By David Crowe NAHB Chief Economist

The NAHB/Wells Fargo Housing Market Index (HMI) rose to 16 in October from 13 in September, its first monthly increase since May and a return to its June level.

All three of the components of the index— current traffic, present sales and sales expectations for the next six months — saw improvement, with the largest coming from sales expectations, which climbed five points from 18 to 23.

Along with some other small but positive housing signals, the latest HMI points to a housing market recovery from the post-tax credit falloff and a softening economy in the late spring and summer.

New job formations slowed in the second and third quarters and both businesses and consumers pulled back on purchases. The uncertainty over economic growth continues to constrain new housing despite historically low interest rates, leveling house prices and pent-up demand from unformed households.

Housing Starts Advance, Led By Single-Family

The improved builder outlook was reflected in September’s construction activity by a 4.4% increase in single-family housing starts to a seasonally-adjusted annual rate of 452,000 units. Meanwhile, single-family permits remained virtually unchanged nationally and on a regional basis fell only in the South.

Multifamily construction in September was down, registering declines of almost 10% in starts and 20% in permits. This followed an unusually high level of activity in the preceding month, and this series is often volatile. The three-month moving average of multifamily units was up 18% in September and has risen for three consecutive months, suggesting an improving environment for multifamily construction.

Completions were up 7.3% in September, their second consecutive monthly increase as builders continued to bring their inventories to market. However, single-family homes under construction fell in September for the fifth straight month, declining to the extremely low rate of 269,000 units — a new record low for data that first started being collected in 1970.

As demand returns, the pipeline of new homes may be difficult to resupply, especially with builders continuing to be denied construction loans.

New-Home Sales Improve

The auspicious signs for housing continued with September’s new-home sales, which rose 6.6% to a seasonally adjusted annual rate of 307,000, up from 288,000 in August. 

Sales were up 3.4% in the Northeast, 60.6% in the Midwest and 3.2% in the South and down 9.9% in the West. The large percentage increase in the Midwest followed a large decline in August. The August-to-September average for the region was in line with its July sales number and the last few months’ three-month moving average of sales.

Similarly, the West’s decline followed a spike in sales in August. Overall, there has been considerable volatility in the monthly regional sales numbers and this can be expected to continue even as the national numbers show a slow, but steady upward trend.

Inventories of unsold new homes in September fell to 204,000, the lowest level since July 1968. The months’ supply declined to 8.0 months.

Awaiting a pick-up in demand, builders have been keeping tight control over their inventories of homes. However, they also continue to have difficulty obtaining construction financing, and that limits their ability to replace inventory and prepare for the slow recovery.

September’s median sales price rose to $223,800, up 3.3% from $216,600 a year earlier. An increase in the share of homes sold in the $200,000 to $300,000 price range is likely responsible for the rise in the price and an indication that some move-up activity is beginning to take hold.

Existing Home Sales Also Improve

The National Association of Realtors (NAR) reported a 10% increase in existing home sales in September, building on a 7.6% rise in August.

Although a definite improvement, September’s 4.53 million sales, at a seasonally adjusted annual rate, were still 19.1% below the 5.6 million-unit pace of September 2009. About 35% of the sales were distressed —23% were foreclosure sales and 12% short sales — compared to a 29% share of distressed sales one year earlier.

Sales of foreclosed properties and short sales are painful but necessary to clear distressed properties from the housing market. First-time buyers were responsible for 32% of the September sales, down from 47% a year earlier when the first-time home buyer tax credit was available.

The rate of recovery in September’s existing home sales was consistent across categories and regions. Single-family home sales grew 10% compared to a 9.8% gain in condominium and coop sales. Single-family sales were up 11.8% in the Northeast, 14.5% in the Midwest, 9.8% in the South and 5.5% in the West.

In contrast to new home prices, median existing home prices in September slipped 1.9% to $172,600, down from $175,900 a year earlier.

House Prices — Still No Clear Direction

The change in house prices was mixed in August, but continued the pattern of stabilization that has materialized over roughly the past 18 months.

The Standard & Poor’s Case-Shiller House Price Index (HPI) eased slightly in August, with the Composite 20 (CS20) index falling 0.2% and the Composite 10 (CS10) index down 0.1% on a not-seasonally adjusted basis (NSA). As noted previously the NSA numbers may be more useful given the unusual non-seasonal forces that have affected house prices and likely undermined the seasonal adjustment process.

Contrary to the S&P HPI, the FHFA House Price Index posted modest growth in August, rising 0.1% on an NSA basis and 0.4% on a seasonally adjusted basis. The August results were the reverse of July’s, when the CS20 and CS10 were up and the FHFA index was down, suggesting that some monthly volatility can be expected on these indexes as housing continues the process of recovery.

The divergence in August in the HPIs is partially attributable to the periods they cover. The Case-Shiller indexes are a three-month moving average of house prices, while the FHFA index is calculated monthly. Both use a repeat sales method, measuring the change in the price of the same property between two sales.

The Case-Shiller August reading is based on sales from June, July and August, including sales from before and after the expiration of the home buyer tax credit, while the FHFA index, is observing sales only in August, two months beyond this point.

Price changes in the individual cities comprising the CS20 and CS10 indexes were mixed, although the magnitude of those changes tended to be small. Monthly NSA prices fell in 15 of the 20 cities, with the largest declines occurring in Phoenix (-1.32%), Dallas (-1.13), Portland, Ore. (-0.88%) and Atlanta (-0.85%). The strongest gains were found in Detroit (0.52%), Chicago (0.42%) and Washington, D.C. (0.26%).

Perhaps even more heartening, house prices for eight of the CS20 cities were up on a year-over-year basis — including San Francisco (7.8%), Los Angeles (5.4%) and Phoenix (0.4%). And two more cities — Detroit and Cleveland — were essentially flat, down by less than 0.5%. The two cities with the largest year-over-year declines were Las Vegas (-4.5%) and Tampa, Fla. (-4.1%).

Five of the nine Census divisions experienced seasonally adjusted increases, with the largest rise in the West South Central (1.50%), East North Central (1.21%) and West North Central (1.17%) divisions. Slight declines were recorded in the Mountain (-0.55%), Mid-Atlantic (-0.29%) and Pacific (-0.25%) divisions.

House prices will continue to be volatile as different parts of the country face different market conditions.

In some areas a large concentration of foreclosures is creating a sizable overhang of vacant properties, while in other areas a rough balance between supply and demand has been established. Most future price declines will be concentrated in the former areas and stable or slightly rising prices will occur in the latter areas.

Inflation Still Subdued Despite Pressure From Energy Prices

The Bureau of Labor Statistics (BLS) September Producer Price Index (PPI) for finished goods rose 0.4%, its third consecutive monthly increase.

On an unadjusted basis, finished goods advanced 4% from a year earlier. The increase was driven mainly by higher food prices, which were up 1.2% and accounted for almost two-thirds of the monthly increase in the PPI.

Higher energy prices also contributed to the rise, increasing 0.5%. Core PPI — finished goods less food and energy — advanced only a modest 0.1%. Year-over-year, the core PPI for finished goods was up 1.6%.

The price index for residential construction inputs edged down 0.1% in September. Decreases in the price indexes for lumber (-1.1%), plywood (-1.9%), oriented strand board (-13.6%), gypsum products (-2.6%) and asphalt (-8.0%) contributed to the overall decline.

These declines were offset by increases in steel products (1.2%) and copper and copper products (5.8%).

Meanwhile, the Consumer Price Index (CPI) advanced only modestly in September. The BLS reported that the CPI for all urban consumers (CPI-U) rose only 0.1%, following a 0.3% increase in August. On a year-over-year basis the index was up 1.1%.

As with the PPI, increases in the price of food and gasoline largely drove the monthly increase. The food index rose 0.2%, following a 0.3% rise in August. The energy index rose 0.7%, after a 2.3% increase the previous month. The increase in the energy index was driven by a 1.6% increase in gasoline prices.

Year-over-year, the food index was up 1.4%, while the energy index was up 3.8%.

Core CPI — all items less food and energy — was again flat, showing zero growth in both August and September. On a year-over-year basis, core CPI has grown a meager 0.8%, the lowest annual increase since March of 1961.

The shelter index in September was unchanged for the second month in a row. The owners’ equivalent rent component — which is largely driven by the rent index without utilities and can be used as a measure of homeownership “prices” — also remained at the same level for the second consecutive month.

With relatively high vacancy rates in both the owner-occupied and rental markets, the shelter index has shown little change for much of 2010. Year-over-year, the shelter index has decreased 0.4%. The shelter index makes up 32% of the CPI’s total value.

As a result, slow growth in rent and rent equivalents has been a major factor in the slow growth of the CPI over the past year.

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. 29 edition. To subscribe to “Eye on the Economy,” click here.

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.

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