Eye on the Economy: Improved Affordability Increases Number of Improving Markets


*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.

The housing industry continues to make slow but sure gains. With a growing labor market and continued household balance sheet repair, household formations are up in 2012, increasing demand for both renter- and owner-occupied housing.

Higher demand has been in turn supporting housing prices. Case-Shiller reported encouraging numbers in November: Both composite indexes were up 0.9% in August from July, with the 10-city composite increasing 1.3% and the 20-city composite up 2% year over year. Among the component cities, all but Seattle were up from July, and 17 of 20 cities increased from last year.

Even as housing prices continued to inch up in metro areas across the country, lower interest rates helped make homes more affordable to median-income families in the third quarter of 2012. The NAHB/Wells Fargo Housing Opportunity Index (HOI) rose to 74.1 in the third quarter, up slightly from 73.8 in the previous quarter. The HOI is the share of new and existing homes that are affordable to a family earning median income. 

However, gains in affordability can be offset if prospective home buyers cannot obtain credit to purchase a home. Results from the October Federal Reserve Board’s Senior Loan Officer Opinion Survey indicate that lending standards for prime residential mortgages remain basically unchanged at still tight levels. Surveyed banks indicated that obtaining a prime residential mortgage has become slightly easier over the past three months, with 4.7% of respondents easing their lending standards – an improvement, albeit small.

While lending standards have remained relatively unchanged since the second quarter of 2010, banks noted that demand for prime residential mortgages is growing. This would be a contrast with recent data from the Mortgage Bankers Association that show mortgage applications for purchase have remained relatively unchanged since February 2011. Home sales have increased over this period, but this is due to the rise in importance of cash buyers: The National Association of Realtors reported that all-cash sales of existing homes stood at 28% in September 2012, which is nearly double the share of four years ago.

Yet the growing foundation for housing prices and increases in home construction has resulted in an increase in the count of markets making the NAHB/First American Improving Markets Index. The index expanded by 22 in November to a total of 125. This marks the third consecutive monthly gain for the index, which now includes representatives from across 38 states as well as the District of Columbia. The index identifies metropolitan areas that have shown improvement from their respective troughs in housing permits, employment and house prices for at least six consecutive months.

The 125 markets on the IMI now represents about one-third of all the markets surveyed for this index. Markets added to the list in November include such geographically diverse locations as San Diego, Calif.; Gainesville, Georgia; Omaha, Neb.; Louisville, Ky.; and Charlotte, N.C.

Gains for housing are not just expanding geographically. The NAHB’s 55+ Housing Market Indices, which measures builder confidence for developers of housing for the 55+ market, showed significant gains for the third quarter of 2012. The 55+ HMI for single-family housing tripled year over year from a level of 12 to 36, which is the highest third-quarter reading since the inception of the index in 2008. 

Although multifamily condos remain the weakest part of the 55+ HMI, builder confidence improved there as well. The 55+ HMI for condos had a significant increase of 13 points to 23, which is the highest third-quarter reading yet. Meanwhile, the 55+ multifamily rental indices, which already recovered substantially last year, showed continued but more modest increases. For example, present production climbed six points to 31.

When analyzing the building industry as a whole, private residential construction spending jumped 2.8% on a month-to-month basis during September 2012. The preliminary estimates for July and August were revised higher as well. Nominal spending activity on private residential construction has expanded in 13 of the last 14 months, putting it nearly 21% above September 2011 and at its highest dollar value since the end of 2008.

The new single-family homes spending category saw growth accelerate in September, gaining 3.9% from the previous month and 26% from last year. Save for a one month in March 2012, construction spending on new single-family housing has increased solidly since last summer and risen more than 50% since hitting bottom during the second quarter of 2009.

Underlying these improving housing conditions are economic conditions, that while not great, continue to support a recovery in housing. For example, third-quarter GDP growth was at 2%, a solid result compared to 1.3% for the second quarter. In addition, consumer confidence is growing. Thomson Reuters and the University of Michigan reported that its Consumer Sentiment Index rose by 5.5% to 82.6, its fourth consecutive monthly gain. The Consumer Confidence Index, produced by the Conference Board, grew by 5.7% over the month of October, its third consecutive monthly increase.

This improved confidence is translating into increased demand for consumer credit. The Federal Reserve Board reported that consumer credit outstanding rose at a seasonally adjusted annual rate of 5.0% in September to $2.7 trillion. The over-the-month increase in consumer credit outstanding, which excludes real estate secured loans such as mortgages and home equity lines of credit, reflected a 9.2% rise in non-revolving credit, such as auto and student loans. It is worth noting that the increase in student loan debt could be an issue for future housing demand and is worth watching in the near term.

The October Bureau of Labor Statistics employment situation report continued the recent pattern of positive but subpar gains in the labor market. The establishment survey reported payroll employment expanded by 171,000, based on an increase of 184,000 in private-sector payrolls and a decline of 13,000 in the government sector. August and September estimates were revised up by a total of 134,000 for the two months. The household survey reported the unemployment rate ticked up to 7.9% from 7.8% in September.

Data from the Job Openings and Labor Turnover Survey indicate construction hiring picked up in September after a slow August. However, an increase in layoffs held back net hiring for the month. As a result, the pace of hiring for the sector in 2012 remains lackluster, especially given the recent pickup of construction activity.

The combination of tight lending conditions and weak job growth is a reason for the continuing decline in the homeownership rate. The Census Bureau reported the seasonally adjusted homeownership rate fell to 65.3% during the third quarter of 2012. In terms of rates across age groups, only those households headed by persons 65 and over registered an increase in the homeownership rate versus the third quarter of 2011. The under 35 and 55-64 householder cohorts saw the largest declines, with each showing a 1.7 percentage point drop-off in the homeownership rate compared to a year ago.

Additional Census data on multigenerational households highlight these impacts. Data from the 2009 – 2011 American Community Survey indicate that 4.3 million households were multigenerational, or 5.6% of the total of 76.4 million family households with more than one person. This count represents a significant increase in the share of multigenerational households from 3.7% of total family households in 2000 and 4.0% of total family households in 2010.

The Census data highlight an opportunity for home builders in terms of meeting demand for multigenerational housing, but also are suggestive of the potential of future unlocked pent-up demand for both renter and owner-occupied housing

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