BuilderBytes' MetroIntelligence Economic Update for 6/19/14

Please click here to see the edition of BuilderBytes for 6/19/14 on the Web.

In this issue of the MetroIntelligence Economic Update, I covered the following indicators:

• Builder sentiment rebounds to 49 in June
• May housing starts dip from April but still up 9.4 percent year-over-year
• May building permits dip modestly from both previous month and year-over-year
• CPI rose 0.4 percent in May, up 2.1 percent over previous 12 months

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2011 in Review: A Rebound Delayed is Not a Rebound Denied

In 2011, a not-so-funny thing happened on the way to the rebound: it was delayed. Whether due to poor consumer confidence, tighter credit standards, high unemployment, delayed foreclosures or some combination of the above, it’s become clear that millions of potential households have delayed the move to their own, private abodes until the economy -- and their aspirations -- improve. But both things are actually getting better – albeit very slowly.

About a year ago, I wrote about how this doubling up with friends or relatives had actually meant that the country was technically under-housed to the tune of well over 3 million households. Given continued population growth, that is even more true now, but with the unusually slow rebound from the Great Recession, builders and developers have had to exercise yet more patience while shepherding future projects along.

However, aside from continued troubling signs from Europe, the economic news is gradually beginning to improve. For example, U.S. GDP, which squeaked along at 0.4% and 1.3% in the first and second quarters of 2011, respectively, accelerated to 2.0% by the third quarter. Retail sales are up, led mostly by gains in cars and electronics. Both business sales and industrial production are rising, and the consumer price index recently declined, suggesting that inflation is being kept in check.

From the point of view of the building community, sentiment is beginning to improve after multiple months of treading water, with the NAHB/Wells Fargo Housing Market Index rising to 20 in November, or the highest level noted since May of 2010. In addition, the national Housing Opportunity Index (which measures housing affordability) has been consistently rating above the 70% mark since the beginning of 2009. According to the Improving Market Index, 30 metro areas made the list for November as the homeownership rate reversed months of decline to rebound slightly to 66.1%, and housing prices seem to have stabilized in most places.

Even building permits, which had struggled throughout most of 2011 to match 2010 levels, are finally rising, although that’s mostly due to the year-to-date performance of the multi-family sector (+32%) versus declines for single-family permits (-8.4%). Still, October’s permits were the highest since December 2010 for single-family homes and October 2008 for multi-family units.

Nonetheless, there remain considerable headwinds weighing on the nation’s housing market. The economy is simply not where it should be at this stage of the business cycle, which has meant continued weakness in the job market. Both pending home sales and the remodeling market continue to struggle, and annualized new home sales remain stuck at about 300,000 units with an inventory timeline of just over six months. Annualized sales of existing homes continue to hover close to the five-million-unit level with an inventory timeline of about 8.5 months

Moreover, looking towards the long term, there is a concern that the weakness in the housing market over the past few years will have a larger impact on household formations, due mostly to both marriages and new births being delayed by those in their 20s and 30s. Indeed, up to two million such households which would otherwise be looking for their own homes have had to postpone those plans due to economic or social duress.

And of course a lower birth rate could certainly put additional pressure on long-term safety nets such as Social Security and Medicare, which require a robust tax base to meet promised obligations. But hopefully that’s a problem which will be more than reversed as the nation’s builders eventually gear up to address the pent-up demand silently but steadily building up nationwide.

New construction and home prices fall, foreclosures rise but builder sentiment rises

Do the nation's homebuilders see something in the latest data releases that the rest of us are missing?

First, a CNNMoney.com story reveals that August foreclosures hit another record:

Foreclosures hit another record high in August: 304,000 homes were in default and 91,000 families lost their houses.

More than 770,000 homes have been repossessed by lenders since August 2007, when the credit crunch took hold...

The 27% jump over last August represents a more modest year-over-year increase than in previous months, but that's only because the housing crisis was already underway in August 2007, which saw a big spike in foreclosures...

Fannie Mae (FNM, Fortune 500) chief economist Doug Duncan isn't surprised by the swelling numbers. "It's been my view for a long time that foreclosures won't peak until the last three months of 2008," he said.

And now that the nation in a recessionary economy, with job losses exceeding 400,000 a month, Duncan speculates that the foreclosure crisis may be drawn out even longer.

"We've been saying that the foreclosure trend has not yet peaked," said Doug Robinson, a spokesman for the foreclosure prevention organization NeighborWorks America. "Before it was a subprime problem," he said. "Now, it's everybody's problem."

Secondly, another story at CNNMoney.com tells us that new home construction is at a 17-year low (which should be good for whittling down inventory):

Construction of new homes and apartments fell to its lowest level in 17 years last month, showing the country is still gripped by a severe housing downturn that has triggered billions of dollars of losses and is reshaping the structure of U.S. finance.

The Commerce Department reported Wednesday that housing construction dropped a surprise 6.2% last month to a seasonally adjusted annual rate of 895,000 units. That's the slowest building pace since January 1991, another period when housing was going through a painful correction.

The decline is larger than the 1.6% drop analysts expected and showed weakness in all the country except the West...

For August, the 6.2% drop in housing construction reflected a 1.9% decline in single-family construction, which fell to an annual rate of 630,000 units. Construction of multifamily units fell by 15.1% to an annual rate of 265,000 units...

Building activity was down in all parts of the country outside of the West. Construction fell by 14.5% in the Northeast and was down 13.6% in the Midwest and 7.4% in the South.

All the declines left construction activity 33.1% below the level of a year ago. Analysts believe that construction will continue falling for many more months as builders struggle to reduce the backlog of unsold new homes in a market that continues to slump.

Building permits, considered a good indicator of future activity, dropped 8.9% in August to an annual rate of 854,000 units.

Thirdly, the Federal Housing Finance Agency reports via AP that home prices fell by 5.3% since last year, and are now at October 2005 levels (of course their methodology is different than that employed by the S&P/Case-Shiller Index, which compares sales of the same home over time):

Nationwide home prices in July fell a record 5.3 percent compared with a year ago, a government agency said Tuesday, and have now receded to October 2005 levels.

Prices were down 0.6 percent from June on a seasonally adjusted basis, according to the Federal Housing Finance Agency...

The housing agency’s director, James Lockhart, suggested Tuesday that mortgage finance companies Fannie Mae and Freddie Mac could loosen lending standards to help more homebuyers qualify for a loan and stabilize the market. The government took control of Fannie and Freddie earlier this month...

Lockhart explained the government had little option but to seize control of Fannie Freddie. Both companies, he said, were unable to raise money to gird against losses without aid from the government.

Without new money, the only other option was to stop doing new business and shed assets in a weak market. “That would have been disastrous for the mortgage markets and mortgage rates would have continued to move higher,” Lockhart said.

But rates are creeping back up.

The national average rate on a 30-year, fixed rate mortgage rose to 6.26 percent on Monday up from 6.11 percent on Friday as details of the government’s rescue plan remained in flux, according to financial publisher HSH Associates. The rate had fallen as low as 5.87 percent last Tuesday.

So why are builders optimistic? Because the latest survey was taken earlier in September, prior to the latest financial meltdown. From a CNNMoney.com story:

Battered housing developers are getting a bit more optimistic about their prospects for the next six months, an index of the sector's confidence showed Tuesday.

The National Association of Home Builders/Wells Fargo housing market index rose two points to 18 this month from an all-time low of 16 in July and August.

The survey was taken in the first 10 days of September, and for the most part doesn't reflect the fall in mortgage rates since the government's takeover of mortgage finance companies Fannie Mae and Freddie Mac. It also doesn't take into account this week's Wall Street turmoil, which may push rates downward as nervous investors move into government bonds...

Builders have been slammed by a combination of falling home prices, soaring foreclosures and an oversupply of unsold homes languishing on the market. But the industry is growing hopeful that consumers will finally take advantage of deeply discounted prices.

Another key reason for the improving outlook: a temporary $7,500 tax credit for first-time homebuyers passed by Congress this summer. The credit essentially works out to a 15-year, interest-free loan.

Many in the industry "are sensing that home sales are nearing a turning point," Sandy Dunn, a homebuilder from Point Pleasant, W.Va. and the trade group's president, said in a statement. New home sales likely will stabilize by year-end, Seiders predicts.

All three components of the index improved, with the largest gain in the index of builders' sales expectations over the next six months. That gauge rose by six points to 30.

Gains in builder confidence were seen across the United States, with the largest gain in the Northeast, where confidence rose by six points...

Still, many in the industry are worried about the cancellation of popular programs that let sellers channel down payment money to cash-strapped homebuyers via charities. Those seller-financed down payment assistance programs were eliminated in the housing bill passed over the summer because homebuyers who used them had high default rates.