Eye on the Economy: Sales Flat But Confidence Rising


Sales of new single-family homes were up 0.7% over a downwardly revised pace for September, according to the Census and HUD October report. The seasonally adjusted annual sales rate came in at 458,000 for the month, only 1.8% higher than the October 2013 sales rate. Inventory of new single-family homes for sale rose to 212,000, but this remains only a 5.6 months’ supply at the current sales rate.

Inventories have been rising along with builder confidence. The November NAHB/Wells Fargo Housing Market Index of single-family builder sentiment rose four points to 58 due to promising long-run trends. The November reading marks the fifth consecutive month for the HMI to come in above the tipping point of 50. All three components of the index (current sales, expected sales and buyer traffic) posted gains in November.

Future sales should be supported by improving hiring in the economy and continued low mortgage interest rates. For instance, according to FHFA data, the average effective contract interest rate for mortgages associated with newly built homes was 4.23% in October. While the NAHB/Wells Fargo Housing Opportunity Index (HOI) slipped to a level of 61.8, from 62.6 in the second quarter (meaning 61.8% of new and existing homes sold during the quarter were affordable to a family earning the U.S. median income), monetary policy will support favorable interest rates in the months ahead, as recently published minutes from the Federal Reserve’s Open Market Committee detail.

Construction of single-family homes also picked up speed in October, according to Census/HUD estimates. Starts for single-family homes were up 4.2%, which at a 696,000 seasonally adjusted annual rate marks the fastest pace since early 2008. Permits also increased for the month.

However, total housing starts were down 2.8% in October due to a 15.4% drop in the volatile multifamily apartment construction sector. Despite these monthly ups and downs, average multifamily starts remain in the healthy range of over 350,000 per year. And multifamily developer confidence remains strong. The NAHB Multifamily Production Index registered a level of 54 for the third quarter. This was an increase of 4 and was the 11th consecutive quarter of a reading at 50 or above. And rents continue to rise, with NAHB calculations of CPI data indicating an increase for inflation-adjusted residential rents of 1.5% from October 2013.

Third-quarter data of housing construction reveals a number of notable trends. For example, for two consecutive quarters the average size of newly built single-family homes has declined. Average home size has risen in the post-recession period due to an atypical market mix that is relatively stronger for wealthier home buyers. Median home size should fall as first-time buyers return to historical levels in the new home market.

Typical new multifamily unit size remains low due to historically high levels of for-rent development and persistent relative weakness for condo development. In contrast, the market for single-family built-for-rent units appears to be cooling off, after reaching historically elevated levels from 2008 through 2013.

Townhouse construction is regaining steam again, with the current market share (as measured on a one-year moving average) standing at 11% of single-family starts. The same trend appears to be in place for custom home building (owner/contractor built), with this sector’s market share reaching approximately 24% of single-family starts (on a one-year moving average basis) during the third quarter.

Turning to the resale market, the National Association of Realtors reported that pending existing home sales decreased 1.1% in October, although the Pending Home Sales Index was 2.2% higher than a year ago. Completed existing home sales were up slightly for the month, rising 1.5% over the September pace and 2.5% higher than October 2013. Inventories are low, decreasing 2.6% in October and representing only a 5.1 months’ supply at the current sales pace.

Recent FHFA and Case-Shiller housing data indicate that home price appreciation has cooled but continues to grow. The FHFA data shows 4.3% annual growth for September, while Case-Shiller reveals 4.8% appreciation. Improved housing prices and labor market performance continue to reduce mortgage delinquencies. According to data from the Mortgage Bankers Association, the share of mortgages more than 90 days past due fell to 2.3% for the third quarter, down from the market peak of 5.1% at the end of 2009.

Some easing of residential construction headwinds was recorded during the fall. Softwood lumber prices fell 3.1% and OSB prices were off 2.9%. However, gypsum prices rose 1.1% after declines in the prior two months and prices are expected to rise into 2015. And the count of unfilled construction sector jobs fell from 121,000 in August to 98,000 in September. Access to labor has been a key builder challenge in recent years.

Underlying macroeconomic trends should help support growth for housing going into 2015. Third-quarter GDP growth was revised up to 3.9% from an initial read of 3.5% due to improved reading for investment and personal consumption expenditures. And consumer sentiment indicators are at or near post-recession highs.

In analysis news, NAHB economists recently detailed industry survey data concerning the cost implications and concerns regarding building code changes. The data indicate that 35% of single-family builders are extremely concerned about code impacts.

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