Monday, 11 of December of 2017

Economics. Explained.  

Category » Housing

Construction Spending

December 1, 2017

Construction spending (the green bars above) jumped 1.4% in October after having risen 0.3% in September.  Over the past year it has risen 2.9%.  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.

Private construction rose 0.6% in October after having fallen fell 0.2% in September.  Over the past year private construction spending has risen 3.2%.   The 3.2% increase in the past year reflects a 1.3% decline in private non-residential construction and a sizable 7.4% increase in the private residential category.

Within the private construction spending category, residential spending rose 0.4% in October after having declined 0.2% in September.   Over the course of the past year private residential construction has risen by 7.4%.  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 11.9% in the past year, multifamily construction has climbed by 0.9%.

The Census Bureau tells us that on average 0.7 million new households are being formed every year.  That is a much slower Pace than what it had been estimating six months ago.  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 1.2 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 0.9% in October after having fallen 0.2% in September.   During the past 12 months nonresidential construction has declined 1.3%.  To get some lift in the investment spending component of GDP we need this component to turn upwards.

Public sector construction jumped 3.9% in October after having risen 2.0% in September and 2.7% in August.  This category can be quite volatile on a month-to-month basis.  Over the past year such spending has risen 1.8%.

Stephen Slifer


Charleston, SC

Pending Home Sales

November 29, 2017

Pending home sales jumped 3.5% in October after declining 2.8% in August and 0.4% in September as the hurricanes took their toll.    This series tends to be rather volatile on a  month-to-month basis and the October rebound is welcome news, but the reality is that this index has fallen 0.6% in the past 12 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 ““Home shoppers had better luck finding a home to buy in October, but slim pickings and consistently fast price gains continue to frustrate and prevent too many would-be buyers from reaching the market.”  Yun added, “The supply and affordability headwinds seen most of the year have not abated this fall. Although homebuilders are doing their best to ramp up production of single-family homes amidst ongoing labor and cost challenges, overall activity still drastically lags demand. Further exacerbating the inventory scarcity is the fact that homeowners are staying in their homes longer.”

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 160.0.  What that means is that potential buyers had 60.0% 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 34 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  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

November 28, 2017

Case Shiller Index of Home Prices rose 0.6% in September after having climbed 0.5% in August.   Over the course of the past year home rices have risen 5.7%.  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 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.  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.  We expect starts to gradually climb to 1,350 thousand units by the end of next year (from 1,200 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 3.9% which is still very low.  They should rise only slightly from about 3.9% currently to 4.4% by the end of 2018 if the Fed raises short-term interest rates one more time in 2017 and an additional 3 times in 2018 which would lift the funds rate to the 2.0% mark.

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 160.0.  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 3.9% mark because consumer income is also rising.

Stephen Slifer


Charleston, SC

New Home Sales

November 27, 2017

New home sales climbed 6.2% in October to an annual rate of 685 thousand after having surged by 14.2% in September.  The pace of home sales in October was the fastest since October 2007.  The August/September results clearly seem to have been impacted by Hurricanes Harvey and Irma.  Sales in the south declined 0.9% in August but then skyrocketed 25.8% in September.  But the pace of sales in October rose in all four regions of the country so it is hard to conclude that this robust pace of sales was hurricane-related.  It is just good, old-fashioned, strength in the housing sector.    A much better representation of the pace of home sales is the 3-month average which stands at 632 thousand (shown above) which is the peak for the cycle.   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.  Any way you slice it, the housing sector is expanding nicely.

The supply of available homes for sale rose 4 thousand in October to 282 thousand.  The big jump in the number of homes sold combined with a small increase in the number of  homes on the market means that the month’s supply of available homes dropped to 4.9 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.

The National Association of Realtors series on housing affordability for existing homes now stands at about 160.0.   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 3.9%. We have made an attempt to estimate affordability if 30-year mortgage rates  climb to 4.4% by the end of 2018.  We estimate the affordability index at that time will be about 155 — still very affordable.  The reason affordability is not hit harder by the increase in mortgage rates is because consumer income continues to climb.

New home prices fell 3.7% in October to $312,800 after having risen 4.2% in September.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $316,500.  During the course of this past year prices have risen 2.3%.

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 700 thousand by the end of next year, builders will continue to boost production, and prices should rise slowly.  Mortgage rates should end 2018 at 4.4% which is still quite affordable.

Stephen Slifer


Charleston, SC

Existing Home Sales

November 21, 2017

Existing home sale jumped 2.0% in October to 5,480 thousand after having risen 0.4% in September.  The August and  September weakness reflect the combined effect of Hurricanes Harvey and Irma, as does the rebound in October.   While these sales have bounced around in recent months they have  clearly fallen off from where they were earlier in the year.  For example, 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,  “While the housing market gained a little more momentum last month, sales are still below year ago levels because low inventory is limiting choices for prospective buyers and keeping price growth elevated.”   He also noted that, “The residual effects on sales from Hurricanes Harvey and Irma are still seen in parts of Texas and Florida. However, sales should completely bounce back to their pre-storm levels by the end of the year, as demand for buying in these areas was very strong before the storms.”

The strong sales pace reduced the months’ supply of unsold homes by 0.3 month to 3.9 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 October which is down 17% from 41 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 160.0.  At that level  it means that a household earning the median income has 60.0% 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 despite the backup in mortgage rates 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 0.2% in October to $247,000 after having fallen 2.2% in September.  Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $249,100.  Over the course of the past year existing home prices have risen 5.5% and have generally been bouncing around in a 4.5-8.0% range.
 Stephen Slifer


Charleston, SC

Housing Starts

November 17, 2017

Housing starts surged 13.7% in October to 1,290 thousand in October after having fallen 3.2% in September and 1.1% in August.  Given that the initial slowdown and subsequent rebound occurred largely in the South it is clear that the recent swings reflect the impact from Hurricanes Harvey and Irma.   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 1,199 thousand which has fallen off from the 1,264 thousand peak pace in the cycle which was registered back in February.    While starts will continue to climb in coming months as the rebuilding effort continues, it is worth asking why starts have fallen so much relative to where they were earlier in the year?  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.

The average home stays on the market for about 30 days currently which is down from 90 days a few years ago.  This statistic provides compelling evidence that the demand for housing remains robust.

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 1.4 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 8.4% while multi-family units have declined by 14.2%.

As a result, multi-family construction as a percent of the total has slipped from 36.2% in July of last year to 27%.

Building permits jumped 5.9% in October to 1,297 thousand after having fallen 3.7% in September.  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 1,265 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 1,265 thousand, housing starts will soon surpass the 1.3 million mark.

Stephen Slifer

Charleston, SC

Homebuilder Confidence

November 16, 2017

Homebuilder confidence rose 2 points in November to 70 after having jumped 4 points in October.  This level is just a shade below the highest reading for the business cycle which was 71 in March of this year.

NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, Texas said, “November’s builder confidence reading is close to a post-recession high — a strong indicator that the housing market continues to grow steadily.  However, our members still face supply-side constraints, such as lot and labor shortages and ongoing building material price increases.”


NAHB Chief Economist Robert Dietz said “Demand for housing is increasing at a consistent pace, driven by job and economic growth, rising homeownership rates and limited housing inventory.  With these economic fundamentals in place, we should see continued upward movement of the single-family housing market as we close out 2017.

Traffic through the model homes rose 2 points in November to 50 after having risen by 1 point in October.  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


Charleston, SC

Homeownership Rates

October 31, 2017

Homeownership edged upwards by 0.2% in the third quarter to 63.9%.  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 68% in the past five years risen from $612 in January 2013 to $1029 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 $52,500 in the same fiveyear 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 7.5% 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


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


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


Charleston, SC