Eye On Housing
New homes sales declined in June, falling 8.1% from a revised May rate to a seasonally adjusted annual pace of 406,000, according to data from the Census Bureau and HUD. It’s a return to the trend in place since March of this year, with gains expected in the months ahead as the labor market and the overall economy improve. New home inventories rose to 197,000 homes, a 5.8-months’ supply.
The average effective mortgage interest rate for new home sales rose from 4.01% to 4.27% in June, according to estimates from the Federal Housing Finance Agency (FHFA). The data also indicate that this is slightly higher than the reported average for existing homes, the first time this has been the case since November of last year.
The Census new home sales report also revealed a slight increase in cash sales. For the second quarter, all-cash sales rose to 8.4% of all new home sales. This is higher than the approximately 4% average in place during the 2002-2003 period, prior to the housing boom. FHA-backed new home sales declined to 11% during the quarter, down from the 28% market share peak set at the start of 2010.
The slowing of housing construction starts at the end of 2013 and beginning of 2014 resulted in a decline in Census-reported private residential construction spending (put-in-place) in June. While total residential spending was up 7.4% year over year for the month, the dollar volume pace of home building and remodeling was down for the last two months, including a 0.3% decline in June. Year over year, the pace of single-family construction spending is up 8.5% and multifamily has increased 33.2%. Improvement spending is down negligibly year over year.
House price growth has also been slowing in recent months, but remains well above the rate of inflation. The annual growth in the S&P/Case-Shiller 20-City Composite home price index eased for the sixth consecutive month in May to 9.3% while the FHFA Purchase-Only house price index slowed to a 5.6% increase. Both these measures were above May’s 2.1% yearly increase in consumer prices.
Among the 20 metro areas in the Case-Shiller report, 18 exhibited slower rates of annual growth in May than April, with only Tampa and Charlotte showing moderate acceleration. In addition, according to a panel of 49 economists in July, the median forecast of growth in the FHFA index for 2014 was 4.7% and 3.8% in 2015.
Mirroring the June new home sales report, pending existing home sales fell 1.1% for the month. The Pending Home Sales Index, a forward-looking indicator based on signed contracts reported by the National Association of Realtors, decreased 1.1% in June, following three consecutive months of increase. The June reading was down 7.3% on a year-over-year basis.
The drop in pending sales comes after a promising string of monthly gains for completed existing home sales, including a 2.6% monthly increase in June that pushed the annual pace of existing sales pass the 5 million mark for the first time since October 2013.
As the volume of existing home sales are a traditional driver of the remodeling market, the NAHB Remodeling Market Index (RMI) rose three points to 56 in the second quarter, bouncing back after a first-quarter decline. Two of the three current market RMI components improved in the second quarter, with a particularly strong increase in major additions and alterations. Each indicator of future activity improved in the second quarter, with three of the four indicators rising by a full 5 points.
The declines in new home sales contracts and pending existing sales are a reminder that economic improvements that unlock pent-up housing demand continue to favor, on relative basis, rental markets over for-sale housing in the near-term. This effect will continue to place downward pressure on the national homeownership rate. For example, according to Census data, the homeownership rate fell to 64.8% during the second quarter. The current rate is 4.6 percentage points below the peak rate of 69.4% set 10 years ago.
In macroeconomic news, July reporting from the Bureau of Labor Statistics revealed that payroll employment increased by 209,000 for the month. The unemployment report rose 0.1 percentage points to 6.2%. However, the increase in the rate was due to an increase of 329,000 in the labor force. For 2014 thus far, monthly employment gains are averaging 230,000 per month.
Gross Domestic Product growth for the second quarter was a significant improvement over the start to the year. GDP growth was up 4%, up from the 2.1% decline for the first quarter. Some bounceback was expected, and the second quarter experienced growth for exports and inventory investment. For the year, NAHB is forecasting 1.7% overall GDP growth.
The Federal Reserve’s monetary policy committee agreed that the first-quarter GDP decline was due to transitory factors. Given the committee’s recognition that inflation has moved closer to its policy target, the Fed is willing to keep the federal funds rate at the current low level while winding down its asset purchasing program.
In analysis news, NAHB Economics published new priced-out numbers examining the key issue of housing affordability. The new estimates indicate that for a $1,000 increase in median new home price, triggered perhaps by higher regulatory costs connected to construction, more than 206,000 households would be priced out of the market given current mortgage interest rates and household incomes. The research also updates the NAHB housing affordability pyramid, which reports the number of households that can afford housing by price tier. For example, the data demonstrate that 87 million households can afford a home priced higher than $100,000, but only 22.8 million of that total can afford a new home priced at $175,000.
Finally, academic analysis examined the impact of sustainability features in multifamily housing and mortgage default for apartment owners. The research found that apartment owners are less likely to experience default if the apartment building is within a mile of open space, in a neighborhood with significant retail presence, accessible to transit, and meets certain affordability thresholds.
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