Sunday, 30 of April of 2017

Economics. Explained.  

Category » Housing

Pending Home Sales

April 27, 2017

Pending home sales retreated by 0.8% in March after having jumped 5.5% in February.  This series tends to be rather volatile on a  month-to-month basis.

Lawrence Yun, NAR chief economist said, “Sparse inventory levels caused a pullback in pending sales in March, but activity was still strong enough to be the third best in the past year. Home shoppers are coming out in droves this spring and competing with each other for the meager amount of listings in the affordable price range.  In most areas, the lower the price of a home for sale, the more competition there is for it. That’s the reason why first-time buyers have yet to make up a larger share of the market this year, despite there being more sales overall.”

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 160.6.  What that means is that potential buyers had 60.6% 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 recent run-up in the 30-year mortgage rate to 4.1% following the election.  However, it has not fallen more sharply because consumer income continues to climb.  Looking forward the extreme shortage of available homes for sale has caused home prices to rise more quickly — and climb more rapidly than the increase in income.  This development seems to have occurred only in the past three months but what it suggests is that this series needs to be monitored closely in the months ahead.

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

April 25, 2017

New home sales rose 5.8% in March to 6212 thousand after having risen 0.3% in February and 6.2% in January.  This is typically an extremely volatile series.  A much better representation of the pace of home sales is the 3-month average which stands at 598 thousand (shown above).   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 4 thousand in March to 268 thousand.  The small increase in inventories combined with the big increase in sales means that there is now a 5.2 month supply of new homes available for sale.  Realtors suggest that a 6.0 months supply is that point at which the demand for and supply of housing is roughly in balance.

The National Association of Realtors series on housing affordability for existing homes peaked at 214 in January 2013.  It has since slipped from that lofty level and now stands at 162.0.   That means that consumers have 60.0% 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 4.1% We have made an attempt to estimate affordability if 30-year mortgage rates  climb to 4.4% by the end of this year.  We estimate the affordability index at that time will be about 156 — 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 jumped 7.5% in March to $305,400.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $305,400.  During the course of this past year prices have risen 3.9%.

Given that the demand for housing far exceeds supply the housing sector will continue to do well in 2017.  Sales will be at a reasonably robust pace, builders will continue to boost production, but prices should rise slowly.  Mortgage rates should end 2017 at 4.4% which is still quite affordable.

Stephen Slifer


Charleston, SC

Case Shiller Index of Home Prices

April 25, 2017

Case Shiller Index of Home Prices rose 0.6% in February after having risen 0.9% in January.   Over the course of the past year home rices have risen 5.1%.  In a world in which income is rising fairly slowly, an increase in home prices of that magnitude seems sustainable.  However, it is worth noting that the pace of home prices may be quickening.  For example, in the past six months they have risen at an 8.4% rate and in the  past three months at a steamy 9.4% pace.  If sustained such price gains would far exceed the likely increase in income and would soon create a problem with affordability.  But the key words are “if sustained”.  This can be a bumpy series, but it clearly bears watching.

There is a shortage of homes available for sale.  The inventory of existing homes is at 3.8 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.  While some are still having difficulty finding adequate financing and an adequate supply of skilled labor, as the economy continues to chug along  in 2017 banks should be more willing to extend credit to builders which will help to alleviate the shortage.

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 since the election have jumped  to 4.1%.  They should rise only slightly from about 4.1% currently to 4.4% by the end of 2017 if the Fed raises short-term interest rates two more times in 2017 to 1.25%.

Housing today continues to be affordable.  The chart below from the National Association of Realtors indicates that after peaking at 213.6 in January of 2013 the affordability index now stands at 162.0 in January.  That means that consumers still have 60.0% 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 4.1% mark because consumer income is also rising.  However, as described earlier, the pace of home price appreciation now bears watching and could impact affordability in the months ahead.

Stephen Slifer


Charleston, SC

Existing Home Sales

April 21, 2017

Existing home sales jumped 5.7% in March to 5,710 thousand after having declined 3.9% in February.  While these sales bounce around a bit from month to month they clearly continue to trend higher,.  The March sales pace was the fastest since February 2007.

Lawrence Yun, NAR chief economist  says, “The early returns so far this spring buying season look very promising as a rising number of households dipped their toes into the market and were successfully able to close on a home last month.  Although finding available properties to buy continues to be a strenuous task for many buyers, there was enough of a monthly increase in listings in March for sales to muster a strong gain. Sales will go up as long as inventory does.”

The months’ supply of unsold homes remained at 3.8 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.

The National Association of Realtors series on affordability reached a peak of 213.6 in January of 2013.  It now stands at 160.6 in February.  At 160.6 it means that a household earning the median income has 62.0% 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 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 rose 3.6% in March to $236,400. Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $227,850.  Over the course of the past year existing home prices have risen 6.8% and have generally been bouncing around in a 4.5-8.0% range.

Stephen Slifer


Charleston, SC

Housing Starts

April 18, 2017

Housing starts declined 6.8% in March to 1,215 thousand after having risen 5.0% in February. 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 1,253 thousand which is close to the fastest pace of construction thus far in the cycle.  It should continue to climb slowly.

Both new and existing home sales continue to climb.   Thus, the demand for housing remains robust.

Builders remain enthusiastic in part because they see traffic through the model homes accelerating.

Mortgage rates have risen 0.6% since the election in early November but at 4.1% they are still 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 2.0% pace.

As a result housing remains affordable for the median-price home buyer.  Mortgage rates may have risen, but income has been rising at almost as quickly, hence affordability has not dropped much.  At 161 the index indicates that a median-income buyer has 61% 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 although construction industry jobs have picked up in recent months.

As one might expect there is a 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 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.

The other 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.  However, the fact that 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 2017 and 1.5 million in 2018.

Building permits rose 3.6% in March to 1,260 thousand after having declined 6.0% in February.  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 1,256 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 1,256 thousand, housing starts will gradually approach the 1.4 million mark.

Stephen Slifer

Charleston, SC

Homebuilder Confidence

April 17, 2017

Homebuilder confidence dipped 3 points in April to 68 after surging upwards by 6.0 points in March to 71 (which was a 12-year high level).   Clearly, builders believe that housing market will perform well in 2017.

Robert Dietz, Chief Economist for the home builders association said, “The fact that the HMI measure of current sales conditions has been over 70 for five consecutive months shows that there is continued demand for new construction,.  However, builders are facing several challenges, such as hefty regulatory costs and ongoing increases in building material prices.”

Traffic through the model homes edged lower by 1 point in April to 52 after having jumped 8 points in March to 54 (once again 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 1.3 million pace.  They should continue to climb gradually in the months ahead and reach 1.4 million by the end of 2017.

Stephen Slifer


Charleston, SC

Construction Spending

April 3, 2017

Construction spending (the green bars above) rose 0.8% in February after having declined 0.4% in January.    Over the past year it has risen 3.0%.  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.  In this case, public spending has fallen sharply in the past three months so while the overall number has pulled lower, private sector spending seems to be doing fairly well (see below).

Private construction rose 0.8% in February after having been unchanged in January after  having risen 0.5% in December.  Over the past year private construction spending has risen 6.9%.   The 6.9% increase in the past year reflects a 6.4% increase in private non-residential construction, a 7.5% increase in the private residential category and an 8.0% decline in public construction.

Within the private construction spending category, residential spending rose 1.8% in February after having climbed 0.2% in January   Over the course of the past year private residential construction has risen by 6.4%.  The extreme 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 3.4% in the past year, multifamily construction has jumped by 10.6%.  While single-family home construction has risen somewhat, home buyers are more often choosing to rent or opting for a condominium which has bolstered the construction of multifamily units.

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.  But the mix of housing appears to have shifted away from single-family dwellings to rental units.

Private nonresidential construction fell 0.3% in February after having declined 0.2% in January.    On a year-over-year basis it has risen 7.5%.  This category was hit by the dropoff in oil and gas drilling activity caused by falling oil prices.  However, that drag on construction spending has disappeared.  Construction of office buildings, hotels and motels, retail shops, schools, and amusement parks have all registered double-digit increases in the past year.

Public sector construction rose 0.6% in February after having declined 1.9% in January.  This category can be quite volatile on a month-to-month basis.  Over the past year such spending has fallen 8.0%.  It will almost certainly rebound sharply in the  months ahead.

Stephen Slifer


Charleston, SC

Homeownership Rates

January 28, 2017

Homeownership Rates

Homeownership edged upwards by 0.2% in the fourth quarter to 63.7%.  At 62.9 homeownership was the lowest  on record in the second quarter of last year  for a series that dates back to 1965.

While the recession has clearly contributed to the decline in homeownership, the reality is that the slide began in 2004,  The recession did not begin until 2008.

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.

Homeownership Rates by Age

Homeownership Rates by Age -- Change

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 47% in the past three years risen from $612 in January 2013 to $876 currently.  Many younger borrowers simply cannot afford those higher payments.

Housing Affordability -- Monthly Payment Required

As home prices have risen the down payment required to purchase a median-priced home has risen from $34,000 to $47,100 in the same three year time period.

Housing Affordability -- Down Payment Required

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.

Consumer Credit -- By Type of Loan

Finally, the very limited supply of homes available to purchase means that some potential home buyers simply cannot find a suitable property to purchase.

Existing Home Inventory

While younger adults have been negatively impacted by higher home prices, the fact remains that mortgage rates are still very low at 4.2%  and home prices are still about 11% below their 2006 peak value.  With a robust pace of jobs growth, it is likely that the steady decline in homeownership will soon end, 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 6.7% 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.

Vacancy Rate -- Rental

Stephen Slifer


Charleston, SC

Mortgage Loans

July 19, 2016

Mortgage Loans -- PerCent

Real estate loans rose at a 5.9% annual rate in June (the light blue bars).   Over the course of the past year mortgage lending has risen 6.9% (the dark blue line).

While banks have been quite willing to make loans to businesses (commercial and industrial loans) for some time, they are only now becoming more willing to make consumer installment loans or to extend credit for home purchases.  Perhaps the still relatively bright outlook for the economy has encouraged banks to loosen their purse strings.  An increased willingness by banks to make all types of loans — business loans, consumer loans, and mortgages — should contribute to a faster pace of economic activity in the months ahead.

Total Loans -- Growth

Stephen Slifer


Charleston, SC

Mortgage Rate

July 19, 2016

Interest Rates -- 30 Year Mortgage

Mortgage rates fell to a record low level of 3.4% by the end of 2012 as the Fed aggressively purchased both Treasury bonds and mortgage-backed securities.   The intent was to push long-term interest rates — mortgage rates in particular — lower and stimulate the housing market.  That appears to have worked in spades as the housing market rebounded sharply.

In mid-June of 2013 then Fed Chairman Bernanke spooked the market by suggesting that the Fed might slow its purchases of Treasury bonds and mortgages.    As a result, long-term interest rates — both bond yields and the 30-year mortgage rate — rose sharply.  In the case of mortgages, rates initially climbed from 3.5% to 4.5%.

What is interesting is that even though the Fed gradually reduced and  eventually eliminated its purchases of Treasury bonds and mortgages by the end of 2014, long rates are lower now that they were at the end of 2013.  The 30-year mortgage rate was 4.46% at the end  of 2013 when the Fed began to cut its bond purchases and stands at 3.5% currently.  Janet Yellen’s consistent comments that the Fed will raise the funds rate very slowly has been re-assuring to market participants.  In addition, strength in the U.S. economy versus weakness in Europe, China, and Japan has generated huge inflows of capital which have pushed rates lower.

Mortgage rates have declined about 0.4% since the end of last year in anticipation of a very slow pace of tightening by the Fed.  By the end of this year the 30-year mortgage rate is probably going to be slightly higher at about 3.6%.

Interest Rates -- 10-year versus mortgages projected

Stephen Slifer


Charleston, SC