Existing Sales Remain Flat

April 22, 2014

Existing home sales decreased 0.2% in March, and fell 7.5% from the same period a year ago. The National Association of Realtors (NAR) reported March 2014 total existing home sales at a seasonally adjusted rate of 4.59 million units combined for single-family homes, townhomes, condominiums and co-ops, down from 4.60 million units in February.
Existing Home Sales March 2014

The Northeast and Midwest increased by 9.1% and 4.0% respectively from February, while the South and West decreased 3.0% and 3.7% respectively. Year-over-year, all regions decreased, ranging from a 3.0% drop in the South to a 13.4% decrease in the West. Seasonally adjusted condominium and co-op sales fell 1.8% in March, and were down 8.3% from the same period a year ago.

First-time buyers comprised 30% of March 2014 sales, up from 28% in February and were unchanged from last March. 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 and tight inventory in the lower price ranges as important factors.

Total housing inventory increased 4.7% in March to 1.99 million existing homes. At the current sales rate, the March 2014 inventory represents a 5.2-month supply, up from a 5.0-month supply in February and up from a 4.7-month supply a year ago. On a positive note, NAR also reported that the March median time on market for all homes was 55 days, down from 62 days in February and 62 days during the same month a year ago. NAR reported that 37% of homes sold in March were on the market less than a month, compared to 34% of all homes sold in February.

As the market cures, the share of distressed sales decreased to 14% of March sales, down from 16% in February and 21% a year ago. Distressed sales are defined as foreclosures and short sales sold at deep discounts. All cash sales comprised 33% of March transactions, down from 35% in February, but up from 30% the same period a year ago. Individual investors purchased a 17% share in March, down from 21% in February and 19% a year ago. Some 71% of March investors paid cash, up from 73% last month.

The median sales price for existing homes of all types increased to $198,500 in March from a downwardly revised $188,300 in February, and was up 7.9% from a year ago. The median condominium/co-op price soared to $200,800 in March, up from a revised $185,100 in February and was up 11.6% from March 2013.

The Pending Home Sales Index fell 0.8% in February to the lowest level since October 2011. Therefore, it was expected that March existing home sales would remain flat. The decline in the March investor share suggests that the continued 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. NAR continues to make the point that increased new home construction will free up existing inventory for first-time buyers.

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. The new home sales numbers will be released tomorrow.


Smaller Banks Are the Largest Source of AD&C Lending

April 21, 2014

Data from the FDIC indicate that smaller financial institutions, typically community banks, are the most common sources of lending for home building acquisition, development and construction (AD&C) loans. This trend strengthened during years of the housing crisis.

The FDIC data are split into two sources: commercial banks and savings institutions. As of the final quarter of 2013, total 1-4 residential construction and development loans held by commercial banks summed to $38.9 billion. Such loans from savings institutions represented a smaller source: $4.8 billion.

Commercial bank AD&C shares 2013

With respect to commercial banks, the fourth quarter 2013 FDIC data reveal that 62% of home building AD&C lending was held by banks roughly matching the community bank standard of possessing less than $10 billion in total assets. This lending was decentralized as there are almost 5800 such institutions, although it is not possible to determine how many held residential AD&C loans. In contrast, there were 90 commercial banks with more than $10 billion in assets, holding a still significant $14.7 billion in home building AD&C loans.

Nonresidential AD&C lending, which includes some land development financing and commercial real estate, is more likely to be held by larger banks, as the chart above indicates. In fact, more than half (56%) of such loans were held by commercial banks with more than $10 billion in assets.

Change in AD&C loan share_commercial banks_0713

A larger share of residential AD&C was held by larger institutions prior to the recession. The chart above notes the change in market share from the end of 2007 to the end of 2013. While the share of nonresidential AD&C held by large banks increased over this six-year period, the market share of residential AD&C shifted to smaller banks. For example, at the end of 2007, 52% of home building AD&C was held by banks with more than $10 billion in assets, a swing of 14 percentage points of market share from 2007 to 2013.

Savings institutions AD&C shares 2013

The smaller savings institutions side of the market tells a similar story. At the end of 2013, 86% of home building AD&C loans held by savings institutions was controlled by institutions with less than $5 billion in assets. A noticeable difference is that both residential and nonresidential AD&C lending shifted, in terms of market share, toward smaller savings institutions from the end of 2007 to the end of 2013, as the following chart demonstrates.

Change in AD&C loan share_savings institutions_0713

 


Characteristics of Owners and Renters

April 18, 2014

An individual’s tenure choice (whether to rent or own) is based on a number of factors including age, income, and housing supply. It is therefore not surprising that characteristics differ markedly by tenure. The purpose of this post is to describe the typical household by tenure.

Age is an important component of tenure choice. Younger individuals are less likely to have the income necessary to purchase a home. In addition, marriage, which often precedes home ownership, typically occurs in the late twenties. In 2013, the Census estimates the median age at first marriage for males is 29 while the median age at first marriage for females is 26.6.

The age distribution of householders by tenure is provided below. A householder is defined by the Census as the person in whose name the housing unit is owned or rented.

Table_1

According to the 2012 American Community Survey (ACS) ten-year age breakouts, the largest share of owners falls within the age bracket between 45 to 54 years. Nearly 17 million or 22.7% percent of all owners are between 45 to 54 years. The largest share of renters falls within the age bracket between 25 to 34 years. Just over 11 million of 26.4% of all renters are between 25 to 34 years.

Income, another critical component of tenure choice, is also provided in the 2012 ACS. The median income for rent-occupied households was $31,888. The median income for owner-occupied households was more than twice that amount at $65,514.

The income measure provided includes all individuals in the household. Therefore, some of the difference is due to household size. According to the 2012 ACS, the average renter-occupied household size, which includes children, was 2.53 occupants. The average owner-occupied household size, which also includes children, was slightly higher at 2.7 occupants.

Additionally, a large share of renter-occupied units is single-income households. Nearly ten million or 26.1% percent of all renter-occupied units are single-income households. Only 13.3% of owner-occupied units are single-income households. The largest share of owner-occupied units is married households at 60.1%.

According to the Bureau of Labor Statistics 2012 Consumer Expenditure Survey (CE), average income for married couples with children was $98,104. The average income for all married couples was $90,393 in 2012.

Table_2

The data described above from the 2012 ACS presents a brief snapshot of housing characteristics by tenure. The typical owner-occupied household is headed by an individual between 45 to 54 years.  The median household income in 2012 was $65,514. The average household size was 2.7 occupants with the most common household type being married.

The typical renter-occupied household is headed by an individual between 25 to 34 years.  The median household income in 2012 was $31,888. The average household size was 2.53 occupants with the most common household type being single. Understanding these differences can help those interested in meeting the needs of occupants.

 


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


Natural Gas Prices Increase Sharply in March

April 15, 2014

Over the past 12 months, according to data released by the Bureau of Labor Statistics (BLS), prices on expenditures made by urban consumers increased 1.5% before seasonal adjustments. Consumer prices increased in March by 0.2% on a seasonally adjusted month-over-month basis.

Two important components of the residential utility bill (natural gas and electricity) increased in March. The natural gas index, a component of the energy price index, increased sharply month-over-month by 7.5%. This was the largest month-over-month increase since October 2005. Over the past twelve months the natural gas index increased by 16.4%. The electricity index increased month-over-month by 1.1% and 5.3% over the past twelve months.

The energy index fell for the second consecutive month by 0.1% on a month-over-month seasonally adjusted basis. The increases in natural gas and electricity were offset by a decrease in gasoline and fuel oil; all components of the energy index.

For the second consecutive month, the food index rose by 0.4%. Over the past twelve months, the food index increased by 1.7%. The index for meats, poultry, fish, and eggs increased 5.1% over the past twelve months.

The core CPI rose by 0.2% on a seasonally adjusted month-over-month basis and 1.7% for the year before seasonal adjustments. The Core CPI excludes more volatile food and energy prices.

Chart_1

The shelter index rose 0.3% month-over-month in March after increasing 0.2% in February.  Over the past twelve months, the shelter index increased 2.7% before seasonal adjustments.

Because shelter costs represent a large share of the average consumer’s expenditures, a 0.3% month-over-month increase is worth exploring further. Although the increase in the shelter index partly reflects increases in rental prices, the BLS measure does not isolate the change in rental prices from the changes in the overall price index. NAHB constructs a real rent price index to isolate the change in rental prices. The NAHB constructed measure indicates whether inflation in rents is faster or slower than general inflation and provides some insight into the supply and demand conditions for rental housing, after controlling for overall inflation. The real rent index increased in March by 0.1% month-over-month and 1.2% for the year.

Chart_2


Builder Sentiment Steady

April 15, 2014

The April NAHB/Wells Fargo Housing Market Index rose one point from a one-point downwardly revised March 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 March 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


Top Metro Areas – Owner-Occupied Units Built Since 2000

April 14, 2014

In a recent study, NAHB examines eight key housing statistics from the 2012 American Community Survey (ACS). This post takes a closer look at one of those statistics; the share of new owner-occupied units.

The share of new owner-occupied units is calculated by taking the total number of owner-occupied housing units built since 2000 divided by the total number of owner-occupied housing units. The number indicates how fast the stock of owner-occupied housing is growing.

The metropolitan area with the highest share of new owner-occupied units is Palm Coast, FL with 46.3%. The Palm Coast figure is well above the national share of new owner-occupied units of 17.0%.

Figure_1_High

The metropolitan areas with the highest share of new owner-occupied units are scattered from Delaware to Utah.  Three of the ten have a population greater than 1 million while four have a population below 200,000. The demand for new housing depends on factors including population and income growth.

The metropolitan area with the lowest share of new owner-occupied units is Binghamton, NY with 4.2%. Four of the ten metropolitan areas on the list are located in New York.

Figure_2_Low

The relatively low demand for new housing in part reflects an aging population.  The aging population represents a challenge for new home builders in these local metro areas but a significant opportunity of remodelers to meet the needs of a population with an aging housing stock.

  • The complete series is provided below.
  1. Eye on Housing – Top Ten Metro Areas – Owner Occupied Housing Units
  2. Eye on Housing – Top Ten Metro Areas – Homeownership Rate
  3. Eye on Housing – Top Ten Metro Areas – Vacancy Rates
  4. Eye on Housing – Top Ten Metro Areas – Single-Family Concentration
  5. Eye on Housing – Top Ten Metro Areas – Median Income and Home Value
  6. Eye on Housing – Top Ten Metro Areas – New Construction

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.


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