Economic Update: The Housing Market Continues to Gain Strength

These days, with so many different economic data points to analyze and numerous global externalities commanding attention, it can be difficult to ascertain both the health of the national economy as well as the trajectory of the housing market.  In summary, however, most signs point to a market which continues to gain strength, and in some ways is actually better than it may look at first glance.

For example, let’s look at U.S. GDP.  Although the disappointing first quarter of 2015 initially showed U.S. GDP contracting by 0.7 percent, in the third and final estimate – which includes more accurate information from various reporting agencies – the contraction was closer to 0.2 percent.  And, while negative GDP growth is certainly not a worthy goal, over the last several years economic growth in the first quarter of the calendar year has consistently under-performed due to a variety of factors including extreme winter weather, port strikes and consumers nursing post-holiday financial hangovers.

Even better, it’s not like U.S. consumers are showing concern over this temporary swoon, and during the first half of this year have actually shown the largest and most sustained increase in economic optimism in over a decade.  Even more encouraging to note is that this optimism is shared by the top, middle and bottom third of all incomes. Consequently, look for consumer spending – which powers about 70 percent of the U.S. economy – to grow about three percent this year.

Builders are also regaining their confidence, with the NAHB/Wells Fargo Housing Market Index rebounding to 59 in June – the highest reading in nine months.  For those indices specifically measuring current and future sales expectations, you’d have to go back to the last quarter of 2005 to find similarly optimistic responses, which means that builders are certainly looking for their businesses to improve in the months ahead.

Sales of new single-family homes, which have continued to ebb and flow in recent years, reached a seasonally adjusted annual rate of 546,000 units in June, which was nearly 20 percent higher than the same month of 2014 and leaves a supply timeline of just 4.5 months at current sales rates.  Although this rate of sales is certainly far less than the nearly 1.4 million new homes per year sold during the last peak in mid-2005, it’s more than double the trough of 270,000 units noted in early 2011.

At the same time, sales of existing homes have been even stronger, rising in May to their highest pace in nearly six years, and rising year-over-year for eight straight months to post a 9.2 percent increase over May of 2014.  It also seems that first-time buyers are re-entering the market, accounting for 32 percent of sales in May versus 27 percent a year earlier.

If there is a concern here, it would be that the current pace of new home sales is about half of what it was during the last peak, and given the huge multiplier effect that new home construction has on local economies, regaining some or all of that historical share of 15 to 20 percent is critical.  Yet improvement is already underway:  After shedding more than two million jobs during the recession and its aftermath, construction companies have regained about a half-million positions in the last two years alone.

Peering ahead, builders pulled 1,275,000 building permits in May, which is not only 11.8 percent above April’s total, but over 25 percent higher than during May of 2014.  Of this total, just 683,000 units were for single-family homes, which suggests that the popularity of the multi-family market still has plenty of demand behind it.  At the same time, housing starts sputtered in May, falling by about 11 percent from the previous month to 1,036,000 units (of which 680,000 were single-family homes) but still about five percent higher than May of 2014.

Finally, there is also the issue of low inflation, which is a primary reason why the Federal Reserve continues to keep interest rates at historic lows.  Through the 12-month period ending in May 2015, the Consumer Price Index was flat, and the Producer Price Index fell by over one percent for the fourth straight month. 

However, given that various indices show housing prices continuing to rise at annual rates ranging from five to eight percent, this disconnect between increasing housing prices versus low inflation and flat wages is unlikely to last.  Still, because new home construction remains relatively subdued while household formations rise, demand should continue to improve even with moderately higher interest rates and inflation.