Tuesday, 22 of January of 2019

Economics. Explained.  

Category » Housing

Homebuilder Confidence

January 16, 2019

Homebuilder confidence rose 2 points in January after having fallen 4 points in December and having plunged 8 points in November.  It is clear that the stock market decline, slower growth overseas, the Fed continuing to raise interest rates, and the softness in home sales is denting builder’s confidence.  But at a level of 58 builder confidence remains positive, just less positive than it was a couple of months earlier.

NAHB Chairman Randy Noel said, “The gradual decline in mortgage rates in recent weeks helped to sustain builder sentiment.  Low unemployment, solid job growth and favorable demographics should support housing demand in the coming months.”

NAHB Chief Economist Robert Dietz said  “Builders need to continue to manage rising construction costs to keep home prices affordable, particularly for young buyers at the entry-level of the market.  Lower interest rates that peaked around 5 percent in mid-November and have since fallen to just below 4.5 percent will help the housing market continue to grow at a modest clip as we enter the new year.”

Traffic through the model homes rose 1 point in January to 44 after having declined 2 points in December and having dropped 8 points in November.  Traffic through model homes has slipped somewhat in recent months as potential homebuyers have become cautious about rising mortgage rates.  The volatility in the stock since early October and fears of slower growth ahead may also be taking a toll on buyer confidence.  However, some of the dramatic stock market volatility has disappeared in the early part of this year.  Mortgage rates have fallen from 5.0% to about 4.5%.  And no economic data are pointing toward any sources of economic weakness.

Not surprisingly there is a fairly close correlation between builder confidence and housing starts.  Confidence took a big hit in November and December while housing starts have been fairly flat for most of this year.

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

Pending Home Sales

December 28, 2018

Pending home sales fell 0.7% in November to 101.4 after having declined 2.6% in October.   This means that in the past year pending home sales have dropped 7.7%.

Lawrence Yun, NAR chief economist noted that  “The latest decline in contract signings implies more short-term pullback in the housing sector and does not yet capture the impact of recent favorable conditions of mortgage rates.”  Yun added that while pending contracts have reached their lowest mark since 2014, there is no reason to be overly concerned, and he predicts solid growth potential for the long-term.

Yun suggests that affordability challenges in the West are part of the blame for the drop in sales. Home prices in the West region have risen too much, too fast, according to Yun. “Land cost is expensive, and zoning regulations are too stringent. Therefore, local officials should consider ways to boost local supply; if not, they risk seeing population migrating to neighboring states and away from the West Coast.”

Finally, Yun indicated the latest government shutdown will harm the housing market. “Unlike past government shutdowns, with this present closure, flood insurance is not available. That means that roughly 40,000 homes per month may go unsold because purchasing a home requires flood insurance in those affected areas,” Yun said. “The longer the shutdown means fewer homes sold and slower economic growth.”

It is important to determine whether the drop in sales reflects a dropoff in demand, or whether there is some sort of supply constraint.  We think it is 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 148.0.  What that means is that potential buyers have 48% more income than is necessary to buy a median priced home (compared to 14% in 2007).   A few years ago they had 80-90% more income than required.  The index has declined  in response to an increase in the 30-year mortgage rate from 3.5%  to 4.7% and a 4.7% increase in home prices.  It has not fallen more sharply because consumer income continues to climb.  So while housing has become less affordable than it used to be, it can not yet be regarded as “unaffordable”.

Keep in mind, too, that the the average home stays on the market for just 42 days which compares to about 100 days when the NAR began collecting this statistic in 2011.  The NAR reports that more than one-half of homes that come on the market sell within a month.

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

December 26, 2018

Case Shiller Index of Home Prices rose 0.5% in October after having risen 0.4% in September.   Over the course of the past year home prices have risen 4.7%, but they have climbed just 2.2% in the past six months.

The actual level of the index at 227.3 has finally surpassed the previous record high level for this series of 226.9 which was set in April 2006.  It has taken more than a decade for home prices to recover from the devastating 2008-09 recession.

Home home prices have been rising at about a 4.7% pace, and mortgage rates have been climbing. Mortgage rates are now at 4.7% .  That combo suggests to some that housing has become unaffordable for many.  However, that is not true for the vast majority of potential home buyers because consumer income has been rising as well.

The chart below from the National Association of Realtors indicates that  the housing affordability index now stands at about 148.0.  That means that consumers still have 48.0% 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 home prices have been climbing and mortgage rates have risen to the 4.7% mark because consumer income is also rising.

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.  If more homeowners would put their homes up for sale, existing sales would be far higher than they are today.

Stephen Slifer


Charleston, SC

Existing Home Sales

December 19, 2018

Existing home sales rose 1.9% in November to 5,320 thousand after having climbed 1.4% in October.  Sales currently are 1.9% higher than they were at this time last year.  While sales have been trending lower, hurricanes  appear to have biased the data downwards in both September and October.   It will take several months for the weather-related distortions to work their way out of the data.

Lawrence Yun, NAR chief economist said,  “The market conditions in November were mixed, with good signs of stabilizing home sales compared to recent months, though down significantly from one year ago.”

With a modest increase in the pace of sales in November and a big drop in the available inventory, the month’s supply of available homes for sale fell sharply in November fell to 3.9 months.  Realtors consider a 6.0 month supply as  the point at which demand for and supply of homes are roughly in balance.  Thus, housing remains in short supply.  If sales were not being constrained by the limited supply they would almost certainly be at a 6,000 thousand pace.

Keep in mind that properties typically stayed on the market 42 days in November which is 5.0% higher than it was last year.  More than 43% of homes that went on the market sold within a month.  Even with the increase in November this is one of the shortest lengths of time between listing and sale  since the NAR began tracking these data in May 2011.

The National Association of Realtors series on affordability now stands at about 145.0.  At that level  it means that a household earning the median income has 45.0% 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 despite the backup in mortgage rates and higher  home prices because sizable job gains are boosting income almost as fast as mortgage rates and home prices are rising.

Existing home prices rose 1.0% in November to $257,700 after  having declined 0.7% in October.  Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $256,600.  Over the course of the past year existing home prices have risen 4.2% and they have generally been bouncing around in a 4.5-8.0% range.  However, in the past six months prices have actually declined 2.8%.  Thus, the slower pace of sales seems to be pushing prices lower.
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 a bit to 4.7%.
The housing sector will continue to expand in the quarters ahead.   Jobs growth is expected to remain solid which should boost  income. Home price appreciation seems to have slowed.  And mortgage rates are edging their way lower.
 Stephen Slifer


Charleston, SC

Housing Starts

December 18,  2018

Housing starts rose 3.2% in November after having declined 1.5% in October . But hurricane activity in the South appears to have depressed starts in that region to some extent in both months.   It will take several months for these weather-related distortions to even out so we can get a true read on the pace of sales.  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 1,237 thousand.

Some economists dismiss the increase in  housing starts in November because it was often volatile multi-family starts category.  That is true, but it is also multi-family starts that were responsible for the bulk of the earlier decline.  Single family starts are only about 5.5% below their peak back in the spring.

Starts have cooled somewhat in recent months, but is that because demand has declined?  Or are constraints on production like a labor shortage and rising costs of materials the more likely cause?  We believe it is both to some extent, but primarily the latter.

Both new and existing home sales fallen in recent month but they are being constrained by a lack of supply so it is unclear that demand has softened as much as the sales data suggest.

The average home stays on the market for 33 days currently which is down from 100 days a few years ago.  One-half 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 3.0% pace which is  somewhat above its long-term average of 2.7%.

Mortgage rates are at 4.9% which are still quite low by any historical standard.

Housing remains affordable for the median-price home buyer.  Mortgage rates may have risen, but income has been rising almost as quickly, hence affordability has not dropped much.  At 145.0 the index  indicates that a median-income buyer has 45.0% more income than is necessary to purchase a median-priced house.

The problem in housing is not a lack of demand.  Rather it is a constraint on the production side.  Builders have had difficulty finding an adequate supply of both skilled and unskilled labor.  Construction employment has been growing by about 30 thousand per month but will be difficult for it to grow any faster.  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 more robust pace as builders begin construction on these previously authorized houses.

Given the continuing strength in demand we expect starts to climb 4.5% next year and reach 1.3 million by the end of 2019.

Building permits jumped 5.0% in November after having declined 0.4% in October.  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 1,288  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 1,288 thousand, housing starts should be at roughly that same level by yearend.

Stephen Slifer

Charleston, SC

Mortgage Rate

December 5, 2018

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 this year coupled with a gradual increase in inflation has boosted the 30-year mortgage rate to 5.0%

We expect the Fed to leave the funds rate at 2.2% at its meeting next week, but then increase rates three times in 2019 which would boost the funds rate to 3.0%.  If that is the case and inflation remains fairly steady, we expect the 30-year mortgage rate to climb to 5.3% by the end of 2019/.



Stephen Slifer


Charleston, SC

Mortgage Loans

December 3, 2018

Real estate loans rose at a 2.9% pace in October after having climbed 5.8% in September (the light blue bars).   Over the course of the past year mortgage lending has risen 3.2% (the dark blue line).

While mortgage lending has been sluggish total loan growth has risen at a slightly faster 4.4% pace which is both a steady and sustainable pace.

Stephen Slifer


Charleston, SC

New Home Sales

November 28, 2018

New home sales plunged 8.0% in October after having risen 1.0% in September (You will recall that a month ago home sales for September were initially reported as dropping 5.5%.  After revision they are now up 1.0%.  Hence, these figures are always subject to significant revision.)  Having said that, sales have fallen in our of the past five  months.  The October drop was broad-based by region.  New home sales are 12.0% below their year ago level.  So is the  problem caused by a lack of demand, a supply constraint, or some of both.  We believe it is both.

First, the demand side.  The National Association of Realtors publishes a series on housing affordability for existing homes which stands at about 145.0.   That means that consumers have 45.0% more income than is necessary to purchase a median priced existing home.  Thus, existing homes remain quite affordable despite an increase in mortgage rates to 4.9% and an increase in prices.  The reason affordability has not been hit harder by the increase in mortgage rates and prices is because consumer income continues to climb.  But at the peak of the previous expansion back in 2007 this affordability index stood at about 115.  Thus, existing homes are less affordable than they were, but they remain relatively affordable and should continue to be affordable for some time to come.

New homes are considerably less affordable.  That is because a median-priced new home costs about $60,000 more than a median-priced existing home.  As a result, the down payment required is about $12,000 higher and the monthly payment $300 per month higher than for an existing home.  Using the same construction as the series described above, the index stands at 119 which means that consumer have just 19% more income than required to  purchase a median-priced new home (vs. 45% for an existing  home).  At the peak of the previous business cycle consumers had just 3% more income than required.  Thus, it seems that new homes are becoming unaffordable.

However, we would have thought that if the new home sales were weakening by any significant amount, traffic through builders’ model homes would be dropping off.  It has dropped a little, but builders are still reporting traffic through the model homes that is relatively robust.  NAHB Chairman Randy Noel said, “Builders report that they continue to see signs of consumer demand for new homes, but that customers are taking a pause due to concerns over rising interest rates and home prices.”

Now the supply side.  The supply of available homes for sale rose 14 thousand in October to 336 thousand.  A big drop in the in the number of homes sold combined with a moderate increase in the number of  homes on the market means that the month’s supply of available homes for sale jumped 0.9 month in October to 7.4 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.  So, at least in October, there was an adequate supply of homes available for sales.

However, one interesting point to note is that most of the increase in the number of homes available for sale was for homes either under construction or not yet started.  The supply of completed homes available for sale is a record low 2.7 months.  Thus, the potential new home buyer still has a hard time finding a model he can purchase right away.  Builders need to step up the pace of construction so that consumers can find a specific model to their liking.

But builders say they are having a hard time finding an adequate supply of both skilled and unskilled workers.  Construction employment is rising by about 30 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.

New home prices fell 3.6% in October to $309,700 after having fallen 0.8% 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 $318,300.  During the course of this past year prices have fallen 1.1%.

We do not believe that the current level of mortgage rates at 4.9% is high enough to significantly impede the pace of sales.  Thus, we believe the housing sector will continue to do reasonably well in 2019.  We expect the sales pace to rise 4.0% next year to 605 thousand.  Mortgage rates should end 2018 at 4.9% and climb to 5.4% by the end of 2019 which is still quite affordable.

Stephen Slifer


Charleston, SC

Homeownership Rates

November 26, 2018

Homeownership edged upwards by 0.1% in the third quarter to 64.4%.  It hit a low of 62.9% in the second quarter of 2016 but has been climbing steadily for the past two years.

The upswing in homeownership in the past two years  has been most pronounced amongst younger borrowers, i.e., those under the age of 45.  That is where most of the earlier decline occurred.

Higher home prices and somewhat higher mortgage rates have caused the monthly mortgage payment required to purchase a median-priced home to rise steadily.

The same thing is true for the down payment required to purchase a median-priced home.

While higher home prices and higher mortgage rates have made homeownership less affordable than it used to be, housing still remains quite affordable for most.  The National Association of Realtors index of housing affordability stands at about 145.   At a level of 145 it means that consumers have 45% more income than is required to purchase a median-priced home.  Back at the peak of the housing boom in 2007  consumers had just 14% more income than required.  Thus, despite higher home prices and rising mortgage rates, housing remains quite affordable for most because of the steady growth in consumer income.

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

Many former homeowners and some younger people have turned to renting, but vacancy rates for rental properties have been falling fast and at 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

Construction Spending

December 3, 2018

Construction spending (the green bars above) fell 0.1% in both September and October.  Over the past year it has risen 4.9%.  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.  Having said all of that, construction spending has been growing moderately over the course of the past year.

Private construction fell 0.4% in October after  having risen 0.4% in September.  Over the past year private construction spending has risen 3.9 which reflects a 6.4% increase in private non-residential construction and a 1.8% increase in the private residential category.

Within the private construction spending category, residential spending fell 0.5% in October after  having risen 0.1% in September.   Over the course of the past year private residential construction has risen by 1.8%.  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 2.4% in the past year, multifamily construction has risen 3.2%%.

The Census Bureau tells us that on average 1.2 million new households are being formed every year.  Those families need a place to live.  It could be a home.  It could be an apartment.  Replacement demand should add about 0.5 million unit to that for a total demand of 1.7 million or so units per year.  Currently, builders are starting about 1.2 million units per year.  But keep in mind that housing starts have fallen way short of demand for the past nine years. Thus, the demand for housing will remain strong for the foreseeable future which will keep construction workers fully employed for some time to come.

Private nonresidential construction fell 0.3% in October after having risen 0.7% in September.   During the past 12 months nonresidential construction has risen 6.4%.  To get more lift in the investment spending component of GDP we would like this component to turn more sharply upwards.

Public sector construction rose 0.8% in October after having fallen 1.5% in September.  This category can be quite volatile on a month-to-month basis.  Over the past year such spending has risen 8.5%.  It will probably rise about 7.0% this year given the increase in defense spending approved in January.

Stephen Slifer


Charleston, SC