Eye on the Economy: Housing Affordability Slips with Price Gains


Recent gains in home prices and rising interest rates have put a dent in housing affordability. According to the NAHB/Wells Fargo Housing Opportunity Index, 69.3% of the homes sold between the beginning of April and end of June were affordable to families earning the U.S. median income of $64,400. This is down from 73.7% in the first quarter and the first time that the measure has fallen below 70% since late 2008.

However, interest rates remain low and underlying economic fundamentals should support continued growth for housing, with occasional monthly ups and downs. The NAHB/Wells Fargo Housing Market Index for August supports this conclusion, rising to a level of 59, the highest in eight years. Builders see customers recovering from the fears evident in the early stages of the recovery when house price movements were uncertain. Unlocked pent-up demand and the limited supply of new and existing homes have also supported housing demand.

Housing starts data were at a seasonally adjusted annual rate of 896,000 in July. The U.S. Census Bureau/HUD report places the July rate at 6% above the upwardly revised June estimate of 846,000 and 21% above a year ago.

The month-over-month increase in housing starts reflected sizeable gains in multifamily housing, increasing 26% over the month of July to a seasonally adjusted annual rate of 305,000. On a three-month moving average basis, multifamily housing starts increased by 6% to 290,000.

Despite the increase, the three-month average of multifamily housing starts remains below the 300,000 level recorded in the first five months of the year. Yet long-run prospects for apartments remain positive, with recent Bureau of Labor Statistics data indicating real rents up 1.1% over the last 12 months.

July single-family housing starts fell 2% to a 591,000 annualized pace. Geographically, month-over-month declines took place in the South (-5%) and West (-10%), while single-family housing starts in the Northeast (12%) and Midwest (10%) rose.

These South and West declines may reflect the National Oceanic and Atmospheric Administration reports of higher-than-average precipitation in July. Despite the slight monthly decline in single-family housing starts, the underlying trend remains basically unchanged. On a three-month moving average basis, single-family housing starts were 597,000, 0.1% below the June level.

Turning to the senior housing submarket, all elements of NAHB’s 55+ Housing Market Index showed significant growth in the second quarter of 2013, with both the single-family and the multifamily indices jumping 24 points: the single-family from 29 to 54 points and the multifamily from 19 to 43 points. Any level above 50 indicates more respondents view markets conditions as good compared to poor. All components of the index (present sales, expected sales and prospective buyer traffic) increased.

Helping boost builder and remodeler conditions, the July Bureau of Labor Statistics Producer Price Index (PPI) data suggested continued easing of certain building material prices. PPIs for softwood lumber prices declined 2.3% from June to July, extending the decline from the recent April peak to 16.6%. However, softwood lumber prices are still 9.9% above prices from one year ago before the sharp run-up in late 2012 and early 2013.

Oriented strand board (OSB) prices declined 12.2% in July, extending the decline from the March peak to 28.4%. OSB prices remain 48.8% above prices prior to the housing recovery that began in 2012. Weekly indicators show wood prices rebounding somewhat in recent weeks, but recent sharp declines remain largely intact. These price declines are due to significant increases in productive capacity in the lumber and OSB industries.

The PPI for gypsum dropped slightly in June and July. There have been some plant reopenings and reconfigurations in the industry, but it remains to be seen whether recent declines are the beginning of a normalization of gypsum prices, which remain 37.3% above housing bust lows and 98.2% of housing boom peaks.

Federal Reserve Board data from bank loan officers suggests ongoing easing of lending conditions for commercial real estate. On a net basis, 13% of banks reported eased lending standards on construction and land development loans over the past year while a net percentage of 33% reported easing lending standards for multifamily. On a net basis, 42% of banks reported stronger demand for construction and land development loans and 53% of banks reported stronger demand for multifamily loans.

Mortgage finance conditions continue to improve as well. According to the Mortgage Bankers Association, the delinquency rate for mortgage loans on one-to-four family residential properties was 6.8% on non-seasonally adjusted basis in the second quarter of 2013, 0.6 percentage points lower than a year ago. And the New York Federal Reserve reports that the transition rate of mortgages 30-60 days late to the status of 90 or more days late peaked at 44.2% in the first quarter of 2009 and has since declined to 19.8%. The 2003 to 2006 average rate was 14%.

Despite improving lending conditions, it is still difficult for some buyers to obtain mortgages, and this fact influences the mix of prospective home buyers. This in turn may be having an impact on the average size of newly built homes. According to recently released data from the Survey of Construction, the trend toward smaller home sizes, which started during the market downturn, has since reversed itself.

In fact, since 2009 the median size of newly started single-family homes has increased steadily to a record high of more than 2,300 square feet last year. This period of increasing home size occurred alongside tight credit conditions that squeezed many first-time and other marginal buyers out of the market, leaving a larger share of buyers demanding larger homes thus affecting the mix.

In analysis news, NAHB recently examined recent builder/remodeler entry into and exit from the industry. According to the Statistics of U.S. Businesses, 20,000 home builders and remodelers entered the industry each year of the economic downturn, with larger numbers of exits than entrants in 2008.

During 2010, the latest year data are available, the number of home builders and remodelers entering the market totaled 8% of the sector while the number leaving equaled nearly 21%. Although there were still more exits than entries in 2010, the data highlights the first year-over-year increase in new entrants since the start of 2006.  In 2010, 21,857 new businesses entered the industry, compared to a slightly smaller 20,226 in 2009.

Finally, HUD has published new Fair Market Rent measures for FY 2014. The primary use of FMRs is to set limits on HUD’s Housing Choice Voucher Program, but FMRs figure into other housing programs and are often used as a general measure of housing costs. On average, FMRs increased by less than 1% in 2014. But individually there were some large swings in both directions. FMRs declined by more than 5% in 67 metropolitan areas.

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