Eye on the Economy: Spotlighting Threats to a Sustained Housing Recovery


*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.

Residential construction spending continued to rise in August, supporting jobs and economic activity as housing continued to improve. Private residential construction spending increased 0.9% on a month-to-month basis and has now risen nearly 18% since August 2011.

Spending on new single-family homes jumped 2.8% and has registered gains in 14 of the last 15 months. Compared to the low that was observed in the second quarter of 2009, single-family spending activity has rebounded approximately 44%.

Multifamily construction has staged the strongest rebound over the past year, and that trend continued into August as spending climbed 3.7%. After bottoming out two years ago, spending on new multifamily housing has surged more than 76%.

While housing is adding to economic growth, home sale indicators slowed their improving trends in the past month. The National Association of Realtors Pending Home Sales Index, a forward-looking indicator based on signed contracts, decreased 2.6% in August, suggesting that while existing home sales will rise in future months, they will do so at a slower rate. An impending 2013 expiration of a tax exclusion for cancelled debt associated with short sales may have accelerated some existing home sales earlier into 2012, which may hold down existing homes sales in future months.

New home sales disappointed somewhat in August, with an annualized rate (373,000) approximately flat from a revised July level. The inventory of unsold new homes once again established a historic low at 141,000 and the number of completed new homes within that group also dropped to a new all-time low of 38,000. In a normal market where potential home buyers have a wider selection of alternatives, there would be 100,000 completed homes ready for immediate occupancy.

New home price data indicate that credit accessibility may be affecting the market, with the median new home price rising 17% from August 2011. The increase is more likely a result of the kind of home sold than any significant change in underlying home prices. In fact, 21% of the homes sold in August cost more than $400,000, compared to 14% of homes sold in 2011. It may be that typical buyer of homes in this price range face less restrictive credit conditions.

Despite monthly ups and downs and geographic variation, the housing recovery is solid. For example, the latest housing price data report significant gains for 2012. The Case-Shiller 10 and 20 city composite indexes posted 1.5% and 1.6% gains respectively in July over June, bringing the year to date increases to 6.3% and 6.9% on a non-seasonally adjusted basis. The Federal Housing Finance Agency reported a less robust 0.2% increase nationally from June to July and a seasonally adjusted 4.1% increase so far this year.

Housing growth is constrained by the health of the job market, which remains lackluster. However, a recent Bureau of Labor Statistics report suggests a significant revision for April 2011 through March 2012 may indicate that job creation was stronger than first estimated. According to the BLS preliminary benchmark adjustment, total net job creation was higher by 386,000 positions over that time period. While seemingly large, this represents an increase of only 0.3% of total employment. In percentage terms, the second-largest adjustment was associated with the estimate of construction employment, which was revised up by 85,000 positions or 1.6% of sector employment. The final benchmark adjustment will be published in February 2013.

Highlighting the importance of strong local job markets for housing, recent NAHB analysis showed that the primary driver behind delinquent mortgages is unemployment. Home owners who have a loss of income and are unable to make their mortgage payments usually have the option of selling their home and moving to a less expensive alternative. However, as house prices have fallen, that ability is truncated and a foreclosure, short sale or other bank-assisted disposition is the likely resolution.

As house prices continue to increase, more home owners who cannot meet mortgage payments can sell their homes rather than default. And, as unemployment falls, fewer households will be unable to pay the mortgage. While an improvement in house prices or employment will reduce the rate, the unemployment effect appears to be the dominant one.

Nonetheless, rising housing prices have helped household balance sheet repair, which on net stalled during the second quarter due to stock market declines. The S&P 500 was down 2.75% for the quarter. The retreat on household net worth caused the savings rate to increase, which reduced consumer spending.

The balance sheet data from the Federal Reserve indicate that total mortgage debt is down $1 trillion from the peak. This statistic offers good news and bad news for housing. On the positive side, it suggests that household deleveraging continues. But it may also reflect that prospective home buyers in some cases are unable to access credit, thereby holding back housing demand.

The lack of mortgage credit access may be boosting demand for rental properties. For example, the share of single-family homes built for rent remains elevated. The market share of single-family homes built for rental purposes, as measured on a one-year moving average, stands at 4.3% for the 2nd quarter of 2012. This is lower than the recent peak of 5.35% set at the beginning of 2011 but considerably higher than the 20-year average of 2.69%.

On tax issues, property tax data for the second quarter indicate that total state and local property tax collections have remained about constant for three years, despite many analysts calling for significant declines due to historic drops in housing prices. Given that tax payments have remained about constant in a period of falling home values, the result has been a significant increase in the effective property tax rate on owner-occupied homes.

Higher taxes on home owners will certainly hold back housing demand. And one possible source of future tax hikes on housing could come in tax reform. Recent NAHB analysis demonstrated how under a common comprehensive tax reform approach, home owners could face lower marginal tax rates, but higher tax bills. This effect is strongly driven by what happens to the mortgage interest deduction (MID), increasingly a topic of debate during election season. The fate of the MID and resolution of the fiscal cliff will shape the future of housing in 2013.

In short, housing construction is contributing to economic growth. But there are numerous factors that could limit the expansion in home building. Lack of credit for home buyers and builders, reduced inventory, weak job growth and policy uncertainty continue to be headline threats for housing.

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0 replies

  1. I do not agree that the primary driver of foreclosures is unemployment. The primary driver of foreclosures is equity drain. If, because of a job loss, a homeowner can no longer afford a home in which he or she has equity, the owner sells the home and moves into more affordable quarters. On the other hand, if the owner has insufficient home equity to satisfy the mortgage and cover selling costs, the lender gets the keys. Unless and until the problem of equity drain is solved, values and home equity will continue to decline and foreclosures will continue to be a problem.

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