up a tiny 0.1% in January. With much of the decrease attributed to weather, it was expected that January and February existing home sales would also fall sharply. Despite the increase in the February investor share, the 2013 run up of existing home prices will eventually make these homes less appealing for investors, and a future withdrawal of that demand will further depress existing sales. While existing home sales are down year-over-year, new home sales continue to post year-over-year gains (tempered by recent weather impacts) as investor activity cools. January 2014 new home sales hit a seasonally adjusted rate of 468,000 which was up from 458,000 during the same month a year ago.

Last month NAR reported that higher flood insurance rates presented a new headwind for just under a tenth of the market, and that 40,000 home sales were either cancelled or delayed because of higher flood insurance rates. NAHB applauds the Senate for joining the House by passing H.R. 3370, the Homeowner Flood Insurance Affordability Act, which will moderate the immediate impact of flood insurance premiums on home owners.

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.

Housing Construction Holds Steady

March 18, 2014

The unusual weather that kept builders out of the field continued into February and kept starts below their expected levels.

February housing starts were virtually unchanged from slightly upward revised January figures for both total starts as well as single-family and multifamily. Total housing starts were 907,000 on a seasonally-adjusted annual basis, nearly identical to 909,000 in January, which was revised upward from 880,000. Single-family starts were 583,000, up 2,000 from January and multifamily came in at 324,000, down 4,000 from January.

Regionally, single-family starts remained well below 2013 totals in the Northeast and Midwest while above last year 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.

Less weather-dependent permits were up almost 8% to 1,018,000, the fourth month over one million in the past year and second only to October 2013 since June 2008. Single-family permits were down almost 2 percent to an annual level of 588,000, due to a 13,000 drop in the West. Multifamily permits, on the other hand, rose 24 percent to 430,000, their highest level since May 2007.

Single-family completions continued to follow a general increasing trend rising to 631,000, the highest since December 2008 as builders continue to restock their depleted inventory in preparation for the spring selling season. Limited buildable lot and skilled labor supply have caused builders to slow production in some markets and lengthen their construction time in order to meet demand.

Housing Starts Feb 2014

Builders’ Confidence Remains Same

March 17, 2014

The March NAHB/Wells Fargo Housing Market Index held roughly the same at 47, which is up one point from the unrevised February level of 46. The past two months have the same message: unusually cold and wet weather over much of the US combined with increasing concern among builders that the supply chain cannot keep up with the expected spring rebound.

Weather continued to limit builders and buyers ability to get to construction sites. At the same time, the continued limited supply of buildable lots and skilled labor has held back builders’ ability to resupply a very low inventory of new homes for sale. The January months’ supply of new homes dipped below 5 months and the absolute level remained at 184,000 compared to an average of 320,000 throughout 1990 and early 2000s.

HMI components were mixed with current sales index up one point to 52 and traffic up two points to 33. Expectations for the next six months dropped one point to 53. Regional indexes reflected the degree of weather disruption with the three month moving average down four points in the South, three points in the Northeast and Midwest and two points in the West.

Builders’ comments continued to concentrate on the unusual weather with greater frequency in the March report than the February report. The most mentioned supply chain problem continues to be lot availability followed by labor supply and cost.

New Home Sales and Builder Sentiment

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.


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.


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