Saturday, 21 of October of 2017

Economics. Explained.  

Category » Housing

Existing Home Sales

October 20, 2017

Existing home sale rose 0.7% in September to 5,390 thousand after having fallen 1.7% in August.  The August and September data reflect the combined effect of Hurricanes Harvey and Irma.  In fact sales in the South are currently 150 thousand below where they were in July.  Add that back in and existing home sales are less troublesome.  While these sales bounce around a bit from month to month they have  clearly fallen off in recent months.  The March sales pace of 5,700 thousand was the fastest since February 2007. We believe that the recent slide represents a supply constraint rather than a lack of demand.

Lawrence Yun, NAR chief economist  says,  “Home sales in recent months remain at their lowest level of the year and are unable to break through, despite considerable buyer interest in most parts of the country.  Realtors continue to say the primary impediments stifling sales growth are the same as they have been all year: not enough listings – especially at the lower end of the market – and fast-rising prices that are straining the budgets of prospective buyers.”

The months’ supply of unsold homes was unchanged at 4.2 months.  Realtors consider a 6.0 month supply as  being the point at which demand for and supply of homes are roughly in balance.  Thus, housing remains in short supply.  If sales were not being constrained by the limited supply it would almost certainly be at a 6,000 thousand pace.

Keep in mind that properties typically stayed on the market 34 days in September which is down 13% from 39 days a year ago.  This is essentially the shortest length of time on the market since the NAR began tracking these data in May 2011.

The National Association of Realtors series on affordability now stands at about 150.0.  At that level  it means that a household earning the median income has 48.0% 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 despite the backup in mortgage rates.  That is because sizable job gains are boosting income almost as fast as mortgage rates 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 declined 3.2% in September to $245,100 after having fallen 1.9% in August.  Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $255,800..00.  Over the course of the past year existing home prices have risen 4.2% and have generally been bouncing around in a 4.5-8.0% range.
 Stephen Slifer

NumberNomics

Charleston, SC


Housing Starts

October 18, 2017

Housing starts fell 4.7% in September to 1,127 thousand after having declined  0.2% in August  This drop obviously reflects the impact of Hurricane Harvey.   The slowdown occurred largely in the South which fell 54 thousand or 9.9.  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 in blue above).   That 3-month average now stands at 1,165 thousand which has fallen off from the 1,264 thousand peak pace in the cycle which was registered back in February.    It will rebound in coming months as the hurricane effect wears off, but it will still be lower than it was earlier in the year.  So what is happening?  Is it a drop in demand?  Or a constraint on the part of builders?  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.

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

Mortgage rates are at 3.9% which is quite low by any historical standard.

At the same time employment gains are about 170 thousand per month which is boosting income.  As a result, real disposable income (what is left after inflation and taxes) is growing at a 1.2% pace.  That is not particularly robust, but disposable income does hit slack periods from time to time and then rebounds.

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 skilled labor.  Construction employment is growing by about 15 thousand per month.  Slow, but steady.

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 1.2 million currently.  However,  as noted above, many home builders  report an inability to get the skilled 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 1.2 million by the end of 2017 and 1.4 million in 2018.

What is interesting is that beginning late last year 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.  In the past year single family starts have risen 12.2% while multi-family units have declined by 19.4%.

As a result, multi-family construction as a percent of the total has slipped from 36.2% in July of last year to 25%.

Building permits fell 4.5% in September to 1,215 thousand after having jumped 3.5% in August.  Because  permits are another volatile  indicator it is best to look at a 3-month average (which is shown below).  That 3-month moving average now stands at 1,239 thousand which continues to point towards slow but 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 1,239 thousand, housing starts will soon approach the 1.3 million mark.

Stephen Slifer

NumberNomics
Charleston, SC


Homebuilder Confidence

October 17, 2017

Homebuilder confidence rose 4 points in October to 68 after having declined 3 points in September.  Confidence is bouncing around from month to month at a very high level.    The moderate drop in September appears to reflect builder concerns following Hurricane Harvey and the 4-point jump in October the first step in the recovery process.

NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, Texas said, ““This month’s report shows that home builders are rebounding from the initial shock of the hurricanes.  However, builders need to be mindful of long-term repercussions from the storms, such as intensified material price increases and labor shortages.”

NAHB Chief Economist Robert Dietz said “It is encouraging to see builder confidence return to the high 60’s levels we saw in the spring and summer.  With a tight inventory of existing homes and promising growth in household formation, we can expect the new home market continue to strengthen at a modest rate in the months ahead.”

Traffic through the model homes rose 1 point in October to 48 after having declined by 1 point in August.  The March reading of 53 was the highest reading thus far in the business cycle.

Not surprisingly there is a close correlation between builder confidence and housing starts.  Right now starts are lagging considerably because builders are having some difficulty finding financing, building materials, an adequate supply of finished lots, and skilled labor.  Starts  currently are at a 1.2 million pace.  They should continue to climb gradually in the months ahead and reach 1.35 million by the end of 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Construction Spending

October 2, 2017

Construction spending (the green bars above) rose 0.5% in August after having declined 1.2% in July.  Over the past year it has risen 2.5%.  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.  So while this series has been soft in the past four months, one should not read too much into it just yet.

Private construction rose 0.4% in August after having fallen 0.5% in July.  Over the past year private construction spending has risen 4.7%.   The 4.7% increase in the past year reflects a 2.6% decline in private non-residential construction and a sizable 11.6% increase in the private residential category.

Within the private construction spending category, residential spending rose 0.4% in August after having climbed 0.2% in July.   Over the course of the past year private residential construction has risen by 11.6%.  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 11,1% in the past year, multifamily construction has climbed by 2.3%.

The Census Bureau tells us that on average 1.3 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.  Currently, builders are only starting about 1.2 million units per year.  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 0.5% in August after having declined 1.4% in July.   During the past 12 months nonresidential construction has declined 2.5%.  To get some lift in the investment spending component of GDP we need this component to turn upwards.

Public sector construction rose 0.7% in August after having declined 3.3%.  This category can be quite volatile on a month-to-month basis.  Over the past year such spending has fallen 5.1%.  It will rebound in the months ahead.

Stephen Slifer

NumberNomics

Charleston, SC


Pending Home Sales

September 27, 2017

Pending home sales declined 2.6% in August after having fallen 0.8% in July.  This series tends to be rather volatile on a  month-to-month basis, but the reality is that it has fallen in five of the past six months.  So which is it?  A dropoff in demand?  Or a shortage of available homes for sale?  We believe it is the latter.

Lawrence Yun, NAR chief economist said “August was another month of declining contract activity because of the one-two punch of limited listings and home prices rising far above incomes.  Demand continues to overwhelm supply in most of the country, and as a result, many would-be buyers from earlier in the year are still in the market for a home, while others have perhaps decided to temporarily postpone their search. Further complicating any sales improvement in the months ahead is the fact that Hurricane Harvey’s damage to the Houston region contributed to the South’s decline in contract signings in August, and will likely continue to do so in the months ahead. Furthermore, the temporary pause in activity in Florida this month in the wake of Hurricane Irma will slow overall sales even more in the South.”  Most of those missed sales will show up in 2018.

Housing remains quite affordable for middle income buyers.  After peaking at 213.6 in January 2013 the housing affordability index has declined slowly and now stands at 150.0.  What that means is that potential buyers had 50.0% 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 3.9%.  However, it has not fallen more sharply because consumer income continues to climb.

Keep in mind, too, that the the average home stays on the market for just 29 days which is essentially the shortest amount of time  since the NAR began collecting that statistic in 2011.

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 and lousy weather 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

NumberNomics

Charleston, SC


New Home Sales

September 26, 2017

New home sales declined 3.4% in August to 560 thousand after having fallen 5.5% in July.  The August results were impacted by Hurricane Harvey given that virtually all of the drop occurred in the South.  Sales will rebound in the months ahead.  This is an extremely volatile series under the best of circumstances.  A much better representation of the pace of home sales is the 3-month average which stands at 585 thousand (shown above) which is now well below the peak for the cycle which was 617 thousand in March).   Keep in mind that builders are still having difficulty finding an adequate supply of skilled 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.

The supply of available homes for sale rose 10 thousand in August to 284 thousand.  The big drop in the number of homes sold combined with a small increase the the number of  homes on the market means that the selling rate is now at 6.1  months.  Realtors suggest that a 6.0 months supply is that point at which the demand for and supply of housing are roughly in balance.  But once the sales pace rebounds the month’s supply of homes on the market will once again decline to about 5.5 months.

The National Association of Realtors series on housing affordability for existing homes now stands at about 150.0.   That means that consumers have 50.0% 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 3.9%. We have made an attempt to estimate affordability if 30-year mortgage rates  climb to 4.2% by the end of this year.  We estimate the affordability index at that time will be about 150 — still very affordable.  The reason affordability has not been hit harder by the increase in mortgage rates is because consumer income continues to climb.

New home prices fell 6.2% in August to $300,300 after having risen 1.1% in July.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $312,100.  During the course of this past year prices have risen 1.9%.

Given that the demand for housing continues to exceed supply the housing sector will continue to do well in 2017.  Sales will be at a reasonably robust pace of perhaps 625 thousand by yearend, builders will continue to boost production, and prices should rise slowly.  Mortgage rates should end 2017 at 4.2% which is still quite affordable.

Stephen Slifer

NumberNomics

Charleston, SC


Case Shiller Index of Home Prices

September 26, 2017

Case Shiller Index of Home Prices rose 0.4% in July after having been unchanged in both May and June.   Over the course of the past year home rices have risen 5.2%.  In a world in which income is rising slowly, an increase in home prices of that magnitude seems sustainable.

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.

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 skilled labor.  All of this suggests that  housing starts will continue to climb in the months ahead, but at a relatively slow pace.

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 3.9% which is still very low.  They should rise only slightly from about 3.9% currently to 4.2% by the end of 2017 if the Fed raises short-term interest rates one more time in 2017 to 1.25%.

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 150.0.  That 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 even though mortgage rates have risen to the 3,9% mark because consumer income is also rising.

Stephen Slifer

NumberNomics

Charleston, SC


Homeownership Rates

July 27, 2017

Homeownership edged upwards by 0.1% in the second quarter to 63.7%.  It hit a low of 62.9% in the second quarter of last year and has rebounded slightly.  It appears to have hit bottom.

The decline in homeownership in the past decade  has been across all age categories, but has been most pronounced amongst younger borrowers, i.e., those under the age of 45.

One factor contributing the decline in homeownership amongst our youth is the higher mortgage payment required to purchase a median-priced home which has risen 59% in the past four years risen from $612 in January 2013 to $974 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 $50,900 in the same four 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 3.9%  and home prices are still about 6.5% 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 7.3% are the lowest they have been since the mid-1900’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

NumberNomics

Charleston, SC


Mortgage Loans

July 25, 2017

Real estate loans rose at a 2.3% rate in June after having climbed by 4.2% in May (the light blue bars).   Over the course of the past year mortgage lending has risen 4.6% (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 have something to do with the uncertain fate of Dodd-Frank legislation under Trump.  We do not expect it to be long-lasting.  With total loans having risen 3.6% in the past year and nominal GDP growth climbing by 4.1%, the slowdown in lending has not yet slowed the pace of economic activity.  But if the extreme slowdown in recent months were to continue for much longer that could be the case.

Stephen Slifer

NumberNomics

Charleston, SC


Mortgage Rate

July 25, 2017

Right after the November election mortgage rates  jumped b 0.7% 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.

Mortgage rates have declined about 0.3% since the end of last year to 3.9% as the legislative proposals described above have (at a minimum) been delayed and some economists believe it will not be passed at all.  If the Fed raises rates one more time this year and the inflation rate begins to climb, by the end of this year the 30-year mortgage rate is probably going to be slightly higher at about 4.2%.

Stephen Slifer

NumberNomics

Charleston, SC