Eye on the Economy: Builder Confidence Adjusts as Sales and Starts Hold Steady


The NAHB/Wells Fargo Housing Market Index (HMI) of builder sentiment fell five points in October to a level of 54. Any value above 50 means more builders see the market favorably over those who see unfavorable conditions. The drop was from a nine-year high of 59 in August and returns the index to levels experienced during the start of the summer.

Local conditions continue to vary across markets, notably those in the oil and energy belt, which retain strongly positive outlooks. Builders continue to note shortages of buildable lots and scattered concerns about access to skilled labor. The HMI’s most recent reading is consistent with month-to-month volatility in various housing indicators, as well as long-run improving trends.

For example, the September housing construction report from the Census Bureau and HUD rebounded from an unusually low August level and returned to the slow but steady growing trend. The pace of total starts rose just above 1 million for the third time in 2014 to an annual rate of 1,017,000. Single-family starts increased slightly to 646,000, establishing a third quarter average of 646,000. This marks a 3.4% increase over the second quarter. Regionally, single-family starts were up in the Midwest and West and offset by smaller declines in the Northeast and South.

Multifamily constructions starts (units in buildings with two or more units) in September increased 16.7% to an annual rate of 371,000, finishing the third quarter at an average of 378,000, a 5% increase over the second quarter.

In another instance of monthly data volatility, September sales of new single-family sales were virtually unchanged, albeit from a significantly revised August report. At an annual rate of 467,000, September sales were at the highest pace since July 2008. However, the August number was revised downward after an unusually large and unsustainable spike. The third quarter finished at a 446,000 rate, up 4.4% from the second quarter (427,000).

Inventories of single-family homes continue to rise as builders prepare for continued demand improvements. Total inventory rests at 207,000, up 13% from the same time last year. Of that inventory, only 50,000 are completed homes ready to move in.

NAHB analysis of Census data of the sources of financing for new single-family home sales suggest little change from the prior quarter, although long-run trends point to a growing market share for conventional financing sources. Third quarter numbers from the Census Bureau’s Quarterly Sales by Price and Financing indicate that the count of cash-based new single-family home sales stood at 8,000 or about 7% of total sales. During the 2002-2003 period, cash sales made up only 4% of purchases. In contrast, cash purchases constitute a considerably larger share of the existing home market – 24% in September.

New home sales due to FHA-backed loans were 12% of the market during the third quarter. This is down from 28% in the first quarter of 2010 and is closer to the 2002-2003 average of 10%. As the conventional mortgage financing share has risen, the share of new single-family home sales due to FHA-backed mortgages has declined.

Pending existing home sales increased 0.3% in September, suggesting continued steady improvement in the resale market. The NAR Pending Home Sales Index (PHSI), a forward-looking indicator, increased to 105.0 in September from 104.7 in August. The September reading was up 1.0% from the same month a year ago, and pending sales were up year-over-year for the first time in 11 months.

This report builds on the positive September existing home sales numbers from NAR. Existing home sales increased to the highest level of the year, having posted gains for five of the last six months, despite weakness among first-time buyers.

Growth in the resale market is a net positive for the remodeling sector. The NAHB Remodeling Market Index (RMI) rose one point to 57 in the third quarter of 2014, the sixth consecutive quarterly period the index has been over 50.  An RMI above 50 indicates that more remodelers report market activity is higher (compared to the prior quarter) than report it is lower.

The Standard and Poor’s (S&P) and Case-Shiller House Price Index – National rose by 5.1% on a year-over-year seasonally adjusted basis in the October report. This is the 28th consecutive month of year-over-year increases. Over this period of more than two years, house prices have risen by 18.0%.

Rising home prices have been good for household balance sheet repair as part of the post-recession deleveraging process has limited some prospective first-time home buyers’ ability to enter the market. And while rising rents (1.5% growth above inflation over the last 12 months) should push younger buyers to consider homeownership, this has not occurred yet. For example, the national homeownership rate fell to 63.4% during the third quarter, nearing a 20-year low.

While home prices continue to rise, that expansion has been slowing. A more price constrained housing market may put pressure on builders, given rising costs of building. For example, recent news suggests another large gypsum price increase is in store for 2015, which will raise the price of items like drywall. Such factors will contribute to the volatility in the monthly construction data.

In recent analysis news, a new study that highlights the benefits of the Low-Income Housing Tax Credit program was published in California. The analysis details the effectiveness of the program and lists the benefits that come from having an assured supply of safe and affordable housing.

NAHB economists also finished a review of 2013 new single-family home construction characteristics. Recent analysis highlighted the fact that lot prices tend to be highest in New England due to local zoning requirements. Other analysis included regional differences in new home sales financing and water utility systems.

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