by David Crowe — Eye on Housing
In the last few months, it has become clear that a recovery in housing has taken hold. However, this promising development has occurred during a period in which much of the rest of the economy has slowed, particularly with respect to GDP growth and job creation.
The reasons for this overall weakening are related to such headline risks as the European sovereign debt crisis, a possible growth slowdown in China and the so-called fiscal cliff in the United States, as well as ongoing household balance sheet repair and drought conditions in the heartland.
Nonetheless, improvements for residential real estate seem to be accumulating, with positive news coming from all sectors of the housing industry. The broad-based nature of these indicators suggests that housing will continue to improve in the face of other macroeconomic risks and will provide an ever-growing measure of support for the rest of the economy, in terms of job creation, household wealth gains, and improved consumer confidence. There will be monthly ups and downs and continued geographic variation, but housing now holds the ability to foster a virtuous cycle for growth.
Home building creates jobs, and Census data for the month of July indicate continued gains for construction expenditures related to single-family and multifamily building. The headline number for total private residential construction expenditures was down 1.6% for the month as measured on a seasonally adjusted annual basis. However, this number was driven by a large decline for home improvement expenditures, which were down 5.5% for the month. In contrast, single-family construction was up 1.5% on a monthly basis and up 19% year over year. From the recession low point, single-family construction expenditures are now up 40%.
For multifamily building, gains continue. Multifamily construction spending increased 2.8% during July and has grown in each of the last 10 months. Overall, spending on new multifamily units has significantly increased by 68% from its low point in August 2010.
For builders to create jobs, credit must be available to both home buyers and home builders. An ongoing frustration for the building sector has been the dearth of credit for acquisition, development and construction (AD&C) loans. Recent NAHB survey data suggest some net loosening of credit for construction loans but ongoing tightness for acquisition and development purposes.
However, FDIC data for the second quarter suggest that perhaps a turning point has arrived for the market for AD&C loans. For the first time since the first quarter of 2008, the total amount of loans outstanding for residential construction (1 to 4 units) rose on a quarter-over-quarter basis. The amount of the net increase was small (about $22 million), with the stock growing from $43.54 billion to $43.56 billion from the first to second quarter of 2012. But this means on net that more AD&C loans for home building are being originated than are being retired.
However, credit remains tight. Given current levels of housing construction, the total stock of AD&C loans should be $47 billion higher, a gap now being filled with other forms of business capital, typically on less favorable terms than traditional AD&C debt.
Supporting the positive news for home building are improving indicators of housing demand. For July, new home sales increased to 372,000 per year on a seasonally adjusted annual basis, which ties the revised May 2012 rate for the highest level since the end of the home buyer tax credit in early 2010. In fact, new home sales are improving at a faster rate than existing home sales since early Fall 2011, rising 22% over the period compared to 5% for existing home sales.
Nonetheless, after a lackluster period for existing home sales, better days appear on the horizon. The National Association of Realtors Pending Home Sales Index, a forward-looking indicator based on signed contracts, increased 2.4% in July 2012 to 101.7 from 99.3 in June. The July 2012 PHSI was 12.4% higher than the same period a year ago. The PHSI is at its highest level since April 2010 when the home buyer tax credit was about to expire, suggesting that August and September existing home sales will be higher.
Surveys of housing prices provide additional evidence of improving housing demand. And higher housing prices help the household balance sheet repair process as it improves consumer confidence.
The Case-Shiller indices of home prices increased, with both the 10-city and 20-city seasonally adjusted (SA) measures up 1% and 0.9% respectively from May to June 2012. This is the fifth straight month for steady increases in the SA indexes. Since January, the 10-city and 20-city indexes have risen 3.5% and 3.6% respectively. All but two metro areas also showed positive SA May to June changes. Dallas and Charlotte declined 0.1%
The year-over-year changes were also much more encouraging than previous reports. At 0.1% and 0.5% respectively, the 10-city and 20-city annual changes were the first positive numbers since the end of the home buyer tax credit in 2010. Thirteen of the 20 metro areas experienced year-over-year increases and the seven that saw negatives were smaller (less decline) than the previous year-over-year comparisons.
In a similar vein, data from the Federal Housing Finance Agency (FHFA) indicate house prices increased in most parts of the country both on a quarterly and annual basis, and are at or above pre-boom trend levels in almost three quarters of the states. The national FHFA purchase-only seasonally adjusted index has shown solid gains since the beginning of the year. The index increased 0.7% in June from May, 1.8% from the first quarter of 2012, and 4.0% from January of 2012. All nine Census divisions have also posted appreciable gains so far this year.
Improving housing demand applies to the multifamily sector as well.Data from the Census and Department of Housing and Urban Development Survey of Market Absorption of Apartments (SOMA) report that for newly built unfurnished rental apartments the second quarter three-month absorption rate increased to 61%, after falling to 56% during the first quarter of 2012. Completions also slightly increased for units rented during the first quarter, to 15,700 units.
A similar story played out in the for-sale multifamily sector. The three-month absorption rate for condominium and co-op units completed during the first quarter of 2012 and sold during the second quarter increased to 64%, after a 49% absorption rate at the beginning of 2012. Completions of for-sale multifamily hit a new low however, totaling only 1,500 units that were completed at the beginning of 2012 and put on the market during the second quarter.