Eye on the Economy: Short-Term Ups and Downs for Housing

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Recent housing market data have illustrated that while the long-run trend for housing remains one of improvement, there will be bumps along the road. In particular, availability of building lots and skilled labor, rising building material prices, and big picture economic and policy developments will present month-to-month challenges for home builders and other housing businesses.

For instance, the share of first-time home buyers remains lower than the historic average. For the housing market to return to normal, these buyers need access to credit and stable labor market conditions to afford a home.

As a result of these challenges, builder confidence has declined slightly in 2013. The NAHB/Wells Fargo Housing Market Index dropped two points to 42 in April. This is the third monthly decline from a peak of 47 in December and January. Two of the three components pulled the composite index down: The current sales component fell two points to 45 and the normally lower traffic component fell four points to 30.

However, consistent with long-run improving trends, the component measuring expectations for future sales increased three points to 53, tied for the highest level since February 2007.

One factor holding builder confidence back is a rise in the cost of some building materials. Since last March, Production Price Indices have significantly increased for gypsum (18%), softwood lumber (30%) and OSB (68%).

Consistent with the decline, the HMI, single-family housing starts were down 4.8% in March. Single-family construction fell to a 619,000 annual pace from an upwardly revised February rate, which in turn was the highest since May 2008. The first-quarter single-family starts average was 628,000, up 6% from the fourth quarter of 2012.

Overall housing starts actually rose 7% for March, but this surge was due to an unsustainable jump in multifamily apartment construction, which was up 31% month over month.

At a 392,000 annualized pace, the starts rate for units in properties with more than five units is the highest it has been since January 2006. This pace is above the total number of five-plus starts in any year since the 1980s, suggesting that the rate of multifamily construction is not sustainable going forward. Consistent with this conclusion, multifamily permits for March were down 8%, while the number of five-plus permits waiting in the pipeline (previously issued but not yet converted to starts) declined 19%.

Nonetheless, total housing starts in March rose above the 1 million pace (1.036 million), a psychological if not economically meaningful threshold.

New home sales continued slow improvement. HUD and Census reported new home sales up 1.5% in March at an annual rate of 417,000 per year. Except for the January outlier rate of 445,000, this is the highest rate of sales since the end of the home buyer tax credit in early 2010. The first-quarter average came in at a 424,000 annualized sales rate, which is the highest since third quarter 2008.

Inventories of newly built homes continue to stand near historic lows at 153,000, with a mere 41,000 homes completed and ready to occupy. In a normal market, there are about 100,000 ready-to-occupy new homes for sale. At the current sales pace, the inventory represents only a 4.4-month supply.

On the other hand, existing home sales were down in March. Per the National Association of Realtors (NAR), existing home sales decreased 0.6% in March from a downwardly revised level in February. However, the sales rate is up 10.3% from the same period a year ago.

NAR reported that total existing home sales for March were at a seasonally adjusted rate of 4.92 million units combined for single-family homes, townhomes, condominiums and co-ops. That compares to 4.95 million units in February, and 4.46 million units during the same period a year ago.

Total housing inventory at the end of March increased 1.6% from the previous month to 1.93 million existing homes for sale. At the current sales rate, the March inventory represents a 4.7-month supply compared to a 4.6-month supply in February, and a 6.2-month supply of homes a year ago.

The increase in March inventory suggests that rising prices are inducing more households to place their homes on the market, after previously holding back because of low prices. Those same rising prices may be dampening the enthusiasm of investors and cash buyers whose participation declined in March.

Indeed, all cash sales were 30% of transactions compared to 32% in February, and 32% in March 2012. Investors accounted for 19% of March home sales, compared to 22% in February and 21% a year ago. First-time buyers accounted for 30% of March sales, the same as the previous three months, although down from 33% during the same period a year ago. Historic norms would place the first-time home buyer share closer to 40%.

Rising rents could further increase demand for new and existing home sales in the months ahead. Per data from the Consumer Price Index, real rental prices rose by 0.1% in March. They have increased steadily since June 2012 and have now surpassed the cycle high established in May 2009.

Lastly, with the release of the 2010 Census, the Office of Management and Budget (OMB) has published new definitions for metropolitan statistical areas (MSAs). Major changes to MSA definitions take place every 10 years when population counts and commuting patterns are revised following the decennial census. In 2013, 23 brand-new areas were designated as MSAs: 10 in the South region, five in the Northeast, five in the West, and three in the Midwest. Pennsylvania added four news MSAs, the most of any state.

Besides creating brand-new metro areas, the OMB guidelines also changed the name of many MSAs (and a few Divisions). One such name change, for example, took place in Baltimore, where the MSA name changed from Baltimore-Towson, Md., to Baltimore-Columbia-Towson, Md.  This indicates that Columbia now has the necessary population and employment totals to be named a principal city of this metropolitan area.

The new OMB guidelines also resulted in a few areas losing their MSA status. In some cases, the counties affected were absorbed by another MSA. In other cases, the counties are simply not metropolitan counties any longer.  Poughkeepsie-Newburgh-Middletown, N.Y. is an example of the former. Its two counties were absorbed into the divisions that make up the New York City MSA.

(Via Eye on Housing.)

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