Economic and housing data continue to describe a modest recovery for housing that will lead to higher levels of construction activity in the years ahead. While some recent information illustrates that there will be ups and downs along the way, current fundamentals indicate rising demand and insufficient housing inventory.
Mortgage interest rates have risen, but thus far there is no evidence to suggest that these increases have changed the overall improving trend for housing. Qualifying for a mortgage, including accumulating the necessary downpayment, remains a larger challenge for most home buyers as opposed to recent rate increases.
Leading the good news for housing was the June new home sales report from the Census and HUD. Sales of newly built homes were up 8.3% over May, reaching an annualized pace of 497,000, the highest rate in five years. Sales were up in three of the four regions, with a 12% drop in the Midwest due to May’s unsustainably high rate.
The inventory of new homes for sale rose slightly, but the months’ supply (the time it would take to sell the remaining inventory at current sales pace) dropped to 3.9. The months’ supply level ties January 2013 for the lowest level since March 2004. The number of completed new homes for sale remains at the lowest level (36,000) ever recorded in the 40 years of data. Builders have been struggling to resupply inventory as they battle increases in costs and reduction in supply of all their inputs: labor, land, building materials and capital.
Sales of existing homes, as reported by the National Association of Realtors, decreased slightly (1.2%) in June, but were up 15.2% from the same period a year ago. The total resale inventory increased 1.9% from May to 2.19 million units for sale. At the current sales rate, the June inventory represents a 5.2-month supply, down from the 6.4-month supply of homes a year ago.
Tight inventory of both new and existing homes continues to push prices up. Over the past 11 months, new home sale prices have been increasing at a 13% annualized rate. According to the Federal Housing Finance Agency’s national measure, home prices rose 0.7% in May, the 16th consecutive monthly increase. Since January 2012, prices are up 10.4%.
Prices of building materials, which rose significantly over the course of 2013, continue to increase but at much slower rates, according to June data from the Bureau of Labor Statistics. Year-over-year growth in gypsum prices slowed by 3.7 percentage points to 15.6%. Annual softwood lumber price growth decelerated by 8.7 percentage points to 8.0%. And Oriented Strand Board prices grew by 37.0% year over year in June, still high, but 24.8 percentage points less than the year-over-year growth recorded in May.
As a result of these market conditions, builders are feeling more optimistic. The NAHB/Wells Fargo Housing Market Index (HMI) rose 6 points to 57 in July, the highest since November 2005. All three subcomponents rose to highs not seen since 2005 or early 2006. Expectations for the next six months rose seven points to 67; current sales rose five points to 60 and traffic rose five points to 45.
Similarly, all four regions’ three-month moving average increased; Northeast up four points to 40, Midwest up eight points to 54, South up five points to 50 and West up three points to 51. The broad improvement in all components and regions is further evidence of the breadth of the recovery. The NAHB/First American Improving Markets index has included more than 70% of all markets for five consecutive months.
The HMI points to more housing construction in the coming months. For June, the U.S. Census Bureau reported that housing starts were at a seasonally adjusted annual rate of 836,000, a 9.9% slower pace than May but 10.4% higher than one year ago.
However, the month-over-month decline reflected a 26.2% decrease in multifamily starts. Multifamily housing starts typically experience month-to-month volatility. Multifamily housing starts have been generally declining since March, with the three-month moving average having fallen by 15.0% over the period. Nonetheless, real rents continue to rise, up 1.2% over the last year, which suggests continued growth in demand for multifamily units.
Single-family housing starts, which accounted for 71% of all housing starts in June, were generally flat. Between May and June single-family starts fell by 0.8% to a seasonally adjusted annual rate of 591,000. Over the past 12 months, single-family housing starts are up 11.5%. Going forward, single-family starts should continue to grow. NAHB forecasts that single-family construction will be up 20% for 2013.
One of the headwinds for builders is lack of available workers. Indeed, the number of open, unfilled positions in the construction industry remains near post-Great Recession highs, according to the Job Openings and Labor Turnover Survey from the Bureau of Labor Statistics. The number of unfilled positions in the sector stood at 103,000 in May, marking four of the last five months for which the total number of open positions was greater than 100,000. This is the first time this has occurred since 2008.
Another headwind, particularly for first-time home buyers, is lack of robust income growth. Disposable incomes actually fell going into 2013 due to the expiration of the payroll tax cut that ended with the Fiscal Cliff deal. Declines in after-tax income may be responsible for recent increases in revolving consumer credit, such as car and student loans. These income and credit issues bear watching for possible impacts on housing demand.