The Official Online Weekly Newspaper of NAHB
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By David Crowe
The NAHB/Wells Fargo Housing Market Index remained a dismal 13 in September, unchanged from the August level. Two of the three components of the index — present sales and expectations for the next six months — also remained unchanged at 13 and 18, respectively. The measure of traffic fell one point to 9, the lowest level since March 2009.
The index had been declining steadily since May, when it was up to 22, reflecting the expiration of the home buyer tax credit. A soft spot in the economy is responsible for the current lull.
New job formations slowed in the second and third quarters and both businesses and consumers pulled back on purchases. Overall uncertainty over economic growth has become the latest impediment to a resurgence in new housing — even with historically low interest rates, leveling house prices and pent-up demand from unformed households.
The housing market will continue to suffer from excess existing home supply as more home owners default and lenders foreclose. Without additional demand, this will continue to keep downward pressure on home prices, which in turn will discourage consumers from making purchases.
However, the worst markets are concentrated in a relatively small number of states, primarily those that saw significant price increases — California, Nevada, Arizona and Florida — or economic stress — Michigan.
States in the energy and farm belts did not experience price run-ups or overproduction and are expected to return to a normal level of housing starts within the next year. Except for Texas, these states are relatively small housing producers.
As a result, the U.S. housing recovery is being driven by small contributions from many low-population states and is lacking a push from the large states that provided the bulk of production when times were good.
With consumers responding slowly to today’s positive conditions for home buying and foreclosures continuing in some large states, the housing recovery that has come into sight over the past year is liable to be protracted.
Housing Starts Move Upward
Total housing starts in August rose 10.5% to a seasonally adjusted annual rate of 598,000, up from 541,000 in July. The increase was largely due to volatile multifamily starts, which jumped to 160,000 units, up 32.2% from 121,000 in the prior month.
August was the fourth consecutive month in which the three-month moving average of multifamily starts was above 110,000 — hardly a stellar performance, but a decided improvement over the period of July 2009 through March of this year, when multifamily starts only twice exceeded 100,000, barely. Matching multifamily starts, multifamily permits have generally shown steady, though modest, improvement over the last few months, rising to 168,000 in August, up from 153,000 in July.
August’s single-family starts rose 4.3% from 420,000 to 438,000, a modest, but desirable improvement. The Northeast saw single-family starts drop 28%. The South was essentially flat, up 0.5%, while the Midwest and West rose 19% and 23%, respectively.
Single-family building permits, on the other hand, slipped a slight 1.2%, to 401,000, down from 406,000 in July. The Northeast, Midwest and West all registered declines in their single-family permits, which were down by 4.5%, 1.4% and 2.4%, respectively. The South was flat with 209,000 permits.
While single-family construction appears to have found a floor in the current mini-cycle, it is struggling to move forward in the face of anemic economic growth and consumer confidence. Discerning little prospect of increasing their sales on the immediate horizon, builders have been reluctant to add to their inventories.
New-Home Sales Flatten
New-home sales in August were unchanged from July’s seasonally adjusted annual pace of 288,000, and although they were up from May’s all-time low of 282,000, they were at their second lowest level since these numbers started to be collected in 1963. The four months following the April 30 deadline for the home buyer tax credit were the four worst for new home sales in history.
Sales among the four census regions were mixed, with the Northeast and the West rising 16.7% and 54.3%, respectively, and the Midwest and South falling 26.1% and 10.8%.
Inventories of unsold new homes fell to 206,000, the lowest level since August 1968. The months’ supply declined to 8.4 months.
The median sales price fell to $204,700, down 1.2% from $207,100 a year earlier, attributable to a combination of price reductions and a shift in the marketplace to more modest homes. Homes sold in the under-$200,000 range, which tends to be dominated by first-time home buyers, picked up share.
Existing Home Sales Improve a Bit
The National Association of Realtors® (NAR) reported that existing home sales advanced modestly in August, rising 7.6% to a seasonally adjusted annual rate of 4.13 million units. This follows the dramatic 27% decline in July — an adjustment to the effects of the home buyer tax credit and its deadlines, which drew home sales that normally would have occurred in July and August forward into March and April.
While the modest rise in home sales in August was a welcome development, it was still the second lowest level since the NAR began reporting total existing home sales, which includes condominiums and coops, in 1999.
The turn-around in August was consistent across housing sectors and regions. Single-family home sales rose 7.4% from 3.37 million in July to 3.62 million, the second lowest sales rate since July 1995. Meanwhile, condominium and coop sales rose 8.5% to 510,000. Regionally, total home sales increased 7.9% in the Northeast, 5.0% in the Midwest, 5.2% in the South and 13.8% in the West.
Home affordability conditions are the best in more than a generation, with the average commitment rate for a 30-year fixed rate mortgage at a record low of 4.43% in August and the NAR median house price back down to its 2003, pre-boom level.
Although this has not been reflected in recent home sales, economic conditions and job growth are expected to improve in this year’s fourth quarter, setting the stage for a sales rebound.
Inflation Still Subdued Despite Pressure From Energy Prices
The Bureau of Labor Statistics (BLS) August Producer Price Index (PPI) for finished goods rose 0.4% from July and on a year-over-year basis was up a moderate 0.9%. August’s increase was tame for a measure that can have large monthly fluctuations; it rose 0.8% in March and 1.3% in January. This was only the second monthly increase following three months of decline.
Most of the August increase came from higher energy prices, with the PPI for energy rising 2.2%, its first monthly increase following four months of decline. Excluding food and energy, the index was up 0.1% for the month and 1.3% from a year earlier.
Building material prices rose 0.2% after falling the previous two months. On a year-over-year basis, they were up 3.6%, but were still down 1.2% from their September 2008 record high.
As with the overall PPI, most of the increase was driven by energy prices, with #2 diesel fuel up 5.8% for August and 13.2% from a year earlier. Meanwhile, always volatile copper and copper products prices rose 6.6% following three months of decline and were up 10.7% from a year earlier.
Lumber and wood products prices — which spiked in the spring due to supply bottlenecks and an uptick in demand from increased home building spurred on by the home buyer tax credit — fell 1.3%, its third consecutive monthly decline.
Although lumber prices have now receded to the levels of late 2009, they were still up 5.1% in August from a year earlier. Plywood and OSB — whose prices also spiked in the spring and have since fallen considerably from their recent highs — fell 3.6% and 20.5%, respectively. Nonetheless, they were still up 8.3% and 14.9% from August 2009.
With residential construction in a holding pattern, commercial construction in the doldrums and worldwide economic growth advancing at a modest pace, building materials prices should continue to moderate. However, any resurgence in demand could again send prices much higher in the short term as a result of plant closings and other adjustments in production to weak demand over the last four years, in addition to thin inventories held by suppliers and distributors.
Meanwhile, at the consumer level, the Bureau of Labor Statistics (BLS) August Consumer Price Index (CPI) for All Urban Consumers rose 0.3% in August, matching July’s increase. On a year-over-year basis the index was up 1.1%.
Most of the increase, as with the PPI, came from higher energy prices, with the CPI for energy rising 2.3%, its second monthly increase following three months of decline, but still up 3.8% from August 2009. Core CPI, which excludes food and energy prices, was essentially flat for the month, and up a modest 0.9% from a year earlier.
The rental component of the CPI fell slightly, 0.1%, only its second decline for the year. On a year-over-year basis, it was flat. Owner’s equivalent rent, which is largely driven by the rent index without utilities and can be used as a measure of homeownership “prices,” was essentially flat for the month, but was down 0.7% from a year earlier.
The rent and owner components of the CPI make up 31% of the CPI. The soft rental market and excess vacancies have kept rents from rising, which has been a challenge to apartment owners who have seen other costs rising. It also has made it more difficult for multifamily projects to obtain financing.
House Prices Up or Down?
According to Standard and Poor’s Case-Shiller Home Price Index (HPI), house prices continued to rise in July despite recent weak housing demand.
On a not seasonally adjusted basis, the Case-Shiller 10-city composite index (CS10) rose 0.8%, and the 20-city composite (CS20) was up 0.6%. On a seasonally adjusted basis, house prices were essentially flat, with a very slight 0.03% rise in the CS10 and a 0.12% decrease in the CS20.
According to a recent S&P report, given turmoil in the housing market in the past few years, “the S&P/Case-Shiller Home Price Index Committee believes that, for the present, the unadjusted series is a more reliable indicator,” preferring year-over-year changes. Further, “if monthly changes are considered, the unadjusted series should be used.”
The Case-Shiller HPIs are three-month moving averages of house prices, with the July HPIs including sales from May, June and July. The July readings are the first to include a month outside the home buyer tax credit window — with most contracts signed before April 30 having been concluded by the end of June. Therefore, a cooling in the HPIs was expected.
The modest rise in the Case-Shiller HPIs was welcome given the negative response of other housing market indicators in the first month following the expiration of the home buyer tax credit.
Prices rose in 13 of the 20 cities covered by the index on a not seasonally adjusted basis. The strongest growth was observed in Detroit (1.6%), New York City (1.3%), Washington, D.C. (1.1%) and Chicago (1.0%).
The weakest markets continue to be those that experienced the greatest surge in prices during the boom, with the largest declines in July in Las Vegas (-0.8%) and Phoenix (-0.6%). Surprisingly, Miami, a poster child for boom price excesses, saw its house prices rise in July, for the third consecutive month. Further, the Miami HPI was up 0.4% from a year earlier, though it was down 47% from its December 2006 peak.
Since reaching a trough in the spring of 2009, house prices have shown moderate growth. On a year-over-year basis, the CS10 index has grown 4.1% and the CS20 has risen 3.2%.
In the past year the HPI has risen in 10 of the 20 cities covered by the Case-Shiller index. The strongest growth in year-over-year prices was observed in California MSAs (Los Angeles, 8%; San Francisco, 11% and San Diego 9%) and Minneapolis (6%). The weakest markets include Las Vegas, (-5%) and Tampa, Fla. (-3%).
In counterpoint to the S&P/Case-Shiller HPI, house prices fell a modest0.5% in July according to the Federal Housing Finance Agency (FHFA) monthly purchase-only house price index (HPI), following a 1.2% drop in June. The recent declines have neutralized the house price appreciation observed earlier this year, when the FHFA HPI increased from 193.0 in February to 195.8 in May. As of July, the index had fallen back to 192.4.
The HPI fell in six of the nine census divisions, with the largest declines observed in the South Atlantic (-1.6%) and Mountain (-1.5%) divisions, which are dominated by states with the weakest economic conditions and housing markets (Florida, Arizona and Nevada).
By comparison, the Pacific division, which is dominated by California, still saw a 1.1% increase. Meanwhile, the East South Central and Middle Atlantic divisions experienced modest rises of 0.3% and 0.2%, respectively.
At this point, with the influence of the home buyer tax credit fading, it would appear that prices are stable to down slightly. Near term, modest downward pressure on house prices can be expected. However, as housing demand revives over the next few months, prices should stabilize and rise modestly.
The Consumer Remains Glum
Consumer confidence turned down in September following a slight improvement in August according to the Conference Board Index of Consumer Confidence, which fell 4.7 points to 48.5. The decline was largely driven by deterioration in the expectations index, which dropped 6.6 points to 65.4. Meanwhile, the consumer confidence index for current conditions also decreased, by 1.8 points to 23.1.
Consumers continued to be pessimistic about current and future employment prospects, with 46% (up from 45% in August) indicting that they are finding jobs hard to get and 23% (up from 20%) expecting fewer jobs in the future.
They are also concerned about business conditions, with 46.1% (up from 42%) appraising current business conditions as bad, and 16% (up from 13%) expecting business conditions to get worse before they get better.
Confidence in the housing market deteriorated in September, with only 1.9% of respondents indicating that they were planning to buy a home in the next six months — down from 2.1% in August. Around one-fifth of those planning to buy a home in September (0.4% of respondents), indicated they were considering buying a new home.
These numbers are close to record lows and are less than half of the previous minor peak in March 2006 when 4.1% of respondents indicated that they were planning to buy a home and 1.5% were planning to buy a new home.
The pessimistic employment outlook continues to restrain home buying demand. Until the outlooks for employment and business improve, we can expect housing demand to remain weak.
While the economic recovery slowed in the second and third quarters of 2010, conditions are expected to improve in the fourth quarter of 2010, with momentum building through in 2011. This will support job growth and buoy consumer confidence. As job growth strengthens and consumer confidence builds, we can expect substantial gains in housing demand through 2011 and 2012.
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 Oct. 1 edition. To subscribe to “Eye on the Economy,” click here.
Register for Fall Construction Forecast Conference Webinar on Oct. 27
The Fall Construction Forecast Conference (CFC) Webinar will feature three distinct perspectives on the housing industry and its near- and long-term future. The webinar will be held from 2:00-4:00 p.m. EDT on Wednesday, Oct. 27.
Speakers David Crowe, NAHB chief economist; Eric Belsky, managing director with Harvard University’s Joint Center For Housing Studies; and Maury Harris, managing director and chief U.S. economist with UBS, will present the latest economic data and opinion in a streamlined, efficient format that will enable attendees to interact directly with them.
The fee is $29.95 for NAHB members and home builders associations and $49.95 for non-members.
To Register
For more information and to register, visit www.nahb.org/cfc.
Visit NAHB’s ‘Eye on Housing’ Blog for the Latest Economics and Housing Policy News and Analysis
Housing and economics followers can get the latest economics and housing policy news, analysis, studies, charts and graphs from NAHB’s free new blog, “Eye on Housing,” at http://eyeonhousing.wordpress.com.
Featuring NAHB Chief Economist David Crowe, as well as observations and comments from NAHB economists Bernie Markstein, Paul Emrath, Robert Dietz, Peter Grist and Robert Denk, the blog also includes links to relevant housing stories and information from other news sources.
Blog entries will be updated on a regular basis as the news related to housing occurs. The blog also will replace the content in NAHB’s Eye on the Economy. While subscribers will still receive their regular issues of Eye on the Economy, the e-newsletter will serve primarily as a digest of the content featured on the "Eye on Housing" blog.
Readers can either visit the free blog directly at http://eyeonhousing.wordpress.com, or subscribe to the RSS feed on the blog to have the latest entries sent to them as they are posted.
Want to Know Your State’s Starts Forecast for 2010-2011?
Find out in HousingEconomic.com’s State Starts Forecast (sample).
The starts forecast include downloadable Excel tables of total, single-family and multifamily starts by region and state.
To learn more, visit www.housingeconomics.com.