Home Building Remains a Bright Spot for Economy

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In a typical economic recovery, home construction leads economic growth. As interest rates fall, home building accelerates, creating jobs and generating a virtuous cycle of employment growth and increasing housing demand.

However, after the Great Recession, home building did not assume this historical role due to excess housing inventories and higher levels of unemployment. Partly as a result, the economic recovery has been fragile and uneven. For example, the last three monthly employment reports from the Bureau of Labor Statistics have been weak. And despite increasing rates of job openings, hiring rates remain flat.

In the last few months, housing data have been a rare bright spot for the economy. While there is significant geographic variation due to local labor markets and inventories, home building is generating an outsized contribution to economic growth. For example, for the first quarter of 2012, growth of real Gross Domestic Product (GDP) registered at 1.9%. Increases in home building and remodeling – residential fixed investment – was responsible for 0.42 percentage points of that increase or more than 20% of the total net growth.

Housing data for June in general followed this trend. The Census Bureau and Department of Housing and Urban Development reported that housing starts were up 6.9% in June, reaching a seasonally adjusted annual rate of 760,000 units. This marks the fastest pace of home construction since October 2008.

This positive news for home building is consistent with recent changes for the NAHB/Wells Fargo Housing Market Index (HMI), which jumped six points in July to 35, the highest total in more than five years. The HMI has been a leading indicator of single-family starts, so the recent increase suggests more builders are feeling confident about the industry and increasing construction.

Further supporting the growth in single-family construction, data from the Federal Housing Finance Agency indicated that home prices were up 0.8% from April to May on a seasonally adjusted basis. The gains were widespread, with seven of nine census division reporting monthly gains.

Multifamily starts were also up in June, rebounding from a May decline to a rate of 213,000. For the month, starts of housing units in buildings with more than five units were up 17% and are 29% higher than levels from a year ago. Higher levels of apartment construction are consistent with declining vacancy rates and rising rents. Using data from the Consumer Price Index series, the real rent index increased for the third month in a row and is up 1% year over year.

Despite these improvements for newly constructed housing, new single-family home sales data for June showed some weakness, at least compared to the last few positive months. New home sales, as reported by the Census Bureau, were down more than 8% to a seasonally adjusted annual rate of 350,000 from the upwardly revised rate for May of 382,000.

To a certain extent, the monthly percentage decline was exaggerated by the upward revisions for May sales rate, which was revised from 369,000 to 382,000. However, there was a large regional decline in new home sales for the Northeast. Nonetheless, while the June new home sales rate was lower than the last four months, it was larger than all of the 21 months before February 2012. And the disappointing June 2012 rate is still up 15% on a year-over-year basis.

The number of homes completed and for sale fell to 41,000, the lowest level recorded since inception of the data in 1973. Overall, the declines of total new home inventory – completed and not completed – appear to have ended, with the number of new homes for sale now standing at around 145,000 since February. For the month of June, the months-supply measure came in at 4.9. The end of new home inventory declines, increasing builder confidence, and recent increases in housing starts bode well for the future growth of residential construction.

Existing home sales also reflected some of the weakness experienced by the broader economy. According to the National Association of Realtors, June existing home sales declined 5.4% to a seasonally adjusted annual rate of 4.37 million. Despite the monthly decline, existing home sales remain 4.5% higher than levels recorded a year ago. Moreover, recent increases in the Pending Home Sales Index from NAR suggest higher levels of existing home sales as the summer concludes.  Inventories declined, but with the fall in the sales rate, the months-supply measure stood at 6.6 months, up from 6.4 in May.

Given the underlying relationship between demography and housing, NAHB’s economists completed two demographic analyses of households. The first explored the geographic distribution of aged 55+ households. The analysis of the American Community Survey data demonstrated that the distribution of such households is fairly even across the nation.

The second analysis examined which states had the highest level of stay-at-home moms among married couple households with children under the age of 18. The data suggest the highest rates to be in the West, Southwest and Southeast, while the reasons for this high degree of regional clustering include differences in average number of children, education levels and immigration status.

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