Monday, 25 of March of 2019

Economics. Explained.  

Category » Housing

Existing Home Sales

March 22, 2019

Existing home sales came roaring back to life with an 11.8% increase in February to an annual rate of 5,510 thousand after having fallen 1.4% in January.  Sales currently are now just 1.8% below where they were at this time last year.

Lawrence Yun, NAR chief economist said,   “A powerful combination of lower mortgage rates, more inventory, rising income and higher consumer confidence is driving the sales rebound.”

With sales surging in February and a small increase in the available inventory, the month’s supply of available homes fell from 3.9 to 3.5 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 very short supply.

If one looks at the actual number of homes available for sale, it has been steadily declining for a decade.  Realtors cannot sell what is not available for sale.  If sales were not being constrained by the limited supply they would almost certainly be at a 5,800 thousand pace rather than the current 5,500 thousand and we would not be talking about weakness in home sales.

Meanwhile, properties stayed on the market for just 44 days in February.  More than 41% of homes that sold in February were on the market less than a month.  The 44-day length of time between listing and sale is still a very short period of time.  Back in 2011 homes remained on the market for 100 days.  Thus, the demand for housing still seems to be quite solid.

The National Association of Realtors series on affordability now stands at about 155.  At that level  it means that a household earning the median income has 55.0% 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 2019 because sizable job gains are boosting income almost as fast as mortgage rates and home prices have been rising.

Existing home prices rose 0.1% in February to $249,500 after have fallen 2.1% in January.  Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $251,200.  Over the course of the past year existing home prices have risen 3.6% which is lower than the 4.0-5.% range that we saw throughout 2018 .  However, in the past six months prices have actually declined at a 12.2% annual rate.  Thus, the slower pace of sales seems to be pushing prices lower.
At the same time mortgage rates are declining.  they reached a peak of 4.9% a couple of months ago, but with global GDP growth slowing, a slower pace of tightening by the Fed, and some softness in the housing sector, mortgage races have dropped to 4.4%.
 The housing sector will rebound in the quarters ahead.   Jobs growth is expected to remain solid which should boost  income. Home prices have begun to fall.  And mortgage rates have worked their way lower to 4.4%.
 Stephen Slifer


Charleston, SC

Homeownership Rates

March 22, 2019

Home ownership continued to climb in the fourth quarter.  It rose 0.4% in that quarter after having  climbed 0.1% in the third quarter.  It hit a low of 62.9% in the second quarter of 2016 but has been climbing steadily for the past 2-1/2 years.

The upswing in home ownership 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.  These younger people are now getting somewhat older and raising families.  As this occurs, they find home ownership increasingly attractive.  Thus, demographics now seems to be working in favor of a significant rebound in housing in the quarters ahead.

Home prices had been rising by 6.0-6.5%, but the softness in sales last year has caused home prices to slow.  They have now risen 3.7% in the past year.

Meanwhile, mortgage rates have fallen 0.5% in the past several months from 4.9% to 4.4%.

As a result, housing affordability has one again begun to rise..  The National Association of Realtors index of housing affordability stands at about 155.   At a level of 155 it means that consumers have 555 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 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 7.1% 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

Homebuilder Confidence

March 18, 2019

Homebuilder confidence was unchanged in March at 62 after having risen 4 points in February.  Most economists had expected a slightly higher number so a level of 62 was slightly disappointing.  However, a level of 62 is indicative of a solid level of confidence going forward although, admittedly, it is below readings of 70-75  at this time last  year.

NAHB Chairman Greg Ugalde said that, “Builders report the market is stabilizing following the slowdown at the end of 2018 and they anticipate a solid spring home buying season.”

NAHB Chief Economist Robert Dietz said  “In a healthy sign for the housing market, more builders are saying that lower price points are selling well, and this was reflected in the government’s new home sales report released last week.  Increased inventory of affordably priced homes – in markets where government policies support such construction – will enable more entry-level buyers to enter the market.”

The NAHB report also indicated that affordability still remains a key concern for builders. The skilled worker shortage, lack of buildable lots and stiff zoning restrictions in many major metro markets are among the challenges builders face as they strive to construct homes that can sell at affordable price points.

Traffic through the model homes fell 4 points in March after having risen 4 points in February.  However, the combination of falling home prices and lower mortgage rates should boost traffic in the months ahead.

Reflecting optimism about the future the homebuilders expectations index jumped 3 points in March to a solid 71.

Not surprisingly there is a fairly close correlation between builder confidence and housing starts.  Given the rebound in the expectations component it is likely that housing starts will pick up further in the months ahead.  But builders continue to have difficulty finding labor so the upswing in starts will probably be muted.

However, builders have many units that have been authorized but not yet started.  In fact, the authorized but not yet started units are the highest they have been in a decade.  Our sense is that as labor slowly becomes available builders will continue building new homes.  Thus, we look for starts to climb about 4% this year.

Stephen Slifer


Charleston, SC

New Home Sales

March 14, 2019

The headlines was that new home sales fell 6.9% in January to an annual rate of 607 thousand.  However, the headline never bothered to point out that sales for November and December were revised upwards sharply.  As a result, the 3-month average pace of new home sales which had been 590 thousand in December is now 629 thousand in January.  That presents an entirely different picture of the market for home sales.  It is true that the pace of sales is 4.1% below what it was a year ago.   Thus, the housing sector has softened, but not nearly as dramatically as the earlier data suggested.

The National Association of Realtors publishes a series on housing affordability for existing homes which stood at about 150.0 in December.   However, since that time mortgage rates have fallen about 0.5%.  which means that in this index is headed higher.  We estimate that in the first few months of this year affordability has jumped to 155.  That means that consumers have 55.0% more income than is necessary to purchase a median priced existing home.  Thus, existing homes were affordable late last year and are more affordable now than they were just a few months ago.  It is important to remember that consumer income continues to climb.  Jobs are being created at a pace of about 190 thousand per month and hourly earnings are accelerating.  Those two factors boost income.  Thus, consumer paychecks are getting fatter and they can more easily afford a new home today that they were just a couple of months ago.  We believe strongly that housing is affordable and should continue to be affordable for some time to come.

New home prices fell 0.6% in January to $317,200 after having risen 4.1% in December after having fallen 6.6% in November.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $314,300.  During the course of this past year prices have fallen 7.2%.  Lower prices will provide some stimulus to the pace of home sales in the months ahead.

At the same time mortgage rates have fallen from almost 5.0% to 4.4%.  That, too, should help sales rebound.

Having said all that, builders  are having a hard time finding an adequate supply of both skilled and unskilled workers.  Construction employment is rising by about 20 thousand per month.  Builders would like to step up the pace of construction, but it is difficult for them to do so given the scarcity of workers.

Between lower prices and lower mortgage rates, we believe new home sales should climb in the months ahead.  Thus, we believe the housing sector will continue to do reasonably well in 2019.  We expect the sales pace to rise 10.0% this year to 675 thousand.  Mortgage rates should  climb to 4.8% by the end of 2019 which is still quite affordable.  But that mortgage rate forecast includes two more rate hikes by the Fed in the second half of this year.  However, inflation expectations remain well in check and as a result the yield on the 10-year note has fallen to 2.65% which is only 0.25% higher than the funds rate.  That means the yield curve — the difference between long-term and short-term interest rates — has flattened to 0.25%.  We will see how the year progresses, but if the yield on the 10-year note remains close to its current level the Fed will have a hard time raising the funds rate later this year without causing the yield curve to flatten to 0% or possibly even invert.  We have noted that an inverted yield curve is one indicator of an upcoming recession.  The Fed is well aware of that and, hence, the two rates hikes in our current forecast are becoming increasingly unlikely.  But we still expect the economy to rebound as the year progresses, which could push long-term  interest rates higher and permit the Fed to raise rates a couple of times as the year progresses.  We will see.

Stephen Slifer


Charleston, SC

Construction Spending

March 13, 2019

Construction spending (the green bars above) rose 1.3% in January after having declined 1.3% in November and 0.8% in December.  Over the past year it has risen 0.3%.  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 come to a halt over the course of the past year driven largely by a drop in residential construction, single-family homes in particular.

Private construction rose 0.2% in January after having declined 1.3% in November and 0.7% in December.  Over the past year private construction spending has fallen 2.0% which reflects a 2.4% increase in private non-residential construction and a 5.6% decline in the private residential category.

Within the private construction spending category, residential spending fell 0.3% in January after having plunged 1.9% in December.   Over the course of the past year private residential construction has fallen 5.6%.  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 declined 7.2% in the past year, multifamily construction has risen 12.8%.

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 0.8% in January after having climbed by 0.6% in December.   During the past 12 months nonresidential construction has risen 2.4%.  To get more lift in the investment spending component of GDP we would like this component to turn more sharply upwards.

Public sector construction jumped 4.9% in January after having declined 1.0% in December.  This category can be quite volatile on a month-to-month basis.  Over the past year such spending has risen 8.0%.  It will probably rise about 7.0% this year given the increase in defense spending approved in January.

Stephen Slifer


Charleston, SC

Housing Starts

March 8, 2019

Housing starts soared by 18.6% in January to 1,230 thousand after having plunged 14.0% in December.  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 1,158 thousand but it is biased downwards because of the December drop.  Starts should quickly rebound to 1,250 thousand or so in the months ahead.

The January rebound was largely in single-family homes.  Multi-family starts rose only slightly.

While the  housing sector has cooled during the past year,  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 primarily the latter.

Both new and existing home sales fallen in recent months but they are being constrained by a lack of supply so it is unclear that demand has softened as much as the sales data suggest.

The average home stays on the market for 49 days currently which is down from 100 days a few years ago.  About 40% of the homes coming to 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 have recently declined by 0.5% to 4.4%.  That should provide some  lift to the housing sector in the months ahead.

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 150.0 the index  indicates that a median-income buyer has 50.0% 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 20 thousand per month but it 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 climb 5.5% this year and reach 1.2 million by the end of 2019.

Building permits rose 1.4% in January to 1,345 thousand.  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 1,331  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 1,331 thousand, housing starts should be at roughly that same level by yearend.  Thus, our forecast for starts to be 1,200 thousand by yearend may be too low.  However, keep in mind that builders continue to have difficulty finding enough workers.  The demand for  housing is solid, but can builders get enough workers to push them sharply higher?

Stephen Slifer

Charleston, SC

Pending Home Sales

February 27, 2019

Pending home sales jumped 4.6% in January after having fallen 2.3% in December.   In the past year pending home sales have dropped 2.3%.

Lawrence Yun, NAR chief economist noted that  “A change in Federal Reserve policy and the reopening of the government were very beneficial to the market.”

Yun added that “Home buyers are now returning and taking advantage of lower interest rates, while a boost in inventory is also providing more choices for consumers.”

It is important to determine whether the drop in home sales last year reflects a drop-off in demand, or whether there is some sort of supply constraint.  We think it is largely the latter.

There is currently a 3.9 month supply of homes available for sale.  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.  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.

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 150.0.  What that means is that potential buyers have 50% more income than is necessary to buy a median priced home (compared to 14% in 2007).   A few years ago potential buyers they had 80-90% more income than required.  In that period of time home prices have risen and mortgage rates have climbed.  As a result, housing has become less affordable than it used to be, but it can not yet be regarded as “unaffordable”.

Keep in mind, too, that the the average home stays on the market for just 49 days which compares to about 100 days when the NAR began collecting this statistic in 2011.  The NAR reports that 40% of homes that come on the market sell within a month.

It is quite evident that the protracted drop-off in pending home sales is largely a function of constrained supply  rather than potential home buyers backing away from the market.

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

Case Shiller Index of Home Prices

February 26, 2019

Case Shiller Index of Home Prices rose 0.2% in both November and December.   Over the course of the past year home prices have risen 3.7%, but they have climbed just 2.9% in the past six months.

The actual level of the index at 228.02 has finally surpassed the previous record high level for this series of 226.9 which was set in April 2006.  It has taken more than a decade for home prices to recover from the devastating 2008-09 recession.

Home home prices had been rising at almost a 5.0$ rate.  But in the past couple of  months when fears of a recession arose in the midst of the stock market drop late last year, mortgage rates declined 0.5% to 4.4%.    Some economists fear that the run-up in  home prices and earlier increase in mortgage rates has made housing unaffordable for many.  However, that is not true for the vast majority of potential home buyers 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 150.0.  This index combines the effect of house prices, mortgage rates, and consumer income.  The level of the index means that consumers still have 50.0% 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 because consumer income is also rising.

There is an acute shortage of homes available for sale.  The inventory of existing homes is at 3.0 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.  If more homeowners would put their homes up for sale, existing sales would be far higher than they are today.

Stephen Slifer


Charleston, SC

Mortgage Rate

December 5, 2018

Right after the election in November 2016 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.  Additional Fed tightening this year coupled with a gradual increase in inflation has boosted the 30-year mortgage rate to 5.0%

We expect the Fed to leave the funds rate at 2.2% at its meeting next week, but then increase rates three times in 2019 which would boost the funds rate to 3.0%.  If that is the case and inflation remains fairly steady, we expect the 30-year mortgage rate to climb to 5.3% by the end of 2019/.



Stephen Slifer


Charleston, SC

Mortgage Loans

December 3, 2018

Real estate loans rose at a 2.9% pace in October after having climbed 5.8% in September (the light blue bars).   Over the course of the past year mortgage lending has risen 3.2% (the dark blue line).

While mortgage lending has been sluggish total loan growth has risen at a slightly faster 4.4% pace which is both a steady and sustainable pace.

Stephen Slifer


Charleston, SC