Tuesday, 16 of July of 2019

Economics. Explained.  

Category » Housing

Construction Spending

July 1, 2019


Construction spending (the green bars above) declined 0.8% in May after having risen 0.4% in April .  Over the past year it has fallen 2.3%.  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.  Construction spending came to a halt last year driven largely by a drop in residential construction, single-family homes in particular.  However, with lower mortgage rates our expectation is that construction spending in general, the residential spending category in particularly, will begin to climb again in the second half of this year.

Private construction fell 0.7% in May after having declined 1.0% in April.  Over the past year private construction spending has fallen 6.3% which reflects a 0.1% decline in private non-residential construction and an 11.2% decline in the private residential category.

Within the private construction spending category, residential spending fell 0.6% in both April and May.   Over the course of the past year private residential construction has fallen 11.2%.  However, home sales have rebounded sharply in the past couple of months which should lead to a pickup in this category in the months ahead.  Furthermore, shortages of both single family homes available for sale and apartments will push this series higher in the months ahead.  The problem is that the scarce availability of labor will limit its rise.  Construction of private single family homes has declined 7.6% in the past year, multifamily construction has risen 9.3%.

The Census Bureau tells us that on average 2.2 million new households are now 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 2.7 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 0.9% in May after having fallen 1.4% in April.   During the past 12 months nonresidential construction has declined 0.1%.  To get sustained growth in the investment spending component of GDP  this component needs to turn more sharply upwards.

Public sector construction declined 0.9% in May after having jumped 4.5% in April after having risen 0.6% in March, 3.9% in February and 5.8% in January.  While this category can be quite volatile on a month-to-month basis it has been flying since the beginning of the year.  Over the past year such spending has risen 10.8%.   We expect it to rise about 7.0% this year — and it still may — but given its behavior in the first four  months of the year it may well turn out to be considerably stronger than anticipated.

Stephen Slifer


Charleston, SC

Pending Home Sales

June 27, 2019

Pending home sales rose 1.1% in May to 105.4 after having declined 1.5% in April.   In the past year pending home sales have dropped 0.7%.

Lawrence Yun, NAR chief economist noted that  “Rates of 4% and, in some cases even lower, create extremely attractive conditions for consumers. Buyers, for good reason, are anxious to purchase and lock in at these rates.”  He added that, “Job creation and a rise in inventory will nonetheless drive more buyers to enter the market.”

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

There is currently a 4.3 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 153.0.  What that means is that potential buyers have 53% more income than is necessary to buy a median priced home (compared to 14% in 2007).   A few years ago potential buyers had 80-90% more income than required.  Since then 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 hardly be regarded as “unaffordable”.

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 55% 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

New Home Sales

June 25, 2019

New home sales fell 7.8% in May to an annual rate of 626 thousand after having declined 3.7% in April.  While those sound like big declines, they follow gains of 14.2%, 3.9%, and 5.4% in the previous three months.  As a result, the 3-month average pace of new home sales is now 670 thousand which is within an eyelash of last month’s average sales pace of 684 thousand which was the fastest 3-month average since October 2007.  Over the past year new home sales have fallen 3.7%.   Despite  monthly wiggles the housing sector is responding nicely to lower mortgage rates and continuing gains in jobs and income.

The National Association of Realtors publishes a series on housing affordability for existing homes which stood at about 153.0 in March.   This means that consumers have 53.0% more income than is necessary to purchase a median priced existing home.   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.  At the same time home prices are now slowing and mortgage rates have fallen dramatically.  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 sales will continue to rise in the months ahead.

New home prices fell 8.1% in May to $308.000 after having risen 8.1% in April.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $317,700.  During the course of this past year prices have fallen 1.4%.  Lower prices will provide considerable stimulus to the pace of home sales in the months ahead.

At the same time mortgage rates have fallen from almost 5.0% to 3.8%.  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 continue to climb in the months ahead.  Thus, we believe the housing sector will continue to do well in 2019.  We expect the sales pace to rise 19.0% this year to 690 thousand.  That sounds like a big increase, but home sales are already at 670 thousand.  They do not have much farther to go.

Stephen Slifer


Charleston, SC

Case Shiller Index of Home Prices

June 25, 2019

Case Shiller Index of Home Prices in 20 cities rose 0.8% in April after having climbed 0.7% in March.   Five years ago home home prices were rising at a 10.5% rate, but they have slowed and over the course of the past year home prices have risen 2.5%.  Clearly, the rate of increase in  home prices has slowed significantly.

Some economists previously feared that the earlier run-up in  home prices and  an increase in mortgage rates had made housing unaffordable for many.  However, the rate of increase in home prices has slowed sharply.  At the same time, mortgage rates have declined 1.1% to 3.8%.

The chart below from the National Association of Realtors indicates that  the housing affordability index now stands at about 153.0.  This index combines the effect of house prices, mortgage rates, and consumer income.  The level of the index means that consumers 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 because the rate of increase in home prices has slowed, mortgage rates have declined, and consumer income is also rising.

There is an acute 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.  If more homeowners would put their homes up for sale, existing sales would be far higher than they are today.

Stephen Slifer


Charleston, SC

Existing Home Sales

June 21, 2019

Existing home sales rose 2.5% in May to 5,340 thousand after having been unchanged in March.  Sales currently are 2.6% below where they were at this time last year.

Lawrence Yun, NAR chief economist said that consumers are eager to take advantage of the favorable conditions. “The purchasing power to buy a home has been bolstered by falling mortgage rates, and buyers are responding.”

With a modest increase in sales  and a moderate increase in the available inventory, the month’s supply of available homes rose from 4.2 to 4.3 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.  Given the low inventory of homes available for sale Yun continues his call for new construction. “More new homes need to be built.  Otherwise, we risk worsening the housing shortage, and an increasing number of middle-class families will be unable to achieve homeownership.”

If one looks at the actual number of homes available for sale, it has been steadily declining for a decade although with an encouraging uptick in recent months.  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 5,200 thousand and we would not be talking about weakness in home sales.

Meanwhile, properties stayed on the market for just 26 days in May.  Fifty-three percent of homes that sold in May were on the market less than a month.  The 26-day length of time between listing and sale is close to the shortest on record.  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 153.  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 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 jumped 4.0% in May to $277,700 after having risen 2.9% in April.  Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $268,10000.  Over the course of the past year existing home prices have risen 4.8% which is in the middle the 4.0-5.0% range that we saw throughout 2018 .  Yun pointed out that “Solid demand along with inadequate inventory of affordable homes have pushed the median home price to a new record high.”
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 3.8%.

The housing sector will continue to climb in the quarters ahead.   Jobs growth is expected to remain solid which should boost  income. Home prices have been rising at a moderate pace.  And mortgage rates have worked their way lower to 3.8%.
 Stephen Slifer


Charleston, SC

Housing Starts

June 18, 2019

Housing starts fell 0.9% in May to 1,269 thousand after having jumped jumped 6.8% in April and 4.4% in March. 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 1,250 thousand.  Housing starts remain 4.5%  below where they were one year ago.

The May decline reflected  a 6.4% decline in single-family starts largely offset by a 13.8% increase in multi-family construction.   It appears that both categories of starts have leveled off but we expect them to rise slowly in the second half of the year.

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 have rebounded in recent months which is obviously good.

But sales are being constrained by a dramatic lack of supply.  Realtors simply cannot sell what is not available for sale.

The average home stays on the market for 26 days currently which is down from 100 days a few years ago.  More than 50% 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 180 thousand per month which is boosting income.  As a result, real disposable income (what is left after inflation and taxes) is growing at a 2.3% pace which is  slightly below its long-term average of 2.7%.  That will  provide the fuel for additional spending on housing as the year progresses.

Mortgage rates have recently declined by 1.1% to 3.8% which is the lowest mortgage rate since the summer of 2017.  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 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 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 somewhat more robust pace as builders begin construction on these previously authorized houses.

Given the continuing strength in demand we expect starts to climb 14.0% this year and reach 1.30 million by the end of 2019.

Building permits rose 0.3% in May to 1,294 thousand after having risen 0.2% 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 1,294 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 1,294 thousand, housing starts should be at roughly that same level by yearend.  Thus, our forecast for starts to be 1,300 thousand by yearend seems about right.  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

Homebuilder Confidence

June 17, 2019

Homebuilder confidence declined 2 points in June to 64 after having risen 3 points in May.   A level of 64 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, “While demand for single-family homes remains sound, builders continue to report rising development and construction costs, with some additional concerns over trade issues,”

NAHB Chief Economist Robert Dietz said “Despite lower mortgage rates, home prices remain somewhat high relative to incomes, which is particularly challenging for entry-level buyers.”

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 declined 1 point in June to 48 after having risen 2 points  in May.  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 fell 2 points in June but the index remains at a lofty level of 70.

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

Mortgage Rate

March 29, 2019

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 last year  boosted the 30-year mortgage rate to 4.9%.  But the Fed recently signaled that it intends to leave rates unchanged for the foreseeable future, the stock market decline in the fourth quarter created an expectation for slower growth ahead, and slower growth overseas, allowed long-term interest rates to decline quickly.  The 30-year mortgage rate dropped from 0.9% from 4.9% late last year to 4.0% currently.

If growth rebounds in the final three quarters of this year and inflation remains steady, it is likely that long-term interest rates will rise slightly as the year progresses.  We expect the 30-year mortgage rate to end the year at about 4.4%.

Stephen Slifer


Charleston, SC

Mortgage Loans

March 22, 2019

Real estate loans rose at a 3.9% pace in February  after having climbed 4,4% in January (the light blue bars).   Over the course of the past year mortgage lending has risen 2.9% (the dark blue line).

While mortgage lending has been sluggish total loan growth has been slightly faster at 5.5% which is both a steady and sustainable pace.

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