Friday, May 22, 2015

Housing Construction Surge—Sign of Better Times?

The Mortgage Corner

U.S. housing starts jumped to their highest level in nearly 7-1/2 years in April and permits soared, hopeful signs for an economy that is struggling to regain strong momentum after a dismal first quarter. And that is exciting economists that say it could mean better economic growth ahead.

The strength in housing stands out from the weakness in consumption, business spending and manufacturing, which have prompted economists to lower their second-quarter growth estimates and raised doubts that the Federal Reserve will raise interest rates before the end of the year.

Of course lower interest rates were the main factor, as housing affordability has been increasing this year, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI).

In all, 66.5 percent of new and existing homes sold between the beginning of January and end of March were affordable to families earning the U.S. median income of $65,800, said the report. “This is up from the 62.8 percent of homes sold that were affordable to median-income earners in the fourth quarter.

Groundbreaking for new construction surged 20.2 percent to a seasonally adjusted annual pace of 1.14 million units, the highest since November 2007, the Commerce Department said on Tuesday. The percent increase was the biggest since February 1991. March's starts were revised up to a 944,000 unit rate instead of the previously reported 926,000 unit rate.


Graph: Calculated Risk

And privately-owned housing units authorized by building permits in April were at a seasonally adjusted annual rate of 1,143,000. This is 10.1 percent above the revised March rate of 1,038,000 and is 6.4 percent above the April 2014 estimate.

"The rebound in permits points to solid starts and construction in the months ahead. After the weather-related weakness in starts during Q1, we think the April data are consistent with housing activity returning to normal," wrote Barclays economists.

For the second straight quarter, Syracuse, N.Y. remained the nation’s most affordable major housing market, as 95.6 percent of all new and existing homes sold in the first quarter of 2015 were affordable to families earning the area’s median income of $68,500. Whereas San Francisco-San Mateo-Redwood City, Calif. was the nation’s least affordable major housing market. Just 14.1 percent of homes sold in the first quarter were affordable to families earning the area’s median income of $103,400.

So where are the signs of higher economic growth ahead? The one statistic showing strength, with the latest downturns in consumer confidence, industrial production, and retail sales is Weekly Initial Unemployment claims. These state reports aren’t guesses or projections, but actual reports from state unemployment departments.


Graph: Econoday

Jobless claims are way down and are easily sending out the strongest positive signals of any indicator, employment or otherwise, claims Econoday. Claims data go all the way back to 1948 and have rarely been this low. Initial claims were last this low back in March and April 2000 when they averaged 272,500.

The current 4-week average out to May 9 is at 271,750, this at a time when the civilian labor force, at 157.1 million, is 10 percent larger than it was back in 2000. Continuing claims tell the same story, at a 15-year low of 2.229 million. The unemployment rate for insured workers is very low, at only 1.7 percent, and overall unemployment rate for nonfarm payroll workers has fallen to 5.4 percent.

So consumers have to be saving more of their increased earnings, at present. And since stocks and bond returns seem to have topped out from their multi-year rally with little room for more growth, housing has to be the one area that can play catchup.

One sign of this is evidenced by investors making more all cash purchases, of late.

And Canaccord Genuity equity strategist Tony Dwyer made a similar point Tuesday in a note to clients, writing that the "acceleration in the number of millennials turning 30 over the next six years,” in a recent CNBC interview. “... could ramp household formations," particularly given the "positive employment outlook" and "low household debt service ratio."

What is the catalyst? Housing formation is recovering, which is largely due to Millennials moving out of their parents homes, or higher education venues. Based on unusually low household formation numbers, "there's a ton of people living in basements," Fundstrat Global Advisors' Tom Lee said in a recent interview with CNBC's "Trading Nation." "Two quarters of pretty decent household formation isn't getting everybody out of the basement. I think this means we have multiple years where household formations are well over 1.3 million, 1.4 million."


Graph: CNBC

Household formation had dipped as low as 360,000 per annum in recent years, due to the housing bust. Is this another sign that the housing market is finally into a sustainable growth pattern? This selling season should tell.

Harlan Green © 2015

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