2014 in Review: A Slow, Gradual Return to Normal

Last year, I wrote about a housing rebound that seemed to finally have solid legs after a few false starts since the Great Recession.  The good news for 2014 is that both the economy and the housing market have continued their slow yet gradual climb back to normal.

Indeed, the NAHB’s Leading Markets Index, which measures how well metropolitan areas are performing relative to their last ‘normal’ market, rose to .90 in the third quarter of 2014.  This means that the combination of permits, prices and employment levels are back to 90 percent of where they should be at a national level, although most of this rebound has been due to new permits and rising prices more than robust, uniform employment gains.

Still, the national job market continues to improve strongly, adding well over 200,000 jobs per month for most of the year, thereby bringing the official unemployment rate down to 5.8 percent.  Since this rate of growth is about double the pace required to reduce unemployment and under-employment, wages could soon come under pressure to rise after years of being stuck near neutral, which could counter-act the impact of future interest rate hikes and higher housing prices.

At the same time, the economic rebound has not been consistent across the country, with much stronger job growth in those states which have benefitted from the domestic energy boom, military or agricultural spending, or include small college towns.   Conversely, those states with weaker labor markets – such as Arizona, Nevada, Rhode Island or New Jersey – also continue to exhibit weaker housing fundamentals.

Nonetheless, from a confidence standpoint, both builders and consumers have been reporting positive attitudes, with the NAHB Housing Market Index rising four points in November to 58, with even stronger gains for the index measuring current sales conditions.  Consumer sentiment has recently been even stronger, rising in November to more than a seven-year high even though respondents don’t expect future income gains to keep up with inflation.

While overall housing starts did take an unexpected but small dip in October from the previous month, they still rose by nearly eight percent year-over-year.  At the same time, starts for single-family homes were still up by just over four percent between September and October to the highest rate since November of 2013.   But it was really building permits – often a forward-looking indicator of market activity – which revealed gradually building strength for housing, rising by nearly five percent in October to the highest level in nearly 6.5 years.

New home sales have also continued to climb, rising by 17 percent between September of 2013 and 2014 to an annual rate of 467,000 units, which would take 5.3 months to sell at current sales rates, down from 5.5 months the previous year.  New home median prices, however, fell to $259,000 from $269,800 during that same time period, most likely due to a higher percentage of sales in the South.

For existing homes, sales rose in October for the second straight month after a challenging spring and relatively flat summer, reaching their highest annual rate since September of 2013 as well as being above year-over-year levels for the first time in over a year.  At the same time, inventory levels fell to a 5.1-month supply, which was the lowest supply timeline since last March.  Existing home prices reached $208,300 in October, up by 5.5 percent over the same month of 2013 and marking the 32^nd straight month of year-over-year price gains.

The remodeling market is also strong, with the NAHB Remodeling Market Index matching its record high of 57 in the third quarter of 2014 even after a dip in activity earlier in the year due to an unusually harsh winter.

Looking ahead to 2015, forecasts are generally calling for continuing expansion for both the U.S. economy and its housing market.  U.S. GDP is expected to sustain its 3.0 percent growth rate due to ongoing fiscal stimulus, lower energy costs (especially for gasoline), slowly easing credit conditions and more positive business and consumer confidence.  However, a stronger dollar will likely dampen exports, and the Fed will probably start boosting its Federal funds rate sometime in 2015.

As for housing, look for housing starts to rise by another 20 percent in 2015, with most of that increase noted for single-family homes built to fulfill a large supply of pent-up supply over the past few years.  Still, as household formations increase in 2015, look for the rental market in urban markets to remain tight as rent growth exceeds inflation.