Eye On Housing
Data revisions and NAHB survey data characterize a brighter environment for the home improvement sector. The NAHB Remodeling Market Index (RMI) rebounded in the second quarter of 2013, bouncing back up to the post-2004 peak of 55 reached at the end of 2012. A level above 50 indicates more remodelers report good market conditions than poor.
After a period below this break-even point, the RMI has been near or above 50 for four consecutive quarters. Some of the factors underlying remodelers’ positive outlook include a higher volume of existing home sales and rising home prices, which increase home owners’ equity and eases the financing of remodeling projects. According to the Case-Shiller House Price Index, home prices registered their 12th consecutive year-over-year increase in May, with the 20 City Composite index up 12.2% on a not seasonally adjusted basis.
Census data concerning home improvement spending has changed markedly over the past few months. Post-revisions, on a three-month moving average basis, the improvement category experienced weakness during the second half of 2012. But recent trends are positive, with remodeling-related spending up 16.2% over the course of 2013. Improvement-related spending is up 30.7% from post-Great Recession cycle lows.
Multifamily spending was down in June by 3.3%. Spending on apartments tends to be more volatile than other categories, but the long-run trends are positive. Since cycle lows, multifamily spending is up 136.9%.
In June, single-family spending registered a slight decline of 0.8%. However, like multifamily, the long-run trends are promising, with single-family spending up 45.3% from recent lows.
Existing home sales may be subject to weakness in the coming months, at least compared to recent gains. The National Association of Realtors Pending Home Sales Index, a forward-looking indicator based on signed contracts, decreased 0.4% in June 2013 to 110.9 from a downwardly revised 111.3 in May. Recent price growth and rising interest rates may reduce demand at the margin for existing home sales as the summer concludes.
In contrast, new home sales continue to show signs of strength. HUD and the Department of Commerce reported new homes sales up 8.3% in June over the May revised figure. The 497,000 annualized pace is the highest rate in five years. Sales were up in three of the four regions.
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 June months’ supply level ties January 2013 for the lowest mark 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.
The prospects for further growth in new home sales are positive. According to the Federal Housing Finance Agency, in June interest rates on conventional mortgages used to purchase newly built homes remain very low, increasing only slightly (11 basis points) from May to 3.52%.
Increasing consumer confidence is also boosting consumer demand in buying a home. According to the Conference Board, since January 2011 the percentage of respondents with house purchasing plans has risen from 2.0% to 5.7%. These data appear to be correlated with new home sales, suggesting additional growth for new home purchases.
Of course a consistently good indicator of the potential of the single-family market is the NAHB/Wells Fargo Housing Market Index (HMI), a measure of single-family builder confidence. In July, the HMI was up six points to a level of 57. The HMI has more than doubled between April 2012 and June 2013. And over the long run, with starts and stops along the way, builder confidence predicts housing starts. However, the lags between confidence and construction tend to lengthen as industry infrastructure (workers, building materials, financing) is restored after deep recessions.
In a similar way, this stop-and-start nature is reflected in recent movements of the NAHB/First American Improving Markets Index (IMI). The number of markets on the IMI fell to 247 as three were added and 11 dropped from the July level of 255. Most of the markets that fell off had very small price increases that qualified them to be on the list and the latest price indexes slipped back below previous peaks.
Future home sales and price growth depend on an improving labor market. And while jobs are being created, the rate of that growth continues to disappoint. The Bureau of Labor Statistics (BLS) establishment survey found that total nonfarm payrolls expanded by a lower-than-expected 162,000 in July.
The unemployment rate dropped to 7.4% based on a gain of 227,000 persons employed. On a more positive note, home building payrolls expanded by 6,300 in July, pushing the total number of jobs added since the housing recovery gained traction in late 2011 over 100,000.
However, job growth among builders has lagged increases in construction activity. One cited reason for this lackluster expansion has been labor shortages: Builders increasingly note the inability to find qualified workers.
And Job Openings and Labor Turnover Survey from the BLS is consistent with this anecdotal evidence. The number of open, unfilled positions in the construction industry reached a five-year high in June. The number of unfilled positions in the sector climbed to 133,000 from 102,000 in May. This marks five of the last six months for which the total number of open positions was greater than 100,000.
Besides finding available workers, housing policy topics are also on the radar of the building industry. For example, the future of the housing finance system is under debate in Washington, D.C. And recent data from the Census Bureau Survey of Construction demonstrates the importance of government insured loans to enable housing demand. As of 2012, FHA/VA insured loans still account for well more than 20% of the market for new single-family homes.
Also having a significant impact on housing affordability, monetary policy could see changes in the coming months. Analysts are debating at what point later this year or next the Federal Reserve will begin to wind down its asset purchases. A June survey of economists showed expectations for a start of “tapering” evenly distributed across the final three Fed meetings of the year in September, October and December.
However, the Fed appears more concerned about the economy than ready to reduce accommodation. For instance, economic growth is weaker than hoped, with a GDP growth rate of 1.7% for the second quarter. The Fed also acknowledged the recent increase in mortgage rates as a potential threat to a strengthening housing sector.
Rising mortgage interest rates also emphasize the importance of the mortgage interest deduction (MID) as a cornerstone of housing and tax policy. The MID remains popular with the public, with a recent United Technologies/National Journal poll noting that 86% of individual ranked the MID as “important” or “very important,” besting other tax policies including the health insurance exclusion (59%), the charitable giving deduction (39%), and the preferred rates on capital gains and dividends (27%).
NAHB in its advocacy efforts has stressed the economic importance of the MID. Research by the non-partisan Tax Foundation illustrates this point. The tax policy think tank found that eliminating the MID and using the revenue gained to reduce individual, statutory income tax rates would reduce GDP by more than $100 billion a year.
In addition to the macroeconomic consequences, research from a team of Harvard and Berkeley economists found that the MID is positively linked with economic opportunity. By reducing the after-tax cost of buying a home with a mortgage, the MID increases income mobility across generations. In contrast, rising effective mortgage interest rates can cause prospective home buyers to delay home purchases, by forcing them to either drop their offering prices or requiring a larger downpayment.
The future of housing finance policy, including the MID, are key for younger home buyers in particular, according to data from the Census Bureau have declining homeownership rates. The overall homeownership rate fell to 65.1% on a seasonally adjusted basis during the second quarter. The largest year-over-year percentage point decline in homeownership occurred for households headed by those between 35 and 44 years old (1.9 percentage points).
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