Eye on the Economy: Slowing Sales


The housing sector entered a slow patch as the summer ended, one made worse by the economic uncertainty produced during the partial government shutdown. With the shutdown ended — for now — and a federal debt ceiling extension in place until February, home sales are suffering due to lower affordability, increases in interest rates from early fall, and general uncertainty.

The most important short-run consequence of the political drama in Washington was a decline in consumer confidence. The Thomson Reuters and the University of Michigan Consumer Sentiment Index fell in October to 73.2, the lowest reading since December 2012. The Conference Board Consumer Confidence Index was also down, posting an 11.2% decline in October. However, it is clear that rising interest rates had an impact on consumer confidence as well, with 66% of respondents expecting higher rates in the future.

While rates eased somewhat in recent weeks, effective mortgage interest rates for loans closed in September for newly built homes rose on average 11 basis points to 4.44%, the highest since July 2011. Larger downpayments, likely influenced by a change in buyer market mix, resulted in the average loan-to-price ratio for new homes sales rising to 77.5%, after three consecutive months above 78%. Rates have since fallen somewhat.

In addition to the higher interest rates, rising home prices pushed some buyers out of the market. The Case-Shiller August price data was up 12.8% on a year-over-year basis for the 20-city composite index. This was the largest such increase since February 2006. Additionally, the Federal Housing Finance Agency house price series was up 8.5% on a year-over-year basis in August. While the gains have been positive for existing home owners, this growth must remain on pace with income and employment to prevent a decline in housing demand in certain metro areas.

Indeed, a persistent concern about the economy remains job creation. Job openings continue to rise, with the job openings rate in August for the overall economy at 2.8% of total employment, the highest since 2008. The construction sector had 111,000 unfilled positions. Despite these openings, only 148,000 jobs were added in September, according to the Bureau of Labor Statistics, with, for this stage after a recession, a stubbornly high unemployment rate of 7.2%. In fact, the ongoing weakness of the job market and concerns about some softness in housing led the Federal Reserve to maintain its asset purchase program at an $85 billion a month pace. Observers expect this program to remain in place with no taper for at least a few more months.

The combination of higher housing prices, some increase in interest rates, and a less than robust labor market produced weakness in home sales. As reported by the National Association of Realtors (NAR), existing home sales declined 1.9% in September (recall these are closing based on contracts signed in the months before September), but remained 10.7% higher than the September 2012 pace. The current inventory of existing homes for sale is a five-month supply.

The NAR pending home sales index, a forward-looking indicator based on signed contracts, fell more significantly in September, posting a 5.6% decline. Furthermore, the September measure was 1.2% lower than the September 2012 report. Pending home sales have declined for four consecutive months, with the index at its lowest reading since December 2012. These data suggest that some of the recent softness in housing was in place before the government shutdown.

Hindering our ability to gauge the extent to which the decline in sales will extend beyond the short-run impacts of the shutdown is the fact that the partial closure of government services has delayed a number of economic data reports. For example, the Census Bureau report for September construction spending is delayed until early December. The August report indicated that construction activity continued to increase, with private residential construction spending up 1.2% from July and up 18.7% from August 2012.

On a three-month moving average basis, remodeling spending is up 8.4% year-to-date. And the latest NAHB Remodeling Market Index (RMI) suggests further growth. The index rose two points to a level of 57, marking the highest reading of the RMI since the first quarter of 2004. An RMI above 50 indicates that more remodelers report market activity is higher (compared to the previous quarter) than report it is lower.

The August construction spending report indicated that on a three-month moving average basis, multifamily construction spending continues to grow, up 3.2% for the month and 15.8% than at the start of the year. According to the NAHB constructed measure of inflation-adjusted housing rents from the Consumer Price Index data, real rents were up 0.1% in September and are 1.2% higher than September 2012. This growth in rents should help support multifamily rental demand, even as production slows from 2012 and 2013 construction rates.

Recent data on building materials offer mixed news. Improvements in the housing market put upward pressure on materials prices, particularly wood products and gypsum. However, some price relief came from the reopening of capacity idled during the housing bust. For example, after more than doubling from 2011 levels, OSB prices peaked in March and have declined to 32% above 2011 levels. Softwood lumber prices also rose sharply in 2012, reaching 38% above 2011 levels. After peaking in April, prices fell sharply through July. Prices rose in August and September, but currently stand at 20% above 2011 levels.

Gypsum prices stand out as the exception to the rule that a recovering housing market will bring productive capacity back to the marketplace — and with it, lower prices. Gypsum prices are currently 33% above 2011 levels and 93% of housing boom peak levels based on two sharp increases in the beginning of 2012 and 2013. There have been no significant gypsum price declines as the rest of the housing sector has moved steadily back toward more normal levels of production. A recently announced 20% increase will bring prices to 60% above 2011 levels and 111% of housing boom peak levels.

With these economic headwinds, certainty with respect to housing policy would help the industry. And perhaps forgotten with the ongoing government spending and debt ceiling fight is the fate of certain expiring housing tax rules, which almost certainly will sunset at the end of the year. The rules include the forgiven mortgage debt tax-relief rule, the energy-efficient tax credits for remodeling and new construction (25C and 45L), the deduction for mortgage insurance, the 9% credit fix for the LIHTC, and others. At best, these provisions may be extended retroactively for 2014 later next year.

In the meantime, expect November to see discussion of comprehensive tax reform that could place additional uncertainty around long-standing housing tax rules like the mortgage interest and property tax deductions. NAHB has been actively engaged over the last few years in providing economic data and analysis in the various working groups and exercises conducted in the House of Representatives and the Senate concerning tax reform, testifying before both the Senate Finance and House Way and Means committees.

Lastly, in analysis news, NAHB economists recently examined data concerning where in the nation solar-powered homes are located. The results indicated growing concentrations in the West and the Northeast, where combinations of higher energy prices and local incentives and rules have spurred photovoltaic system installation.

An additional study reviewed Census data concerning the average length of time required to build a single-family home. The results indicate an average of seven months from permitting to completion, with longer periods of time required in the West and Northeast. Finally, NAHB economists reviewed the data concerning what home buyers tend to purchase after moving.

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