Housing Construction Key to Economic Recovery

The Mortgage Corner

Any doubts that housing is leading the economic recovery should be dispelled by now. Existing-home sales are projected to top 5 million units per year, as the so-called shadow inventory of distressed homes continues to fall due to pent up demand and sharply rising housing prices.

Even more telling is the surge in housing construction as builders strain to fill the demand for new homes. The U.S. Census Bureau just reported privately-owned housing starts in May were at a seasonally adjusted annual rate of 914,000. This is 6.8 percent above the revised April estimate of 856,000 and is 28.6 percent above the May 2012 rate of 711,000.

Graph: Calculated Risk

The all important single-family housing starts in May that determines whether the homeownership rate will increase were at a rate of 599,000; this is 0.3 percent above the revised April figure of 597,000. The May rate for units in buildings with five units or more was 306,000.

This is why builder confidence in the resurgence in housing construction has increased, boosting housing stocks. Builder confidence in the market for newly-built single-family homes hit a significant milestone in June, surging eight points to a reading of 52 in the just released National Association of Home Builders/Wells Fargo Housing Market Index (HMI). It is a poll of home builders, so that any number over 50 percent indicates that more builders view sales conditions as good than poor.

“This is the first time the HMI has been above 50 since April 2006, and surpassing this important benchmark reflects the fact that builders are seeing better market conditions as demand for new homes increases,” said NAHB Chairman Rick Judson. “With the low inventory of existing homes, an increasing number of buyers are gravitating toward new homes.”

Even better news is that inventories of existing homes continue to increase from record lows as banks continue to decrease their holdings of distressed homes. So far in 2013, inventory is up 14.9 percent, according to Housing Tracker. But inventory is still very low, and is down 15.8 percent from the same week last year according to Housing Tracker. 

Graph: Calculated Risk

Calculated Risk’s Bill McBride opines that inventory is well above the peak percentage increases for 2011 and 2012, which suggests that inventory is near the bottom. I believe it will continue to increase. The reason is housing values continue to increase, up as much as 25 percent from their lows in Florida, California, and Nevada, states hardest hit by the housing bust.

We reported last week that Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 0.3 percent to 106.0 in April from 105.7 in March, and is 10.3 percent above April 2012 according to the National Association of Realtors. The data reflect contracts but not closings.

And the S&P Case-Shiller Home Price Index reported the year-on-year increase of 10.9 percent is the first double-digit gain since May 2006.

The bottom line is activity in the housing sector is heating up with April existing-home sales rising 0.6 percent to an annual rate of 4.97 million. Supply, which had been very tight, poured into the market during April with 230,000 units added to lift the months supply to 5.2 from 4.7 months. The median time for a house on the market fell dramatically, to 46 days vs 62 days in March.

The only fly in this ointment is whether mortgage rates will continue to rise. The 30-year conforming fixed rate is up to 3.75 percent with a 1 point origination fee in California, 4 percent with no origination fee. That might slow the price increases, as borrowers find it harder to qualify for larger loan amounts. But they can’t go much higher if the Fed maintains it QE3 bond purchases for at least the rest of this year, which it has said it will do. We will see.

Harlan Green © 2013

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