Eye on the Economy: Home Sales Surge after Slow First Quarter


Housing news continued to improve as pending home sales surged following a slow first quarter. Home prices also continued to move higher but at a more moderate pace, suggesting the extra push caused by investors may be slowing. Economic news, however, was mixed. Consumer confidence increased in response to improving labor market conditions. On the other hand, new estimates from the first quarter revealed a steeper decline in real GDP. Early indications are that real GDP will reverse course from a dismal first quarter and gains in housing will continue the pace set before the end of 2013.

Pending homes sales posted the biggest month-over-month increase in four years. The Pending Home Sales Index (PHSI) increased 6.1% in May. The increase in pending home sales follows a healthy increase in existing home sales and a Census report showing a surge in new home sales. In May, new single-family home sales increased 18.6% from the prior month.

The first quarter of 2014 continued to disappoint as the Bureau of Economic Analysis released its third estimate of real GDP. According to the release, real GDP contracted at a 2.9% seasonally adjusted rate. The second estimate showed real GDP decreasing by 1%. The poor result is largely due to declining inventories, exports, and fixed investment. Housing’s contribution to real GDP was 15.6% in the first quarter of 2014, which is low compared to historical standards. Real GDP and housing’s share of real GDP are expected to grow in the second quarter.

The latest estimate of residential construction spending from the U.S. Census Bureau shows a slight decrease from the prior month but strong growth from one year ago. In May, private residential spending fell 1.5% from the revised April estimate but grew 7.5% from May 2013. The release shows significant improvement for the single-family and multifamily categories from a year ago. On a three-month moving average basis, single-family construction spending increased by 12.3% and multifamily construction spending increased by 33%.

The employment situation improved according to the latest release from the Bureau of Labor Statistics (BLS), with widespread employment growth in professional and business services, retail trade and health care. Payroll employment grew by 288,000 in June. The three-month average is 272,000 jobs added per month. The unemployment rate improved as the number of unemployed decreased 325,000. The June unemployment rate of 6.1% fell from the prior month and is well below the June 2013 unemployment rate of 7.5%.

Improvements in the labor market are reflected in recent gains in consumer confidence. Consumers were more optimistic about the labor market in June and the Consumer Confidence Index hit its highest level since January 2008. The index rose three points to 85.2. Consumer outlook on the present situation and expectations of economic conditions also improved from the prior month.

Although sentiment recovered in June, builders remain cautious due to supply constraints including a persistent shortage of labor. A recent NAHB survey found a particularly acute shortage of carpenters. In particular, a serious shortage of framing crews was reported by 15% of builders while 52% reported some shortage. The survey also found that builders reported a more difficult time finding subcontractors when compared to hiring directly-employed workers.

In a related post, NAHB examined specialty trades or subcontractors. The analysis found lower volatility in specialty trade one-person firms versus company employment during the Great Recession. For example, employment in multi-employee companies decreased 19.4% from 2008 to 2009 while one-person firms declined just 3.7%. Lower volatility reflects the ability of a one-person firm to better adjust to changing market conditions.

In two posts, NAHB economists discussed results of a recent survey from McGraw Hill Construction (MHC) that queried a set of NAHB single-family and multifamily members and asked a series of questions on cost and prevalence of green building. The survey found that a majority of single-family and multifamily builders are doing more than 15% of their projects as green. Respondents indicated that increasing consumer interest is a reason for growth in this area. The incremental cost for builders to construct green homes was 8% in 2013. The higher cost of incorporating green features suggests that consumer choice should hold the leading role in determining market share of green homes.

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