Eye on the Economy: Broader Economic Weakness Threatens Housing Gains


*Eye on the Economy is an NAHB newsletter that is published every two weeks and takes a larger view of recent economic and housing policy news.

While housing indicators reported a small slump in February and March, recent data have suggested a return to the long-run trend of improvement for housing. This stands in contrast to recent disappointing news for the economy as a whole.

Last week’s jobs report from the Bureau of Labor Statistics showed only a 69,000 increase in payroll employment for May. Analysts had been expecting a net increase of 150,000. The unemployment rate also increased to 8.2%. However, some of that increase was due to formerly discouraged workers returning to the labor force and seeking employment. In fact, the labor force increased by 642,000 in May, which could actually be a positive factor in the months ahead. Despite this, the labor market report suggested that the recent slowdown may be more than just weather related.

Similarly disappointing news came from the revised first quarter Gross Domestic Product (GDP) estimates from the Bureau of Economic Analysis. The revised data show that the economy grew by only 1.9% at the beginning of the year, down from the initial estimate of 2.2%. However, much of the downward revision was driven by changes to the inventory investment component. The personal consumption expenditure (PCE) component remained relatively healthy under the new estimates, growing at 2.7%. PCE growth was only 2.1% for the final quarter of 2011.

In housing news, the most recent Survey of Market Absorption data (SOMA) – a Census and Department of Housing and Urban Development product that tracks lease and sale rates of recently completed multifamily units – provided more evidence that the housing market slowed during the early part of 2012. The first-quarter absorption rate of for-rent apartments completed at the end of 2011 fell to 51%, compared to 67% for the previous quarter. Similarly, the absorption rate for condominiums for the same period fell from 79% – a high for the current cycle – to 40% at the beginning of 2012.

A striking statistic in the SOMA data reveals that for apartments completed at the end of 2011, 40% were either Low-Income Housing Tax Credit (LIHTC) financed or otherwise subsidized for affordable housing purposes. The average share for such units in previous years has been less than 20% of multifamily completions. This high market share proves the success of certain LIHTC policies that ensured a flow of capital for the construction of affordable housing during the downturn.

Some momentum was lost for existing home sales in April, as the National Association of Realtors (NAR) pending home sales index fell 5.5%. This declined came after three consecutive months of increases. Nonetheless, the index remains solidly higher than its level from one year ago, which should be reflected in future existing home sales reports from NAR.

The commonly watched home price data indices showed some weakness in recent reporting but remain essentially flat over the past year. The Case-Shiller national index for the first quarter fell 2%, but is down only 1.9% year over year. However, the national Federal Housing Finance agency index indicated that house prices were up 1.8% in March relative to February and up 2.7% from March 2011 year over year.

Construction spending continues to contribute to economic growth. Private residential spending was up 2.8% in April, with upward revisions for both February and March levels. Single-family expenditures were up 1.8% and have now increased for 10 of the last 11 months. Multifamily spending, which has been leading the industry over the past year, was up strongly at 4.1%. And the volatile measure of home improvement spending was up 3.7%, after registering a 2.9% decline in March.

Despite construction spending picking up, which in turn contributes to economic growth and creates jobs, lending for builders remains restrictive. However, there are signs that home builder lending sources for Acquisition, Development and Construction (AD&C) loan purposes may be entering a new phase.

First, NAHB survey data of builders showed stabilization for lending, although builders still report lending channels are getting worse for acquisition and development loans. This is particularly true for builders with less than 25 starts a year.

Secondly, data from the FDIC Statistics of Banking reveal that the quarterly declines for AD&C lending have been slowing, and in the first quarter of 2012, the declines may have ended. The first quarter 2012 AD&C loan total was only 2.6% lower than the previous quarter, which in turn was 5.4% lower than the third quarter of 2011. Before mid-2011, quarterly declines averaged about 10%.

Nonetheless, a lending gap continues to exist between home building demand and available credit. Since the beginning of 2007, the dollar value of single-family permitted construction has fallen 56%. During this same period, home building lending for AD&C purposes is down 79%.

If we assume that the ratio of total AD&C lending to the value of housing permits at the beginning of 2007 reflected normal levels, then a lending gap opened in the middle of 2010. Using the same benchmarks, total AD&C lending should be at least $40 billion higher to support today’s level of housing permits.

Overall, while housing has returned to its improving trend after a soft March, the recent data suggest that there are numerous macroeconomic risks that threaten to derail the ongoing slow recovery. Anemic job creation, weaker-than-expected GDP growth, continuing risks from Europe’s financial crisis, and domestic policy risks – including the fiscal cliff the U.S. faces at the end of 2012 – hover over a housing market that faces positive factors in terms of reduced inventories and pent-up demand. We continue to forecast gradual improvements for housing, but the presence of these macroeconomic risks suggest that the improvements and/or setbacks for local markets may become increasingly varied over the next few months.

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