Saturday, 19 of August of 2017

Economics. Explained.  

Category » Housing

Housing Starts

August 16, 2017

Housing starts fell 4.8% in July to 1,155 thousand after having jumped 7.4% in June. Because these data are particularly volatile on a month-to-month basis, it is best to look at a 3-month moving average of starts (which is the series shown in blue above).   That 3-month average now stands at 1,166 thousand which has fallen off from the 1,264 thousand peak pace in the cycle which was registered back in February.    So what is happening?  Is it a drop in demand?  Or a constraint on the part of builders?  We  believe it is the latter.

Both new and existing home sales continue to climb.   Thus, the demand for housing remains robust.

Builders remain enthusiastic in part because they see traffic through the model homes quite steady at a rapid rate.

Mortgage rates are at 3.9% which is quite low by any historical standard.

At the same time employment gains are about 170 thousand per month which is boosting income.  As a result, real disposable income (what is left after inflation and taxes) is growing at a 1.2% pace.  That is not particularly robust, but disposable income does hit slack periods from time to time and then rebounds.

Housing remains affordable for the median-price home buyer.  Mortgage rates may have risen, but income has been rising almost as quickly, hence affordability has not dropped much.  At 153.0 the index  indicates that a median-income buyer has 53.0% more income than is necessary to purchase a median-priced house.

The problem in housing is not a lack of demand.  Rather it is a constraint on the production side.  Builders have had difficulty finding an adequate supply of skilled labor.  Construction employment is growing by about 15 thousand per month.  Slow, but steady.

As one might expect there is a tight correlation between home builder confidence and the starts data which probably makes a great deal of sense.   Judging by the homebuilder confidence data we should expect starts to eventually climb to 1.5 million or so from about 1.2 million currently.  However,  as noted above, many home builders  report an inability to get the skilled workers they require.   Overcoming the labor shortage on a long-term basis will be challenging.  Employment in the construction industry will continue to climb, but slowly, which will limit the speed with which starts rise in the months ahead.

Another thing worth noting is that about 1.3 million new households are being formed every year.  Those families all need a place to live, either a single-family home or an apartment.  Thus, we need to see housing starts rise by 1.3 million just to keep pace with growth in households.  And because housing starts were substantially below the growth in households for so long, there is pent-up demand.  We expect starts to reach 1.2 million by the end of 2017 and 1.4 million in 2018.

What is interesting is that beginning late last year single family starts have begun to climb while multi-family buildings such as apartments have been slowing down.  It appears that many of the millennials who chose to rent for the last decade are getting older, perhaps starting families, and are now choosing to purchase a single family house.  In the past year single family starts have risen 10.4% while multi-family units have declined by 22.3%.

As a result, multi-family construction as a percent of the total has slipped from 36.2% in July of last year to 27.2%.

Building permits declined 4.1% in July to 1,223 thousand after having jumped 9.2% in July.  Because  permits are another volatile  indicator it is best to look at a 3-month average (which is shown below).  That 3-month moving average now stands at 1,222 thousand which continues to point towards slow but steady improvement in housing.   The reason people look at permits is because a builder must first attain a permit before beginning construction.  Thus, it is a leading indicator of what is likely to happen to starts several months down the road.  If permits are currently at 1,222 thousand, housing starts will gradually approach the 1.3 million mark.

Stephen Slifer

Charleston, SC

Homebuilder Confidence

August 15, 2017

Homebuilder confidence jumped 4 points in August to 68 after having declined 2 points in July.  Confidence is bouncing around from month to month at a very high level.    Clearly, builders believe that the housing market will perform well in 2017.

“Our members are encouraged by rising demand in the new-home market,” said NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, Texas. “This is due to ongoing job and economic growth, attractive mortgage rates, and growing consumer confidence.”

NAHB Chief Economist Robert Dietz said  “Builders continue to face supply-side challenges, such as lot and labor shortages and rising building material costs.”

Traffic through the model homes edged higher by 1 point in July to 49 after having declined by 1 points in July.  The March reading of 53 was the highest reading thus far in the business cycle.

Not surprisingly there is a close correlation between builder confidence and housing starts.  Right now starts are lagging considerably because builders are having some difficulty finding financing, building materials, an adequate supply of finished lots, and skilled labor.  Starts  currently are at a 1.2 million pace.  They should continue to climb gradually in the months ahead and reach 1.4 million by the end of 2017.

Stephen Slifer


Charleston, SC

Construction Spending

August 1, 2017

Construction spending (the green bars above) fell 1.3% in June after having risen 0.3% in May after having fallen 1.8% in April.  However, this index registered sharp increases in the January to March period.    Over the past year it has risen 1.6%.  Not only is this a very volatile series with large swings from month to month, even the previously released data can revise substantially.  Furthermore, the series can be distorted by big swings in public construction spending.  So while this series has been soft in the past three months, one should not read too much into it just yet.

Private construction declined 0.1% in June after having fallen 0.1% in May and in April after steady increases in each of the previous eleven months.  Over the past year private construction spending has risen 5.3%.   The 5.3% increase in the past year reflects a 1.1% increase in private non-residential construction and a sizable 9.2% increase in the private residential category.

Within the private construction spending category, residential spending declined 0.2% in June,  0.8% in May and 0.4% in April after having risen in each of the previous eleven months   Over the course of the past year private residential construction has risen by 9.2%.  The shortages of both homes available for sale and apartments will push this series higher in the months ahead, however the scarce availability of labor will limit its rise.

Construction of private single family homes has risen 9.0% in the past year, multifamily construction has climbed by 0.6%.  While single-family home construction has risen somewhat, home buyers are more often choosing to rent or opting for a condominium which has bolstered the construction of multifamily units.

The Census Bureau tells us that on average 1.3 million new households are being formed every year.  Those families need a place to live.  It could be a home.  It could be an apartment.  Currently, builders are only starting about 1.2 million units per year.  Thus, the demand for housing will remain strong for the foreseeable future which will keep construction workers fully employed for some time to come.  But the mix of housing appears to have shifted away from single-family dwellings to rental units.

Private nonresidential construction rose 0.1% in June after having risen 0.6% in May after having fallen 1.4% in April    On a year-over-year basis it has risen 1.1%.  This category was hit by the dropoff in oil and gas drilling activity caused by falling oil prices.  However, that drag on construction spending has disappeared and we expect this category to rise at a moderate pace in the months ahead.

Public sector construction plunged 5.4% in June after having risen 1.9% in May after having fallen 4.7% in April.  This category can be quite volatile on a month-to-month basis.  Over the past year such spending has fallen 9.5%.  It will rebound in the months ahead.

Stephen Slifer


Charleston, SC

Pending Home Sales

July 31, 2017

Pending home sales rose 1.5% in June after having fallen 0.7% in May.  This series tends to be rather volatile on a  month-to-month basis.

Lawrence Yun, NAR chief economist said it’s clear the critically low inventory levels in much of the country somewhat sidetracked the housing market this spring.  “Buyer interest is solid, but there is just not enough supply to satisfy demand. Prospective buyers are being sidelined by both limited choices and home prices that are climbing too fast.”

Housing remains quite affordable for middle income buyers.  After peaking at 213.6 in January 2013 the housing affordability index has declined slowly and now stands at 153.0.  What that means is that potential buyers had 53.0% more income than was necessary to buy a median priced home (compared to 14% in 2007).   The  housing affordability index has declined slightly in response to the recent run-up in the 30-year mortgage rate to 4.0% following the election.  However, it has not fallen more sharply because consumer income continues to climb.

This  series on pending home sales is collected by the National Association of Realtors and represents contracts signed, but not yet closed, on existing home sales.  Thus, it is both a leading indicator of existing home sales and housing market activity in general.   Not all these contracts go to completion.  The buyer may not qualify for a mortgage, the house may not appraise at a sufficiently high value, or the house may fail the buyer’s inspection.  But the series is clearly indicative of changes in housing market activity.

Stephen Slifer


Charleston, SC

Homeownership Rates

July 27, 2017

Homeownership edged upwards by 0.1% in the second quarter to 63.7%.  It hit a low of 62.9% in the second quarter of last year and has rebounded slightly.  It appears to have hit bottom.

The decline in homeownership in the past decade  has been across all age categories, but has been most pronounced amongst younger borrowers, i.e., those under the age of 45.

One factor contributing the decline in homeownership amongst our youth is the higher mortgage payment required to purchase a median-priced home which has risen 59% in the past four years risen from $612 in January 2013 to $974 currently.  Many younger borrowers simply cannot afford those higher payments.

As home prices have risen the down payment required to purchase a median-priced home has risen from $34,200 to $50,900 in the same four year time period.

At the same time many younger borrowers are saddled with a considerable amount of student debt which will negatively impact their ability to qualify for a mortgage.  Such loans have been climbing at a double-digit pace since the recession began in December 2007 and are, in fact, the only type of consumer credit that has risen significantly during that period of time.

Finally, the very limited supply of homes available to purchase means that some potential home buyers simply cannot find a suitable property to purchase.

While younger adults have been negatively impacted by higher home prices, the fact remains that mortgage rates are still very low at 3.9%  and home prices are still about 6.5% below their 2006 peak value.  With a robust pace of jobs growth, it is likely that the steady decline in homeownership has ended, although it is difficult to envision a significant rebound in ownership any time soon.

As many former homeowners and younger people turn to renting, vacancy rates for rental properties have been falling fast and at 7.3% are the lowest they have been since the mid-1900’s.  There continues to be a significant housing shortage in the United States.  This implies that home sales and prices will continue to climb.  The shortage of rental properties is especially acute so look for builders to shift construction from single-family homes into this highly sought category.

Stephen Slifer


Charleston, SC

New Home Sales

July 26, 2017

New home sales rose 0.8% in June to 10 thousand after having risen 4.9% in May and having fallen 9.6% in April.  This is typically an extremely volatile series.  A much better representation of the pace of home sales is the 3-month average which stands at 597 thousand (shown above) which is within an eyelash of being the fastest sales pace thus far in the cycle (peak was 6167thousand in March).   Keep in mind that builders are still having difficulty finding an adequate supply of skilled labor.  If they could find more workers, builders would build and sell more homes.  Also do not forget that new home sales are single family homes and do not include sales of condos.

The supply of available homes for sale rose 3 thousand in June to 272 thousand.  The small increase in the number of homes for sale combined with a similar-sized increase in the selling rate means that there is now a 5.4  month supply of new homes available for sale.  Realtors suggest that a 6.0 months supply is that point at which the demand for and supply of housing are roughly in balance.

The National Association of Realtors series on housing affordability for existing homes peaked at 214 in January 2013.  It has since slipped from that lofty level and now stands at 153.0.   That means that consumers have 53.0% more income than is necessary to purchase a median priced home.  Existing homes remain quite affordable despite a post-election increase in mortgage rates to 4.0% We have made an attempt to estimate affordability if 30-year mortgage rates  climb to 4.2% by the end of this year.  We estimate the affordability index at that time will be about 150 — still very affordable.  The reason affordability has not been hit harder by the increase in mortgage rates is because consumer income continues to climb.

New home prices fell 4.2% in June to $310,800 after having risen 4.8% in May.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $314,900.  During the course of this past year prices have risen 0.6%.

Given that the demand for housing far exceeds supply the housing sector will continue to do well in 2017.  Sales will be at a reasonably robust pace of perhaps 625 thousand by yearend, builders will continue to boost production, and prices should rise slowly.  Mortgage rates should end 2017 at 4.2% which is still quite affordable.

Stephen Slifer


Charleston, SC

Mortgage Loans

July 25, 2017

Real estate loans rose at a 2.3% rate in June after having climbed by 4.2% in May (the light blue bars).   Over the course of the past year mortgage lending has risen 4.6% (the dark blue line).

Total loan growth has been slowing for all types of bank lending — real estate, consumer, and commercial and industrial loans.   The slowdown began right at the time of the election so it may have something to do with the uncertain fate of Dodd-Frank legislation under Trump.  We do not expect it to be long-lasting.  With total loans having risen 3.6% in the past year and nominal GDP growth climbing by 4.1%, the slowdown in lending has not yet slowed the pace of economic activity.  But if the extreme slowdown in recent months were to continue for much longer that could be the case.

Stephen Slifer


Charleston, SC

Case Shiller Index of Home Prices

July 25, 2017

Case Shiller Index of Home Prices was unchanged in May after having declined 0.1% in April.   Over the course of the past year home rices have risen 4.9%.  In a world in which income is rising slowly, an increase in home prices of that magnitude seems sustainable.

There is a shortage of homes available for sale.  The inventory of existing homes is at 4.3 months which is well below the 6.0 month supply that is generally regarded as the point where supply and demand are roughly in balance.  This shortage of homes available for sale portends a trend towards higher prices in the months ahead.

While  builders have stepped up the pace of production there is still a significant shortage of available homes for sale.  While some are still having difficulty finding adequate financing and an adequate supply of skilled labor, as the economy continues to chug along  in 2017 banks should be more willing to extend credit to builders which will help to alleviate the shortage.

At the same time a continuation of job gains will boost income and make homes more affordable which means that moderately rising prices are not going to significantly hamper the housing industry.

Mortgage rates since the election have jumped  to 4.0%.  They should rise only slightly from about 4.0% currently to 4.2% by the end of 2017 if the Fed raises short-term interest rates one more time in 2017 to 1.25%.

Housing today continues to be affordable.  The chart below from the National Association of Realtors indicates that after peaking at 213.6 in January of 2013 the affordability index now stands at 153.0 in May.  That means that consumers still have 53.0% more income than is necessary to buy a median priced home.   To put the current level in context,  just prior to the recession in 2007 consumers had 14% more income than was necessary to purchase a median priced home.   Housing at that time was very expensive.  Housing today remains affordable even though mortgage rates have risen to the 4.0% mark because consumer income is also rising.

Stephen Slifer


Charleston, SC

Mortgage Rate

July 25, 2017

Right after the November election mortgage rates  jumped b 0.7% from 3.5% to 4.2% as market participants believed that President Trump’s proposed individual and corporate income tax cuts.  repatriation of corporate earnings currently locked overseas, and significant relief from the currently onerous regulatory burden, would boost GDP growth significantly, boost inflation, and push long-term interest rates higher.

Mortgage rates have declined about 0.3% since the end of last year to 3.9% as the legislative proposals described above have (at a minimum) been delayed and some economists believe it will not be passed at all.  If the Fed raises rates one more time this year and the inflation rate begins to climb, by the end of this year the 30-year mortgage rate is probably going to be slightly higher at about 4.2%.

Stephen Slifer


Charleston, SC

Existing Home Sales

July 24, 2017

Existing home salesfell 1.8% in June to 5,520 thousand after having risen  1.1% in May.  While these sales bounce around a bit from month to month they clearly continue to trend higher.  The March sales pace of 5,700 thousand was the fastest since February 2007.

Lawrence Yun, NAR chief economist  says, “Closings were down in most of the country last month because interested buyers are being tripped up by supply that remains stuck at a meager level and price growth that’s straining their budget,” he said. “The demand for buying a home is as strong as it has been since before the Great Recession. Listings in the affordable price range continue to be scooped up rapidly, but the severe housing shortages inflicting many markets are keeping a large segment of would-be buyers on the sidelines.”

The months’ supply of unsold homes rose slightly to 4.3 months.  Realtors consider a 6.0 month supply as  being the point at which demand for and supply of homes are roughly in balance.  Thus, housing remains in short supply.  If sales were not being constrained by the limited supply it would almost certainly be at a 6,000 thousand pace.

Keep in mind that properties typically stayed on the market for just 28 days in June which is down from 34 days a year ago.  This is the shortest length of time on the market since the NAR began tracking these data in May 2011.

The National Association of Realtors series on affordability reached a peak of 213.6 in January of 2013.  It now stands at 153.0 in May.  At that level  it means that a household earning the median income has 53.0% more income than is necessary to get a mortgage for a median priced house.  Going into the recession consumers had only 14% more money than was required to purchase that median priced home.  Thus, housing remains quite affordable despite the backup in mortgage rates.  That is because sizable job gains are boosting income almost as fast mortgage rates are rising.

The housing sector will continue to expand in the quarters ahead.   Jobs growth is expected to remain solid which should boost  income.  Builders are trying hard to boost production to increase the supply of available homes which should slow the pace of price appreciation. Finally, mortgage lenders should become slightly less restrictive as the economy remains healthy and default rates decline.
Existing home prices rose 4.5% in June after climbing 3.6% and 3.1% in April and May. Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $248,900..00.  Over the course of the past year existing home prices have risen 6.5% and have generally been bouncing around in a 4.5-8.0% range.  However, in the past six months prices have risen at a troubling 21.1% annual rate.  This bears watching.  The shortage of available housing is beginning to lift prices.

Stephen Slifer


Charleston, SC