Eye On Housing
*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.
A set of recent NAHB surveys suggest that the growth in housing will continue. This is a promising sign for home builders, remodelers and other stakeholders in the housing sector. It is also a hopeful indicator for the economy as a whole, which has underperformed in terms of growth and job creation during 2012.
With respect to the single-family market, the NAHB/Wells Fargo Housing Market Index rose another three points to a level of 40 in September, the highest in more than six years and extending to five the number of consecutive months of increase. All three components also increased to levels last seen five or six years ago.
The component measuring expectations for the next six months broke the 50-threshold, landing at 51. The three-month moving average indexes for all four Census regions also increased from two to five points to 30 for the Northeast, 40 for the Midwest, 36 for the South and 43 for the West.
The uptick in builder confidence was followed by a Census Bureau report of an increase in total housing starts for August. Housing starts increased 2.1% in August to a 750,000 seasonally-adjusted annualized (SAAR) level. The increase was concentrated entirely in the single-family sector increasing 5.5% to an SAAR of 535,000, the highest since early 2010 just before the home buyer tax credit expired. The improvement was broad-based with increases in all four Census regions.
Recent quarterly data from the Census Bureau provide details concerning conditions of specific types of single-family building. As of the second quarter of 2012, total townhouse construction increased significantly in recent months, matching a post-Great Recession high set during the home buyer tax credit period.
Quarterly starts of townhouses rose from 11,000 in the second quarter of 2011 to 17,000 during the same period of 2012. Using a one-year moving average, the market share of townhouses now stands at 11% of all single-family starts, up from 10.4% for the first quarter of 2012.
Despite growth for all types of single-family building, the market share for custom home building also remains high as of second quarter 2012. Census data indicate that the number of owner- or contractor-built housing starts totaled 37,000, placing the 1-year moving average of the share of total single-family starts at 28%.
This is down somewhat from the cycle high share of 31.5% set during the second quarter of 2009, a period for which the custom home building sector played an important role of providing jobs and economic growth during the depths of the Great Recession.
The growth seen in builder confidence and single-family housing starts is matched by positive trends in the NAHB/First American Improving Markets Index. The number of improving housing markets across the country rose to 99 in September, up from 80 metros that were listed as improving in August. The index now includes representatives from 33 states as well as the District of Columbia.
More metros across the country are experiencing a sustained uptick in house prices, employment and new building activity as rising consumer confidence in local market conditions pushes more people to consider a new-home purchase. Existing home sales are on the rise as well, increasing 7.8% from July and up 9.3% from the same period a year ago, according to the National Association of Realtors. That said, overly tight lending conditions for builders and buyers continue to slow the ability of housing to contribute to more robust GDP growth.
Tight lending conditions are confirmed by a recent NAHB survey on acquisition, development and construction (AD&C) financing, which shows that while there may have been some modest easing in lending conditions for new single-family construction loans during the second quarter, that slight improvement was more than offset by tightening on new loans for land acquisition and multifamily condo construction.
In general, for any type of AD&C loan, more than half of builders and developers in the NAHB survey reported that availability of credit was about the same in the second quarter as it was in the first. About 23% said credit had become less available for land acquisition loans, versus 15% for both land development and single-family construction loans.
Meanwhile, the tendency to report declining availability of credit was stronger among builders with fewer than 25 starts. One upbeat finding of the survey was that the practice of lenders tightening terms on outstanding AD&C loans appeared to be receding.
With respect to multifamily construction, the NAHB Multifamily Production Index (MPI) improved for the eighth consecutive quarter with an index level of 54, the highest reading since the second quarter of 2005. The MPI, which measures builder and developer sentiment about current conditions in the apartment and condominium market on a scale of 0 to 100, rose from 51 in the first quarter to 54 in the second quarter.
The Multifamily Vacancy Index (MVI), which measures the multifamily housing industry’s perception of vacancies, increased five points to 36, bringing it back approximately to the level it sustained throughout 2011. With the MVI, lower numbers indicate fewer vacancies. After peaking at 70 in the second quarter of 2009, the MVI declined consistently through 2010, then held steady at either 35 or 36 in every quarter of 2011.
These survey findings suggest that multifamily construction will continue to increase over the long run. For August, Census data indicate that the seasonally adjusted annual rate of starts in buildings with five or more apartments was 208,000. This is a 2.8% decrease from the downwardly revised July starts rate. Despite the monthly drop, this rate is nearly 37% higher than the August 2011 rate of 5+ unit starts. Moreover, the three-month moving average of 5+ unit starts for the month of August is the fourth highest since 2008.
Despite improving housing conditions, other economic factors offer negative headline and substantive risks. The employment market continues to experience lackluster growth. Monthly job openings data from the Bureau of Labor Statistics (BLS) repeat a pattern that has been in place for more than two years: Hiring rates remain positive but with no breakouts while job opening rates increase. This suggests the economy is having problems adding jobs by filling open positions, which in turn holds back housing demand for renter- and owner-occupied housing.
Low hiring rates mean that total employment growth is sluggish. BLS data for August indicated nonfarm payroll employment added a meager 96,000 jobs, down from a revised 141,000 last month. The private sector added 103,000 while the government sector shed another 7,000. Figures for the prior two months were revised downward by a total of 41,000.
The unemployment rate moved down to 8.1% from 8.3% in July. This would be positive news except that it happened for the wrong reason: a shrinking labor force. According to the household survey, the number of persons employed actually declined by 119,000. But the unemployment rate declined because an equal number plus an additional 250,000 workers, previously counted as unemployed, left the labor force.
Persistently high unemployment and softening GDP growth were certainly factors that led the Federal Reserve to announce effectively a new round of quantitative easing (QE). As expected, the FOMC extended its forward guidance, announcing that the Fed funds target rate would remain at its current 0-25 basis point range through mid-2015.
Under QE3, the Fed will purchase $40 billion in agency mortgage-backed securities per month. This combined with the maturity extension program (”operation twist”) and the current principal payment reinvestment practice will increase the Fed’s holdings of longer-term securities by $85 billion per month through the end of the year, reducing long-term interest rates and providing support to mortgage markets. However, we expect QE3 to have little real effect on housing markets as appraisals and credit constraints offer more binding restraints on housing demand than mortgage interest rates.
The rate of inflation moved higher in August, with the CPI-U increasing 0.6% on a month-to-month basis. This ended a four-month streak in which the CPI-U was either unchanged or declined, plus it also marked the largest percentage change in overall consumer price levels since mid-2009.
Energy prices accounted for the bulk of last month’s increase in CPI as the energy index surged 5.6% from July 2012. The index for gasoline climbed 9% on a month-to-month basis, with the EIA indicating that the national average retail price of all grades rose from $3.50 to $3.78 per gallon.
Despite the headline risks, positive survey data concerning home building conditions and the growing amount of pent-up housing demand suggest better times ahead for housing. For example, recent NAHB analysis of households containing individuals who are not relatives provide another illustration of pent-up housing demand, which will be unlocked when job market conditions improve.
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