Eye on the Economy: Tracking Progress on the Housing Recovery


The economy and the housing market continue their gradual march back to normal. The national NAHB/First American Leading Markets Index (LMI) rose to .90 in the third quarter from .89 in the second quarter. The index measures how close every metropolitan area is to its last normal level of single-family housing permits, employment and house prices.

The LMI has three components, and two of them were responsible for the increase. The single-family permit index rose from .43 to .44, meaning total permits issued in the past three months were at 44% of the last normal period, which was 2000-2003. Home prices also rose to 1.3 from 1.27, which means house prices are 30% higher than the average in 2000-2003.

Employment was the only component that did not change: It remained at .95, meaning the last 12 months’ average employment was at 95% of the peak employment levels of 2007.

Of the 350 metro areas with their own LMI, 59 have a value at or over 1, meaning they have recovered and moved on from their last normal state. Seven metro areas were added to this list in the last year. The recovered markets are dominated by energy-producing areas, with 15 in Texas, 8 in Louisiana and 3 in North Dakota. Smaller metro areas with universities or military bases have also done well.

While the employment component of the LMI did not change, recent job news has proved positive for housing. According to the most recent BLS data, total non-farm payroll employment grew by 214,000 on a seasonally adjusted basis in October. After upward revisions for September and August, the economy has added 673,000 positions over the last three months. In the separate household survey, the national unemployment rate fell from 5.9% to 5.8% in October. However, real wage growth continues to lag, posting only a 0.1% pickup in October after a 0.2% decline in September.

In October, home builders and remodelers added 8,000 jobs to the residential construction sector on a seasonally adjusted basis. Over the last 12 months, the industry has created 131,000 jobs. Employment growth for the sector has been steady recently, adding on average just a little more than 10,000 jobs per month over the last six months.

With respect to construction, total private residential spending in September increased over the revised August estimate to a seasonally adjusted annual rate of $349.1 billion, a 0.4% monthly increase. Single-family spending increased 1.1%, multifamily spending decreased 1.0% while home improvements spending fell 0.3%.

On a three-month moving average basis from September 2013, single-family construction spending increased 9.7% and multifamily construction spending increased 33.8%. In contrast, over the same period private construction spending on home improvements decreased 13.8%.

One area of the market that is doing well is senior housing development. The single-family 55+HMI jumped nine points from the third quarter of 2013, to 59—the highest third-quarter reading since the inception of the index in 2008 and the 12th consecutive quarter of year-over-year improvements. All three components posted year-over-year increases: present sales, expected sales for the next six months and traffic of prospective buyers.

One factor helping explain the continued strength in the 55+ housing market is the slow but consistent rise in home equity, releasing some of the pent-up demand from older householders who had been sidelined due to their inability to sell their existing homes at an acceptable price.

Underlying recent gains for housing has been solid growth in economic output, which expanded at a seasonally adjusted annual rate of 3.5% for the third quarter: down from the 4.6% rate in the second quarter but still respectable. The slowdown is no surprise given the rapid pace in the second quarter, driven in part by a bounce-back from the decline in the first quarter.

The real question is whether the momentum of the third quarter can be sustained. Key drivers of growth — personal consumption expenditures and business fixed investment — slowed, while more volatile sectors — net exports and national defense spending — made outsized contributions to growth.

Household balance sheet gains of recent years plus improvements in the labor market are now helping consumer credit expansion. For instance, over the course of the third quarter, consumer credit outstanding expanded at a seasonally adjusted annual rate of 6.6%. Non-revolving credit outstanding grew faster over the quarter at 7.9%, while revolving credit outstanding rose by 3.0%. Growth in the student loan category remains a concern for first-time home buyers.

Other industry headwinds persist. For example, a new NAHB industry survey indicates remodelers continue to face some labor shortages. Although shortages were apparent in many job categories, they were particularly acute in the three categories of carpenters. For example, 72% of remodelers reported a shortage of finished carpenters, and 30% said the shortage was serious.

Business lending is also a factor determining the pace of the housing recovery. According to the most recent Federal Reserve Senior Loan Officer Opinion Survey, demand for loans secured by multifamily residential properties strengthened on net over the past three months of 2014, particularly at smaller banks. However, lending standards for loans secured by multifamily residential properties, a measure of loan supply, tightened on net over the past three months of 2014 as the multifamily construction expansion continued.

In analysis news, NAHB released a new study examining residential energy use. Among the findings, single-family and multifamily homes built in the previous 10 years accounted for just 3.2% of the energy consumed in the U.S. Newer homes are larger, but over the long run the effects of increased efficiency offset the extra square footage, so that homes built since 1999 tend use the same to slightly less energy than homes built before 1950. The research also finds that energy use is determined by household behavior, including appliance use.

Lastly, NAHB analysis showed that over the past year the rate of house price growth recorded in the U.S. places it in the second quintile globally.


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