Eye on the Economy: Housing Stumbles on Road to Recovery
Despite various forces impeding a full recovery for housing, residential construction has clearly improved over the last year.
The bottom for single-family construction was reached in January/February 2009 when starts hit a seasonally adjusted annual rate of 357,000, their slowest pace since reliable records started being kept in 1959. Spurred on by the first-time home buyer tax credit and low mortgage rates, single-family production climbed to an average of 498,000 starts in the third quarter.
Despite an extension of the tax credit and its expansion to repeat home buyers in early November (see www.FederalHousingTaxCredit.com for details), single-family housing starts slid back to an average 480,000 in the fourth quarter. January saw some slight improvement to 484,000 starts.
Single-family existing home sales hit their low for this cycle in November 2008 at a seasonally adjusted annual rate of 4.06 million sales. They subsequently rose to their most recent peak of 5.71 million in November 2009. The strong sales that month were due in large part to first-timers rushing to close before the expiration to the tax credit at the end of November.
All those settlements showed up in the November existing home sales figures, and it was not surprising to see existing sales slow in December and January. As people take advantage of the extended and expanded tax credit, existing home sales will improve in coming months, with April, May and June likely to show the most improvement.
While existing home sales are based on closings that occur in the reported month, and therefore represent the completion of contracts signed weeks or months earlier, new home sales are based on contracts signed, along with a deposit, in the month reported.
As a result, it was no surprise that new home sales began to decline from their local peak of 419,000 (seasonally adjusted annual rate) in July 2009. As late as October, sales stood at 400,000. Sharp drops in November and December, while certainly not welcomed, were not unexpected given that the vast majority of prospective new home buyers who had wanted to take advantage of the original first-time home buyer tax credit had already done so.
With the extension and expansion of the tax credit, there was now an incentive but no immediate pressure to purchase a new home (or existing home for that matter). The big surprise came with the January new home sales number of 309,000, a record low since these data have been recorded going back to 1963. That new low replaced the previous low of 329,000 set in January of last year.
Given that on average it takes about five months from breaking ground to completion of a new home, that leaves little time for a new home buyer to sign a contract, have a home built to their specifications and close by the end of June in order to qualify for the tax credit. Although some homes can be constructed in shorter time, January was close to the last month in which home buyers who wanted to take advantage of the tax credit and desired a home built to their specifications could sign a purchase contract.
Buyers will still be able to purchase homes out of builders’ inventory, whether already completed or under construction, and NAHB fully expects the tax credit to encourage potential buyers to do just that.
However, January new home sales were lower than expected. A partial explanation is that unusually wet weather, particularly in the South and Northeast, may have discouraged potential buyers from shopping. A more likely explanation is that the continued uncertainty over the economy and job market has been discouraging potential buyers.
Massive snow storms in the Midwest and along the Eastern seaboard as well as continued wet weather throughout the South in February are likely to continue the below trend sales for that month. March new home sales (reported on April 23) may provide the first true picture of the impact of the extended and expanded home buyer credit and the health of the housing recovery.
At the same time, builders are anticipating the demand arising from the home buyers’ tax credit. Single-family building permits have risen for three months running now (from November through January) and single-family housing starts rose in January. The stock of unused single-family building permits has been increasing as well as builders prepare for the spring. Completions did slump in December and January as builders slowed the final stages of building in order to leave selections to the final buyer.
No Help for Builders on the Cost Front
Home builders have been receiving unwelcome news from their suppliers of late. An index produced by the Bureau of Labor Statistics that tracks building material prices for builders of single-family homes and multifamily structures has now risen three months in a row.
In January, both measures jumped 1.0% from December. Chief contributors to the recent rise are lumber, fuel products (gasoline and diesel), plumbing fixtures and copper products. On a year-over-year basis, the single-family index is up only 0.3% and the multifamily index is up a slight 0.2%.
Nonetheless, with a number of countries around the world on the expansion path, building material prices are likely to continue to rise in coming months.
The recent earthquake in Chile will disrupt supplies of some imported building materials — in particular, moldings and door frames. These items can be, and likely will be, replaced by items from other countries, but at a higher price. Chile is also a major exporter of copper, and although the mines escaped direct damage, operations and shipping will likely be delayed as the country recovers. So far, copper prices on the COMEX are up about 4% since the quake.
But General Inflation Remains Tame
Building materials prices are an exception to general inflation trends, which appear to be tame. For the past five months (September 2009 through January 2010), the Consumer Price Index (CPI) has risen 0.2% per month.
On a year-over-year basis, it is up 2.6%. Excluding food and energy, the index is up 1.6% from a year ago. A broader measure of inflation used by the Federal Reserve — the price index for personal consumption expenditures excluding food and energy — rose 1.6% in the fourth quarter at a seasonally adjusted annual rate and 1.5% from fourth quarter 2008.
These good inflation numbers enable the Fed to continue pursuing its current stimulative monetary policies without fearing they will put much upward pressure on prices. Even with the healthy increase in gross domestic product (GDP) in the fourth quarter (revised up to 5.9% from 5.7% at a seasonally adjusted annual rate), considerable slack remains in the national economy (not just in residential construction) as indicated by February’s unemployment rate of 9.7%.
Stimulus this year will be provided not just from the monetary side but from the fiscal side as well. Of the $787 billion appropriated for the American Recovery and Reinvestment Act of 2009, only a little over a third ($284 billion) had been distributed as of late February.
These funds will be flowing out into the economy in coming months, with construction projects (including road work) picking up in the spring and summer as the weather improves and the annual building/improvement cycle ramps up.
Meanwhile legislation was signed into law on March 2 that extends unemployment benefits for 30 days for people who have been out of work for more than 26 weeks. This temporary legislation will undoubtedly be followed up with an extension of benefits for a longer period.
These stimulus measures should assist the economy along its recovery path and we should soon start finally seeing employment growth. As the economy continues to advance and employment growth turns positive, the outlook of consumers will improve. Job growth will help restore home buyers’ confidence and return them to the housing market.
Multifamily Construction Has Its Own Struggles
Multifamily construction has gradually improved since October’s historic low of 53,000 starts, a suggestion that the worst may be over. Nonetheless, January’s multifamily starts of 107,000 are hardly stellar. Activity in this sector has been hampered by the difficulty in obtaining financing for new projects and competition from rentable single-family homes in the foreclosed inventory.
The decline has been relatively recent and rapid. In first quarter 2008, multifamily housing starts averaged 324,000 at a seasonally adjusted annual rate. The starkness of the slowdown in construction can be seen in the Census Bureau’s value put in place numbers.
From December to January, the value of single-family construction fell a scant 0.2%, compared to an 11.1% decline for multifamily construction. On a year-over-year basis, single-family was down 8.6% in January, while multifamily fell an astounding 51.2%.
A Looming Shortage of Places to Live?
It may seem absurd to think about, let alone talk about the possibility of a shortage of housing units given the number of foreclosed homes still on the market and the likely addition of foreclosed units in the next few months. However, even with the low new home sales numbers home builders managed to keep their inventory of new homes for sale virtually unchanged at 234,000 in January (up a statistically insignificant 1,000 from December), a level that was last observed in 1971 despite a considerable increase in U.S. population.
At the same time, the low level of multifamily starts will limit the supply of completed rental projects for several years because it takes three to four years to plan, get approval and construct multifamily projects.
As the economy improves and jobs return, new households will form from their current doubled-up and return-to-parents living arrangements. Many young individuals and families will first turn to the rental market or to starter homes.
The current excess inventory that is appropriate and in the right places for the newest households could be consumed relatively quickly and pressure on new construction could return quickly.
While concerns about shortages seem far from reality as we struggle to dig out of a huge hole, it is that same “never could happen” attitude that got some companies to run well ahead of reality. As today’s hesitant recovery unfolds, it will pay to keep an eye on the distant future.
NAHB Chief Economist David Crowe analyzes the economy from the point of view of the housing market every other week in the free e-newsletter, “Eye on the Economy.” The preceding is a reissue of his March 5 edition. To subscribe to “Eye on the Economy,” click here.
Web Site One-Stop Shop for Tax Credit Info
Builders and other industry professionals can help spur home sales by referring prospective home buyers to www.federalhousingtaxcredit.com. The NAHB Web site provides detailed information on both the extended $8,000 first-time home buyer tax credit and the new $6,500 repeat buyer tax credit signed into law by President Obama.
Consumers can use the Web site to find information on both tax credits — including frequently asked questions and links to social media sites that provide updated information as it becomes available. It also includes a number of home-buying resources for consumers.
Industry professionals are encouraged to highlight the tax credit Web site when marketing to their potential home buyer market.