Monday, 24 of September of 2018

Economics. Explained.  

Category » Housing

Existing Home Sales

September 20, 2018

Existing home sales were unchanged in August at 5,340 thousand after having fallen 0.7% in July.  Sales currently at 0.2% lower than they were at this time last year.

Lawrence Yun, NAR chief economist said,  “Strong gains in the Northeast and a moderate uptick in the Midwest helped to balance out any losses in the South and West, halting months of downward momentum.  With inventory stabilizing and modestly rising, buyers appear ready to step back into the market.”

With both sales and the inventory of homes available unchanged in August, the month’s supply of homes available for sale was steady in August at 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 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 29 days in August which is down 3.3% from 30 days a year ago.  More than 53% 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 1.7% in August to $264,800 after having declined 1.6% in July.  Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $271,700.  Over the course of the past year existing home prices have risen 4.6% and have generally been bouncing around in a 4.5-8.0% range.
 Stephen Slifer


Charleston, SC

Housing Starts

September 19,  2018

Housing starts jumped 9.2% in August to 1,282 thousand after having fallen 0.3% in July. 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 1,211 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 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.

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 3.1% pace which is  somewhat above its long-term average of 2.7%.

Mortgage rates are at 4.5% 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.

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.

Building permits fell 5.7% in August to 1,229 thousand after having risen 0.9% in July.  Because  permits are another volatile  indicator it is best to look at a 3-month average (which is shown below).  That 3-month moving average now stands at 1,275  thousand which is somewhat below 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 at 1,275 thousand, housing starts should easily rebound to the 1.3 million mark by yearend.

Stephen Slifer

Charleston, SC

Homebuilder Confidence

September 18, 2018

Homebuilder confidence was unchanged in September at 67 after having fallen fell 1 point in August.  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 Chief Economist Robert Dietz said  “Despite rising affordability concerns, builders continue to report firm demand for housing, especially as millennials and other newcomers enter the market. The recent decline in lumber prices from record-high levels earlier this summer is also welcome relief, although builders still need to manage construction costs to keep homes competitively priced. Wages and subcontractor payments continue to rise as the labor market for residential construction sector remains tight.”

Traffic through the model homes was unchanged in September was unchanged at 49 after having fallen fell 3 points in August.  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 49 indicates that the number of people going through model homes was slightly lower in September than in August.

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

Construction Spending

September 4, 2018

Construction spending (the green bars above) rose 0.1% in July after having fallen 0.8% in June.  Over the past year it has risen 5.8%.  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.

Private construction declined 0.1% in July after having fallen 0.5% in June.  Over the past year private construction spending has risen 5.1% which reflects a 3.2% increase in private non-residential construction and a 6.7% increase in the private residential category.

Within the private construction spending category, residential spending rose 0.6% in July after having fallen 0.9% in June.   Over the course of the past year private residential construction has risen by 6.7%.  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 6.0% in the past year, multifamily construction has risen by 1.1%.

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 1.0% in July after having risen 0.1% in June.   During the past 12 months nonresidential construction has risen 3.2%.  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 July after having fallen 1.7% in June.  This category can be quite volatile on a month-to-month basis.  Over the past year such spending has risen 8.3%.  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

August 29, 2018

Pending home sales fell 0.7% in July after having risen 1.0% in June.   That means that this series has declined 2.3% 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, “It’s evident in recent months that many of the most overheated real estate markets – especially those out West – are starting to see a slight decline in home sales and slower price growth.”

Added Yun, “The reason sales are falling off last year’s pace is that multiple years of inadequate supply in markets with strong job growth have finally driven up home prices to a point where an increasing number of prospective buyers are unable to afford it.”

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 4.3 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 27 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.

The National Association of Realtors also publishes a housing affordability index now stands at about 140.0.  What that means is that potential buyers had 4100% 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  that traffic through their model homes remains robust although it has backed off slightly in recent months (although from a very fast 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.

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

August 28, 2018

Case Shiller Index of Home Prices rose 0.1% in June which is the third consecutive monthly  increase of that magnitude.   Over the course of the past year home prices have risen 6.0%.  After having sustained year-over-year increases of about 5.0%, home prices have begun to rise a bit more quickly.  At the moment they do not seem like they are on the verge of climbing beyond the 6.0% mark but, as always, this series bears watching.

The actual level of the index at 224.8 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 within the next month or two.

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.

Because of the  significant shortage of available homes for sale 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 1,250 thousand units by the end of this year (from 1,218 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 4.8% 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 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 4.5% mark because consumer income is also rising.

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

New Home Sales

August 23, 2018

New home sales fell 1.7% in July to 627 thousand after having fallen 2.4% in June.  New  home sales are always very volatile on a month-to-month basis.  Its current level is not too far below that.  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. At the same time their cost of materials for lumber, copper, and aluminum have been rising which perhaps retards the pace of construction and helps to keep home sales from climbing more rapidly.  Do not forget that new home sales are single family homes and do not include sales of condos.  The housing sector is doing okay, but builder constraints are limiting the supply.

The supply of available homes for sale edged upwards in July to 309 thousand.  That is a shade higher than in other recent months..  This is encouraging and seems to reflect builders’ efforts to boost production.  A decline 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 rose 0.2 month in July to 5.9 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.  This indicator hit the 6.0 month mark a couple of times last year, but has not been above 6.0 since 2011.  If more homes become available, home sales will rise.  You cannot sell what you do not have.

The National Association of Realtors series on housing affordability for existing homes now stands at about 141.0.   That means that consumers have 38.0% 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 5.0% by the end of 2018.  We estimate the affordability index at that time will remain at about 140 — still very affordable.  The reason affordability is not hit harder by the increase in mortgage rates is because consumer income continues to climb.  At its peak this affordability index stood at about 115 back in 2007.  Thus, housing remains affordable and should continue to be affordable for some time to come.

New home prices jumped 6.0% in July to $328,700 after having fallen 1.1% in June.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $317,30000.  During the course of this past year prices have fallen 1.0%.

The demand for housing remains hot.  Builders are reporting traffic through the model homes that is basically the highest in more than a decade.

Homes being offered for sale remain on the market for just 27 days which is one of the shortest time periods since the National Association of Realtors began collecting these statistics back in 2011,

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 660 thousand by the end of this year, builders will continue to boost production, and prices should rise slowly.  Mortgage rates should end 2018 at 5.0% which is still quite affordable.

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