Wednesday, 22 of May of 2019

Economics. Explained.  

Category » Housing

Existing Home Sales

May 21, 2019

Existing home sales fell  0.4% in April to 5,190 thousand after having declined 4.9% in March to 5,210 thousand after having surged 11.2% in February.  Sales currently are 4.4% below where they were at this time last year.

Lawrence Yun, NAR chief economist is not overly concerned about the slight April decline.  He said,  “First, we are seeing historically low mortgage rates combined with a pent-up demand to buy, so buyers will look to take advantage of these conditions.  Also, job creation is improving, causing wage growth to align with home price growth, which helps affordability and will help spur more home sales.”

With a modest decline in sales  and a moderate increase in the available inventory, the month’s supply of available homes rose from 3.8 to 4.2 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.  Yun also noted that “We see that the inventory totals have steadily improved, and will provide more choices for those looking to buy a home,”

If one looks at the actual number of homes available for sale, it has been steadily declining for a decade.  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 24 days in April.  Fifty-three percent of homes that sold in March were on the market less than a month.  The 24-day length of time between listing and sale is 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 rose 2.9% in April to $267,300 after having risen 3.8% in March.  Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $259,000.  Over the course of the past year existing home prices have risen 3.6% which is lower than the 4.0-5.0% range that we saw throughout 2018 .
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 4.1%.

   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 slowly.  And mortgage rates have worked their way lower to 4.1%.
 Stephen Slifer


Charleston, SC

Housing Starts

May 16, 2019

Housing starts jumped 5.7% in April to 1,235 thousand after having risen 1.7% 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 1,184 thousand.  Housing starts remain 8.5%  below where they were one year ago.

The April increase was  in both single-family and multi-family construction.   It appears that both categories of starts have leveled off but have not yet begun to turn upwards but we expect that to happen soon.

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 36 days currently which is down from 100 days a few years ago.  Almost 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 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 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 0.9% to 4.1% which is the lowest mortgage rate since this time last year.  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 155.0 the index  indicates that a median-income buyer has 55.0% 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 9.0% this year and reach 1.25 million by the end of 2019.

Building permits rose 0.6% in April to 1,296 thousand after having fallen 0.2% in March.  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 1,292 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 1,292 thousand, housing starts should be at roughly that same level by yearend.  Thus, our forecast for starts to be 1,250 thousand by yearend may be somewhat too low.  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

May 15, 2019

Homebuilder confidence rose 3 points in May to 66 after having edged upwards by 1 point in April.   A level of 66 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, “Builders are busy catching up after a wet winter and many characterize sales as solid, driven by improved demand and ongoing low overall supply.  However, affordability challenges persist and remain a big impediment to stronger sales.”

NAHB Chief Economist Robert Dietz said “Mortgage rates are hovering just above 4% following a challenging fourth quarter of 2018 when they peaked near 5%. This lower-interest rate environment, along with ongoing job growth and rising wages is contributing to a gradual improvement in the marketplace.  At the same time, builders continue to deal with ongoing labor and lot shortages and rising material costs that are holding back supply and harming affordability.”

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 rose 2 points  in May to 49 after having risen 3 points in March.  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 rose 1 point in May to 72 after having fallen 1 point in April.

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

Construction Spending

May 1, 2019

Construction spending (the green bars above) fell 0.9% in March after having risen 0.7% in February.  Over the past year it has fallen 0.8%.  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.  Construction spending came to a halt last year driven largely by a drop in residential construction, single-family homes in particular.  But construction spending rebounded sharply in January and February before retreating in March.  Our expectation is that construction spending will continue to climb slowly.

Private construction fell 0.7% in March after having declined 0.2% in February.  Over the past year private construction spending has fallen 3.6% which reflects a 2.1% increase in private non-residential construction and an 8.4% decline in the private residential category.

Within the private construction spending category, residential spending fell 1.8% in March after having dropped 0.4% in February.   Over the course of the past year private residential construction has fallen 8.4%.  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 8.2% in the past year, multifamily construction has risen 11.1%.

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 rose 0.5% in March after having risen 0.1% in February   During the past 12 months nonresidential construction has risen 2.1%.  To get more lift in the investment spending component of GDP we would like this component to turn more sharply upwards.

Public sector construction fell 1.3% in March after having climbed 3.2% in February nd 5.8% in January.  This category can be quite volatile on a month-to-month basis.  Over the past year such spending has risen 8.6%.  It will probably rise about 7.0% this year given the increase in defense spending approved in January.

Stephen Slifer


Charleston, SC

Pending Home Sales

April 30, 2019

Pending home sales jumped 3.8% in March to 105.8 after having fallen 1.0% in February.   In the past year pending home sales have dropped 1.2%.

Lawrence Yun, NAR chief economist noted that  “We are seeing a positive sentiment from consumers about home buying, as mortgage applications have been steadily increasing and mortgage rates are extremely favorable.”  Yun also noted that, “In the year 2000, we had 5 million home sales. Today, we are close to that same number, but there are 50 million more people in the country.  There is a pent-up demand in the market, and we should see a better performing market in the coming quarters and years.”

It is important to determine whether the drop in home sales last year reflects 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 3.9 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 155.0.  What that means is that potential buyers have 55% 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 not yet be regarded as “unaffordable”.

Keep in mind, too, that the the average home stays on the market for just 36 days which compares to about 100 days when the NAR began collecting this statistic in 2011.  The NAR reports that 50% 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

Case Shiller Index of Home Prices

April 30, 2019

Case Shiller Index of Home Prices in 20 cities rose 0.2% in February after climbing 0.1% in January.   Home home prices had been rising at about a 6.5% rate, but over the course of the past year home prices have risen 4.0%, and they have climbed just 3.6% in the past six months.  Clearly, the rate of increase in  home prices has slowed significantly.

In January of last year the actual level of the index surpassed the previous record high level for this series  which was set in April 2006.  It took more than a decade for home prices to recover from the devastating 2008-09 recession.

Some economists previously feared that the earlier run-up in  home prices and  mortgage rates had made housing unaffordable for many.  However, the rate of increase in home prices has slowed and in the past couple of  months when fears of a recession arose in the midst of the stock market drop late last year.  Meanwhile, mortgage rates declined 0.8% to 4.1%.

The chart below from the National Association of Realtors indicates that  the housing affordability index now stands at about 155.0.  This index combines the effect of house prices, mortgage rates, and consumer income.  The level of the index means that consumers have 55.0% 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 3.9 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

New Home Sales

April 23, 2019

New home sales rose 4.5% in March to an  annual rate of 692 thousand after having surged 5.9% in January and 11.2% in December.  As a result, the 3-month average pace of new home sales is now 660 thousand in March which is the fastest 3-month average since January of last year.  Over the past year new home salves have risen 3.0%.   The housing sector is on the mend.

The National Association of Realtors publishes a series on housing affordability for existing homes which stood at about 155.0 in February.   This means that consumers have 55.0% 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 declining 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 4.0% in March to $$302,700 after having 3.9% in February.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $307,100.  During the course of this past year prices have fallen 8.2%.  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 4.1%.  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 22.0% this year to 690 thousand.  That sounds like a big increase, but home sales were already at 692 thousand in March and the 3-month average is 660 thousand.  They do not have much farther to go.

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