Thursday, 15 of November of 2018

Economics. Explained.  

Category » Housing

Construction Spending

November 1, 2018

Construction spending (the green bars above) was unchanged in September after having risen 0.8% in August.  Over the past year it has risen 7.2%.  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.  Having said all of that, construction spending has been growing moderately over the course of the past year and seems to be accelerating somewhat.

Private construction rose 0.3% in September after having climbed 0.4% in August.  Over the past year private construction spending has risen 6.1% which reflects a 7.2% increase in private non-residential construction and a 5.1% increase in the private residential category.

Within the private construction spending category, residential spending rose 0.6% in September after having declined 0.4% in August.   Over the course of the past year private residential construction has risen by 5.1%.  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 3.1% in the past year, multifamily construction has risen 8.2%%.

The Census Bureau tells us that on average 1.2 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.  Replacement demand should add about 0.5 million unit to that for a total demand of 1.7 million or so units per year.  Currently, builders are starting about 1.2 million units per year.  But keep in mind that housing starts have fallen way short of demand for the past nine years. Thus, the demand for housing will remain strong for the foreseeable future which will keep construction workers fully employed for some time to come.

Private nonresidential construction rose 0.1% in September after having surged 1.4% in August.   During the past 12 months nonresidential construction has risen 7.2%.  To get more lift in the investment spending component of GDP we would like this component to turn more sharply upwards.

Public sector construction fell 0.9% in September after having jumped 2.2% in August.  This category can be quite volatile on a month-to-month basis.  Over the past year such spending has risen 11.0%.  It will probably rise about 7.0% this year given the increase in defense spending approved in January.

Stephen Slifer


Charleston, SC

Case Shiller Index of Home Prices

October 30, 2018

Case Shiller Index of Home Prices rose 0.1% in August after having been unchanged in July after having risen 0.1% in both May and June.   Over the course of the past year home prices have risen 5.2% but they have climbed just 1.7% in the past six months.

The actual level of the index at 225.0 has finally begin to approach the record high level for this series of 226.3 which was set in June 2006.  It has taken more than a decade for home prices to recover from the devastating 2008-09 recession, but they should surpass that previous record high level within the next month or two.

Home home prices have been rising at about a 5.0% pace, and mortgage rates have been climbing. Mortgage rates are now at 4.9% .  That combo suggests to some that housing has become unaffordable for many.  That is not the case because consumer income has been rising as well.

The chart below from the National Association of Realtors indicates that  the housing affordability index now stands at about 140.0.  That means that consumers still have 40.0% 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 4.9% mark because consumer income is also rising.

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.

Stephen Slifer


Charleston, SC

Pending Home Sales

October 25, 2018

Pending home sales climbed by 0.5% in September after having fallen 1.9% in August.  The index would have risen somewhat more markedly were in not for a decline of 1.4% in the South which seems to be related to Hurricane Florence.  This series has declined 1.0% in the past year.  It is important to determine whether this reflects a dropoff in demand, or whether there is some sort of supply constraint.  We think it is the latter.

Lawrence Yun, NAR chief economist blamed it largely n a shortage of available homes for sale.  He said, “The latest monthly increase is a good, stabilizing trend. This shows that buyers are out there on the sidelines, waiting to jump in once more inventory becomes available and the price is right,”

Yen also noted that  while rising mortgage rates are always a deterrent to potential buyers, they should not lead to a significant decline. “We have two opposing factors affecting the market: the negative impact of rising mortgage rates and the positive impact of continued job creation. This should lead to future homes sales staying fairly neutral.  As long as there is job growth, rising mortgage rates will hinder some buyers; but job creation means second or third incomes being added to households which gives consumers the financial confidence to go out and make a home purchase.”

As evidence of what Yun is saying, existing home prices had been rising steadily at a rate between 5.0-7.0% for the past several years.  But prices declined in both July and August and, as a result, the year-over-year increase has slipped to 4.6%.  As price gains slow, homeowners may believe that further rapid appreciation has come to an end and be more inclined to put their house on the market.

There is currently a 4.3 month supply of homes available for sale.  However realtors suggest that the supply of and demand for housing is roughly in balance when there is a 6.0-month supply.  We are not even close.

On the demand side could it be that housing has become less affordable?  The National Association of Realtors publishes a housing affordability index that now stands at about 140.0.  What that means is that potential buyers have 40% more income than is necessary to buy a median priced home (compared to 14% in 2007).   A few years ago they had 80-90% more income than required.  The index has declined  in response to n increase in the 30-year mortgage rate to 4.9% and a moderate increase in home prices.  It has not fallen more sharply because consumer income continues to climb.  So while housing has become less affordable than it used to be, it can not yet be regarded as “unaffordable”.

Keep in mind, too, that the the average home stays on the market for just 32 days which compares to about 100 days when the NAR began collecting this statistic in 2011.  The NAR reports that more than one-half of homes that come on the market sell within a month.

At the same time the builders report  that traffic through their model homes remains robust although it has backed off slightly in recent months (although from a very high level at the beginning of the year.

Thus, it is quite evident that the dropoff in pending home sales is a function of constrained supply  rather than potential home buyers backing away from the market.  Hopefully, supply will increase in the months ahead and the pace of sales will rebound between now and yearend.

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

New Home Sales

October 24, 2018

New home sales plunged 5.5% in September to 580 thousand after having fallen 3.0% in August, 1.5% in July and 6.3% in June.  Sales have fallen four months in a row and in five of the past six months.  And, unlike with existing home sales for September the decline was broad-based by region.  New home sales are 13.8% below their year ago level.  So is it a drop in demand, a drop in supply of available homes for sales, or some of both that is slowing the pace of sales.

First, the demand side.  The National Association of Realtors publishes a series on housing affordability for existing homes which stands at about 140.0.   That means that consumers have 40.0% more income than is necessary to purchase a median priced home.  Thus, existing homes remain quite affordable despite an increase in mortgage rates to 4.9% and an increase in prices.  The reason affordability has not been hit harder by the increase in mortgage rates and prices is because consumer income continues to climb.  Housing, however, is not as affordable as it was a couple of years ago when the consumer had 80-90% more income than was necessary to purchase that median-priced house.   But at the peak of the previous expansion back in 2007 this affordability index stood at about 115.  Thus, housing is less affordable than it was, but it remains relatively affordable and should continue to be affordable for some time to come.

We would have thought that if the housing sector were weakening by any significant amount, traffic through builders’ model homes would be dropping off.  But builders are reporting traffic through the model homes that is still quite robust.

Similarly, if the demand for housing were weakening we would have thought that homes would sit on the market for a longer period of time.  However, homes being offered for sale remained on the market for just 32 days in September which is one of the shortest time periods since the National Association of Realtors began collecting these statistics back in 2011,

Now the supply side.  The supply of available homes for sale rose 9 thousand in September to 327 thousand thousand.  A big drop in the in the number of homes sold combined with a moderate increase in the number of  homes on the market means that the month’s supply of available homes for sale jumped 0.6 month in September to 7.1 months.  Realtors suggest that a 6.0 month supply is that point at which the demand for and supply of housing are roughly in balance.  So, at least in September, there was an adequate supply of homes available for sales.  However, one interesting point to note is that of the 9 thousand increase in the number of homes available for sales 8 thousand was for homes either under construction or not yet started.  The supply of completed homes available for sale is a minuscule 2.9 months.  Thus, the potential new home buyer still has a hard time finding a model he can purchase right away.

At the same time builders say they are having a hard time finding an adequate supply of both skilled and unskilled workers.  Construction employment is rising by about 30 thousand per month.  Builders would like that to be higher.

New home prices rose 0.3% in September to $320,000 after having fallen 3.2% in August.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $323,00000.  During the course of this past year prices have been unchanged.

We refuse to believe that the current level of mortgage rates at 4.9% is high enough to significantly impede the pace of sales.  Thus, we believe the housing sector will continue to do reasonably well in 2018 and 2019.  We expect the sales pace to rise 4.0% next year to 610 thousand.  Mortgage rates should end 2018 at 5.0% and climb to 5.8% by the end of 2019 which is still quite affordable.

Stephen Slifer


Charleston, SC

Existing Home Sales

October 19, 2018

Existing home sales fell 3.4% in September to 5,150 thousand after having declined 0.2% in August.  That is the sixth consecutive drop in this series.  Sales currently are 4.1% lower than they were at this time last year.  While sales have been trending lower, the September drop was almost exclusively in the South which implies that Hurricane Florence played a big role in the significant drop in that month.  Unfortunately, Hurricane Matthew will depress sales in the same region in October.  It will take several months for the weather-related distortions to work their way out of the data.

Lawrence Yun, NAR chief economist said,  “A decade’s high mortgage rates are preventing consumers from making quick decisions on home purchases. All the while, affordable home listings remain low, continuing to spur underperforming sales activity across the country.”

With the significant drop in the pace of sales in September, the month’s supply of homes available for sale edged upwards in September to 4.4 months.  Realtors consider a 6.0 month supply as  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 32 days in September which is down 5.9% from 34 days a year ago.  More than 47% of homes that went on the market sold within a month.  This is one of the shortest lengths of time between listing and sale  since the NAR began tracking these data in May 2011.

The National Association of Realtors series on affordability now stands at about 140.0.  At that level  it means that a household earning the median income has 40.0% 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 and should continue to remain affordable throughout 2018 and 2019 despite the backup in mortgage rates because sizable job gains are boosting income almost as fast as mortgage rates and home prices 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 fell 2.8% in September to $258,100 after having declined 1.6% in August.  Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $267,100.  Over the course of the past year existing home prices have risen 4.2% and have generally been bouncing around in a 4.5-8.0% range.
 Stephen Slifer


Charleston, SC

Housing Starts

October 17,  2018

Housing starts fell 5.3% in September to 1,201 thousand after having risen 7.1% in August. But Hurricane Florence took a toll as starts in the South fell 90 thousand.  Unfortunately, Hurricane Michael will keep starts depressed in the South in October.  It will take several months for these weather-related distortions to even out so we can get a true read on the pace of sales.  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 above).   That 3-month average now stands at 1,218 thousand.  Starts have cooled somewhat in recent months, but is that because demand has declined?  Or are constraints on production like a labor shortage and rising costs of materials the more likely cause?  We believe it is the latter.

Both new and existing home sales continue to trend upward but they are being constrained by a lack of supply.   Thus, the demand for housing remains robust.

The average home stays on the market for 29 days currently which is down from 100 days a few years ago.  One-half of the homes coming on the market sell within one month.  This statistic provides compelling evidence that the demand for housing remains robust.

Monthly  employment gains are about 190 thousand per month which is boosting income.  As a result, real disposable income (what is left after inflation and taxes) is growing at a 3.0% pace which is  somewhat above its long-term average of 2.7%.

Mortgage rates are at 4.9% which is quite low by any historical standard.

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 140.0 the index  indicates that a median-income buyer has 40.0% 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 both skilled and unskilled labor.  Construction employment has been growing by about 30 thousand per month but will be difficult for it to grow any faster.  At the same time tariffs on lumber, steel and aluminum  are driving up the cost of production.

There are plenty of homes that have already been authorized but construction has not yet begun because of builders inability to find workers, and because the cost of materials has risen so sharply in the wake of tariffs on steel, aluminum, and lumber.  Once supply constraints begin to abate we will see starts climb at a more robust pace as builders begin construction on these previously authorized houses.

Given the continuing strength in demand we expect starts to reach 1.3 million by the end of 2018 and continue upwards next year to 1.35 million.

Building permits declined 0.6% in September fell 0.7% after having declined 4.1% in August.  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 1,264  thousand which is below the fastest pace thus far in the business cycle (1,355 thousand).   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 at 1,264 thousand, housing starts should easily rebound to the 1.3 million mark by yearend.

Stephen Slifer

Charleston, SC

Homebuilder Confidence

October 16, 2018

Homebuilder confidence was rose 0.1 point in October to 68 after having been unchanged in September.  The December level of 74 was the highest for this series since July 1999 — over 18 years ago — and current confidence levels are somewhat below the lofty December level.

NAHB Chairman Randy Noel said, “Builders are motivated by solid housing demand, fueled by a growing economy and a generational low for unemployment.  Builders are also relieved that lumber prices have declined for three straight months from elevated levels earlier this summer, but they need to manage supply-side costs to keep home prices affordable.”

NAHB Chief Economist Robert Dietz said  “Favorable economic conditions and demographic tailwinds should continue to support demand, but housing affordability has become a challenge due to ongoing price and interest rate increases.”

Traffic through the model homes jumped 4 points in October to 53 after having been unchanged in September.  The December level of  58 was by far the highest level 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 1.25 million pace.  They should continue to climb gradually in the months ahead and reach 1.30 million by the end of 2018 and 1.35 million by the end of next year.

Stephen Slifer


Charleston, SC

Mortgage Loans

August 27, 2018

Real estate loans rose at a 3.7% pace in July after climbing by 2.6% in June (the light blue bars).   Over the course of the past year mortgage lending has risen 3.4% (the dark blue line).

While mortgage lending has been sluggish, total loan growth — led by a faster pace of consumer lending and more rapid growth rate in  commercial and industrial loans — has gathered momentum.   Over the course of the last year total loans have risen at a 4.9% pace which is slightly faster than in other recent months.

Stephen Slifer


Charleston, SC

Homeownership Rates

August 26, 2018

Homeownership edged upwards by 0.1% in the second quarter to 64.3%.  It hit a low of 62.9% in the second quarter of 2016 but has been climbing steadily for the past two years.

The upswing in homeownership in the past two years  has been most pronounced amongst younger borrowers, i.e., those under the age of 45.  That is where most of the earlier decline occurred.

Higher home prices and somewhat higher mortgage rates have caused the monthly mortgage payment required to purchase a median-priced home to rise steadily.

The same thing is true for the down payment required to purchase a median-priced home.

While higher home prices and higher mortgage rates have made homeownership less affordable than it used to be, housing still remains quite affordable for most.  The National Association of Realtors index of housing affordability stands at about 140.   At a level of 140 it means that consumers have 40% more income than is required to purchase a median-priced home.  Back at the peak of the housing boom in 2007  consumers had just 14% more income than required.  Thus, despite higher home prices and rising mortgage rates, housing remains quite affordable for most because of the steady growth in consumer income.

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

Many former homeowners and some younger people have turned to renting, but vacancy rates for rental properties have been falling fast and at 6.8% are the lowest they have been since the mid-1980’s.  There continues to be a significant housing shortage in the United States.  This implies that home sales and prices will continue to climb.

Stephen Slifer


Charleston, SC

Mortgage Rate

May 8, 2018

Right after the election in November of last year mortgage rates  jumped quickly 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.  Strong data early this year coupled with a gradual increase in inflation has boosted the 30-year mortgage rate to 4.5%

If the Fed raises rates two more times in 2018 to 2.1% and the core inflation rate climbs from 1.7% today to 2.4% by yearend, the 30-year mortgage rate is probably going to end 2018 at about 4.7%.

Stephen Slifer


Charleston, SC