Monday, 16 of July of 2018

Economics. Explained.  

Category » Housing

Construction Spending

July 2, 2018

Construction spending (the green bars above) rose 0.4% in May after having increased 0.9% in April.  Over the past year it has risen 4.5%.  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.

Private construction rose 0.3% in May after having risen 0.4% in April..  Over the past year private construction spending has risen 4.4% which reflects a 1.8% increase in private non-residential construction and a 6.6% increase in the private residential category.

Within the private construction spending category, residential spending rose 0.8% in May after having increased 0.5% in April.   Over the course of the past year private residential construction has risen by 6.6%.  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 risen 8.3% in the past year, multifamily construction has risen by 4.2%.

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 fell 0.3% in May after having risen 0.4% in April.   During the past 12 months nonresidential construction has risen 1.8%.  To get more lift in the investment spending component of GDP we need this component to turn more sharply upwards.

Public sector construction rose 0.7% in May after having risen 2.3% in April.  This category can be quite volatile on a month-to-month basis.  Over the past year such spending has risen 4.7%.  It will probably rise about 5.0% this year given the increase in defense spending approved in January.

Stephen Slifer


Charleston, SC

Pending Home Sales

June 27, 2018

Pending home sales declined 0.5% in May after having dropped 1.3% in April.   That means that this series has declined 2.2% 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 on a shortage of available homes for sale.  He said  “Pending home sales under-performed once again in May, declining for the second straight month and coming in at the second lowest level over the past year.  Realtors in most of the country continue to describe their markets as highly competitive and fast moving, but without enough new and existing inventory for sale, activity has essentially stalled.”  He added, “The lackluster spring has primarily been a supply issue, and not one of weakening demand. If the recent slowdown in activity were because buyer interest is waning, price growth would start slowing, inventory would begin rising and homes would stay on the market longer.”  None of the above is happening.

Existing home prices have been rising steadily at a rate between 5.0-7.0% for the past several years.

On the inventory side there is currently a 4.1 month supply of homes available for sale.  However realtors suggests 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.

Keep in mind, too, that the the average home stays on the market for just 26 days which compares to about 100 days when the NAR began collecting this statistic in 2011.  The NAR reports that almost one-half of homes that come on the market sell within a month.

The National Association of Realtors also publishes a housing affordability index now stands at 145.0.  What that means is that potential buyers had 45.0% 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 increase in the 30-year mortgage rate to 4.5% and the modest increase in home prices.  However, it has not fallen more sharply because consumer income continues to climb.

At the same time the builders report  more traffic through their model homes than they have seen in a decade.

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.

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

June 26, 2018

Case Shiller Index of Home Prices rose 0.6% in April after  having risen 0.8% in May.   Over the course of the past year home prices have risen 6.2%.  After having sustained year-over-year increases of about 5.0%, home prices have begun to rise a bit more quickly.  A 6.2% annual increase is essentially the largest since July 2014.  We expect home prices to rise 7.9% this year.   If prices should continue to climb at that  pace some buyers will soon get priced out of the market and the housing sector will weaken.  That is not our call, but this is a development that clearly bears watching.

The actual level of the index at 223.7 is 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 and be fully recovered by midyear.

There is a shortage of homes available for sale.  The inventory of existing homes is at 4.1 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.  Thus, builders have an incentive to boost production.  However, some of them are still having difficulty finding adequate financing and an adequate supply of both skilled and unskilled labor.  All of this suggests that  housing starts will continue to climb in the months ahead, but at a relatively slow pace.  We expect starts to gradually climb to 1,400 thousand units by the end of this year (from 1,300 thousand currently).

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 are now at 4.5% which is still very low.  They should rise only slightly to 4.7% by the end of 2018.  If the Fed raises short-term interest rates 2 more times in 2018 it would lift the funds rate to the 2.0% mark which is still quite low.

Housing today continues to be affordable.  The chart below from the National Association of Realtors indicates that  the housing affordability index now stands at about 145.0.  That means that consumers still have 45.0% 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 4.5% mark because consumer income is also rising.

Stephen Slifer


Charleston, SC

New Home Sales

June 25, 2018

New home sales jumped 6.7% in May to 689 thousand following a 3.7% decline in April.  This series hit a cyclical peak in November at 712 thousand.  New  home sales are always very volatile on a month-to-month basis.  A much better representation of the pace of home sales is the 3-month average which stands at 669 thousand (shown above) which is the fastest 3-month pace of sales thus far in the expansion.   Keep in mind that builders are still having difficulty finding an adequate supply of both skilled and unskilled 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.  Any way you slice it, the housing sector is expanding nicely.

The supply of available homes for sale edged upwards in May to 299 thousand.  That is roughly in  line with other recent months, but all of those months represent the most homes for sale since March 2009.  That is encouraging and seems to reflect builders’ efforts to boost production.  However, a big jump in the number of homes sold combined with a tiny increase in the number of  homes on the market means that the month’s supply of available homes for sale fell 0.3 month to 5.2 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.  The housing shortage persists.

The National Association of Realtors series on housing affordability for existing homes now stands at about 145.0.   That means that consumers have 45.0% 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 4.5%. We have made an attempt to estimate affordability if 30-year mortgage rates  climb to 4.7% by the end of 2018.  We estimate the affordability index at that time will remain at about 145 — still very affordable.  The reason affordability is not hit harder by the increase in mortgage rates is because consumer income continues to climb.

New home prices fell 1.7% in May to $313,000 after having fallen 4.7% in April.   That is the fourth decline in the past nine  months.  Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $321,900.  During the course of this past year prices have risen 1.0%.

Given that the demand for housing continues to exceed supply the housing sector will continue to do well in 2018.  Sales will be at a reasonably robust pace of perhaps 700 thousand by the end of this year, builders will continue to boost production, and prices should rise slowly.  Mortgage rates should end 2018 at 4.7% which is still quite affordable.

Stephen Slifer


Charleston, SC

Existing Home Sales

June 20, 2018

Existing home sales declined 0.4% in May to 5,430 thousand after having fallen 2.7% in April.  As always these numbers have considerable monthly volatility.  It seems to us that the trend still seems to be clearly upward.  The November sales pace of 5,780 thousand was the strongest pace in more than 10 years (December 2006).

Lawrence Yun, NAR chief economist said,  “Closings were down in a majority of the country last month and declined on an annual basis in each major region.  Incredibly low supply continues to be the primary impediment to more sales, but there’s no question the combination of higher prices and mortgage rates are pinching the budgets of prospective buyers, and ultimately keeping some from reaching the market.”

The modest decline in sales combined with a small increase in the inventory of homes available caused the month’s supply of home to climb from 4.0 months in April to 4.1 months in May.  The December reading of 3.2 months was the lowest reading since the National Association of Realtors began collecting data in 1999.  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.  Having said that, to sustain the current pace of sales with inventory in such short supply builders will have to substantially boost their rate of production.

Keep in mind that properties typically stayed on the market 26 days in May which is down 3.7% from 27 days a year ago.  This is one of the shortest lengths of time between listing and sale  since the NAR began tracking these data in May 2011.  Note, too, the strong seasonal movement in this series.  The four most recent peaks occurred in December or January of each year between 2013 and 2016.  Our sense is that as sales pick up in the spring, this series will continue to decline.

The National Association of Realtors series on affordability now stands at about 145.0.  At that level  it means that a household earning the median income has 45.0% 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 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 rose 2.7% in May to $264,800 after having risen 3.2% in April and 3.7% in March  Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $250,40000.  Over the course of the couple of years existing home prices have risen 4.9% and have generally been bouncing around in a 4.5-8.0% range.
 Stephen Slifer


Charleston, SC

Housing Starts

June 19, 2018

Housing starts jumped 5.0% in May to 1,350 thousand after having fallen 3.1% in April. 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 1,321 thousand which is  the fastest pace of starts thus far in the business cycle.

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.

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

Mortgage rates are at 4.5% which is quite low by any historical standard.

The average home stays on the market for 26 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.

At the same time 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 1.7% pace which is acceptable but somewhat below its long-term average of 2.7%.

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 145.0 the index  indicates that a median-income buyer has 45.0% 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.

As one might expect there is a fairly 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 1.3 million currently.  However,  as noted above, many home builders  report an inability to get the skilled and unskilled 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 1.4 million by the end of 2018.

What is interesting is that beginning in mid-2016 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.

As a result, multi-family construction as a percent of the total has slipped from 37% in mid-2015 to 30%.

Building permits fell 4.6% in May to 1,301 thousand after having declined 0.9%1.8% in April.  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 1,347  thousand which closes to the fastest pace thus far in the business cycle (1,355 thousand) and continues to point towards 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 1,350 thousand, housing starts should surpass the 1.4 million mark by yearend.

Stephen Slifer

Charleston, SC

Homebuilder Confidence

June 18, 2018

Homebuilder confidence declined 2 points in June after having risen a similar amount in May.  The December level of 74 was the highest for this series since July 1999 — over 18 years ago — and current confidence levels remains just a few points below the lofty December level.

NAHB Chairman Randy Noel, a homebuilder from LaPlace, Louisiana, said ,“Builders are optimistic about housing market conditions as consumer demand continues to grow.  However, builders are increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability. Record-high lumber prices have added nearly $9,000 to the price of a new single-family home since January 2017.”

NAHB Chief Economist Robert Dietz added “Improved economic growth, continued job creation and solid housing demand should spur additional single-family construction in the months ahead.  However, builders do need access to lumber and other construction materials at reasonable costs in order to provide homes at competitive price points, particularly for the entry-level market where inventory is most needed.”

Traffic through the model homes fell 1 point in June to 50.  The December level of  58 was by far the highest level thus far in the business cycle.  Traffic volume remains high and an index level of 50 indicates that the number of people going through model homes was the same in June as in May.

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 1.3 million pace.  They should continue to climb gradually in the months ahead and reach 1.4 million by the end of 2018.

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

Mortgage Loans

April 27, 2018

Real estate loans rose at a 4.2% pace in March after  having climbed 4.0% in February (the light blue bars).   Over the course of the past year mortgage lending has risen 4.1% (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 reflect uncertainty regarding the fate of Dodd-Frank legislation under Trump.  Over the course of the last year total loans have risen at a 4.2% pace which is slightly faster than in other recent months.

Stephen Slifer


Charleston, SC

Homeownership Rates

February 5, 2018

Homeownership edged upwards by 0.2% in the fourth quarter to 64.2%.  It hit a low of 62.9% in the second quarter of 2016 and has rebounded slightly.  It appears to have hit bottom.

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.

One factor contributing the steady decline in homeownership amongst our youth is the higher mortgage payment required to purchase a median-priced home which has risen 68% in the past five years risen from $612 in January 2013 to $977 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 $49,600 in the same five-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 4.1%  and home prices are still about 6.0% 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 6.9% 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.  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