Eye On Housing
The end of 2014 saw an acceleration of job creation that compared favorably with the poor start to the year. Combined with the ongoing expansion of consumer confidence, these trends will help support housing demand and residential construction during 2015.
The Bureau of Labor Statistics (BLS) reported that payroll employment expanded by 257,000 in January, with an additional 147,000 jobs reported in November and December after data revisions. The unemployment rate inched up to 5.7% in January from 5.6% in December, which is in fact a positive development as this change was due to more individuals seeking work. In January, home builders and remodelers added 20,100 jobs on a seasonally adjusted basis. Over the last 12 months, the industry has created 162,000 jobs.
The separate BLS JOLTS survey of job openings and turnover suggests additional hiring ahead. For the overall economy, the job opening rate (number of unfilled jobs as a percent of total employment) reached 3.5% in December, the highest rate for the post-recession period.
The number of open construction sector jobs for December (on a seasonally adjusted basis) rose to 147,000. The December level marks the third-highest monthly measure of unfilled jobs in construction during the post-recession period. Quits surged in the construction sector for the month, along with a moderate increase in hiring, which may reflect some worker churn among employers.
The good news on the employment front has helped consumer confidence. The January 2015 University of Michigan Index of Consumer Sentiment soared to its highest level since January 2004. The Conference Board Consumer Confidence Index also increased sharply, reaching its highest level since August 2007.
With respect to the broadest measure of the economy, the advance estimate from the Bureau of Economic Analysis indicates that Gross Domestic Product (GDP) increased at a 2.6% annual rate. This was below expectations, which were generally around 3%.
While a “miss,” the first estimate of growth for the final quarter of 2014 includes some notable elements of optimism. In particular, consumers – benefiting from improved balance sheets and reduced gas prices ─ showed strength. Personal consumption expenditures expanded at a 4.3% annual rate for the quarter, exceeding expectations.
Residential fixed investment (RFI, or home building and remodeling) grew at a 4.1% rate for the fourth quarter. RFI has now expanded for three consecutive quarters, after weakness at the end of 2013 and the start of 2014 due to an increase in interest rates and bad weather. Of the 2.6% growth for overall GDP for the fourth quarter, 0.13 percentage points was due to the growth in RFI.
In December, total private residential construction spending increased 0.3%, driven by a large increase in the single-family component of private residential construction. Single-family spending increased 1.2% over the revised November estimate while multifamily spending increased 0.3%.
Strong rental demand continues to hold vacancy rates down, while the national homeownership rate continues to decline. According to the Census Bureau’s fourth-quarter survey, the rental vacancy rate dropped 40 basis points from last quarter and is down 120 basis points from one year ago to 7.0%. According to a separate government survey, non-seasonally adjusted three-month absorption rates for second-quarter completions (rented during the third quarter of 2014) increased slightly to 67%, effectively the same rate as a year earlier.
One of the factors holding back housing demand (rental and owner-occupied) has been weak household formation, particularly among young adults. New research by BLS economists found that for those born between 1980 and 1984, 90% moved out of their parents’ household by age 27. Of those moving out, however, over 50% returned. This return is sometimes referred as “Boomeranging,” moving out of a parental home and back.
This lack of robust household formation, combined with weakness in existing home inventory, has placed a ceiling on growth for the home resale market. In fact, the NAR Pending Home Sales Index decreased 3.7% in December, although it was up 6.1% from a particularly weak period that began at the end of 2013.
In contrast, the 55+ market continues to do well. NAHB’s 55+ Housing Market Index was higher year over year for all segments of the senior market—single-family homes, condominiums and multifamily rental. The single-family index increased six points from the fourth quarter of 2013, to 54—the highest fourth-quarter reading since the inception of the index in 2008 and the 13th consecutive quarter of year-over-year improvements. This market continues to be supported by recent gains in home equity, as well as favorable interest rates. For example, data from the Federal Housing Finance Agency shows that on average, the contract rate on conventional mortgages used to purchase newly built homes was 4.03% in December.
Gauging the overall state of the housing recovery, the NAHB/First American Leading Markets Index rose one point to .90 in the fourth quarter of 2014 from a revised .89 in the third quarter. The U.S. level of .90 means the nation’s economic and housing market is 90% of the way back to normal using the same base levels. The number of metropolitan areas that have returned to or exceeded their last normal level of housing and economic health increased to 63 (out of 351) from 60 last quarter.
In analysis news, economists at NAHB highlighted a number of studies related to housing, including a recently published paper by economists at the Federal Reserve Bank of Boston that demonstrates a link between home price gains – and homeownership in general – and the educational attainment and future earnings of children. The paper contributes to the broad academic literature demonstrating the positive social and individual impacts of homeownership.
In green building, a study conducted by a team of researchers led by the U.S. Department of Energy’s Berkeley Laboratory found that buyers are willing to pay more for homes that have installed solar photovoltaic (PV) energy systems. The research estimates a price premium of approximately $4 per watt of PV installed, or $15,000 for a typical PV system.
Finally, a HUD analysis examined the beneficiaries of the LIHTC program. Among the report’s findings, the median household income of a LIHTC resident was just over $17,000 and approximately 60% earned less than $20,000. Future analysis is expected to build on this effort, which details who benefits from the nation’s largest affordable housing production program.
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