Surging Construction Sector Aids Home Sales

The Mortgage Corner

Construction payrolls were a positive surprise of the January employment report, rising 36,000 for the best gain since March. Construction was soft through most of last year though it did pick up at year end.

And this is why Pending and New-home sales are doing so well. Overall construction spending fell 0.2 percent in December but spending on new single-family homes rose 0.5 percent in the month with multi-family spending up 2.8 percent.

Graph: Econoday

This is why sales of newly built, single-family homes rose 12.2 percent in 2016 to 563,000 units, the highest annual rate since 2007, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

Only public construction spending fell a sharp 1.7 percent in the month. Educational spending fell 2.2 percent with highways & streets down 0.6 percent. Private nonresidential categories (ie, commercial) are mixed with total spending for this component unchanged in the month.

“We are encouraged by the growth in the housing sector last year, and by the fact that builders increased inventory by 10 percent in anticipation of future business,” said Robert Dietz, chief economist of the National Association of Home Builders (NAHB). “NAHB’s forecast calls for continued upward momentum this year, with housing starts expected to rise 10 percent over the course of 2017.”

The inventory of new home sales for sale was 259,000 in December, which is a 5.8-month supply at the current sales pace, an improvement from the 5 percent range most of last year. The median sales price of new houses sold was $322,500, up from.

Graph: Trading Economics

So we know why housing starts, or construction, is so important in building up inventories depleted by the Great Recession. Starts jumped 11.3 percent from the previous month to a seasonally adjusted annualized rate of 1226 thousand in December of 2016, beating market expectations of 1200 thousand. Multi-segment starts rebounded while single-family declined for the second month. Considering full 2016, housing starts rose 4.9 percent to 1166.4 thousand.

“This report represents firm growth for housing in 2016, as single-family starts rose 9 percent and multifamily production was down slightly,” said NAHB Chief Economist Robert Dietz. “We expect that 2017 will be another year of gradual, steady improvement in the housing market. Multifamily starts have been volatile in recent months, but should level off as supply meets demand. Meanwhile, single-family production continues to gain momentum but is limited by supply-side headwinds.”

So housing construction is returning to normal times. Starts in the United States averaged 1438.64 thousand from 1959 until 2016, reaching an all-time high of 2494 Thousand in January of 1972 and a record low of 478 Thousand in April of 2009.

Harlan Green © 2017

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

JOLTS Jobs Report Highest In Years

Popular Economics Weekly

The U.S. Bureau of Labor Statistics reported the number of job openings was little changed at 5.8 million on the last business day of March, but it is actually up 11 percent over March 2015. Methinks the BLS is being overly modest, as it shows many more available jobs than workers, a sign of future job and economic growth.

Graph: Calculated Risk

Why do we know this? Jobs openings even increased substantially in March to 5.757 million from 5.608 million in February. And Quits are up 9 percent year-over-year, which is when workers leave voluntarily, usually because they are able to find better jobs. These are voluntary separations. (see light blue columns at bottom of graph for trend for "Quits").

Note that hires (dark blue line) and total separations (red and light blue columns stacked) are pretty close each month in the Calculated Risk graph. This is a measure of labor market turnover.  When the blue line is higher than the columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.

We also see much improvement in home building, another job creator, as construction jobs are up 1.2 million jobs from their lows, but 1.1 million below their 2006 bubble highs.

The U.S. Census Bureau of the Department of Commerce announced construction spending during March 2016 is 8.0 percent (±1.6%) above the March 2015 estimate of $1,052.9 billion. During the first 3 months of this year, construction spending amounted to $240.4 billion, 9.1 percent (±1.5%) above the $220.3 billion for the same period in 2015.

Lastly, state and local government employment has been the largest drag on job growth. This graph shows total state and government payroll employment since January 2007. State and local governments lost 129,000 jobs in 2009, 262,000 in 2010, 247,000 in 2011, and 29,000 in 2012, for a total of 669,000 jobs lost due to the Great Recession.

Graph: Calculated Risk

And through November 2015, reports Calculated Risk, state and local employment is up 70,000.   So, in the aggregate, state and local government layoffs are over - and the economic drag on the economy is over.  However state and local government employment is still 561,000 below the pre-recession peak.

So where will all the new jobs come from? There will be a pickup in manufacturing for one, but most jobs will occur in the non-manufacturing service sector, as I’ve said in past columns. That means Professional and Business Services (insurance, et. al.), construction, health care, and Real Estate, now the fastest growing segments.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Consumers' Financial Health Much Better

Consumers’ financial health has substantially improved in 2015, and their net worth has now surpassed that of pre-recession 2006, according to the Fed’s 2015 Q4 Flow of Funds report.  That is the main reason economic growth prospects have picked up in 2016.

The net worth of households and nonprofits as a percentage of Gross Domestic Product rose to $86.8 trillion during the fourth quarter of 2015, said the Fed. The value of directly and indirectly held corporate equities increased $758 billion and the value of real estate rose $458 billion.  Consumers’ net worth is now the highest in history in this graph that dates back to 1952.  This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages).
 

  

Graph: Calculated Risk

            We are in a goldlilocks economic moment, in other words.  Gas and energy prices in general are extremely low, there is almost no inflation, and we are nearing full employment.  Interest rates are also still at record lows, with fixed 30-year conforming mortgage rates still at 3.375 percent for a 1 point origination fee, which means housing will continue to contribute to growth.

 

      We know consumers are buying more because consumer debt is increasing.  January's increase in total outstanding consumer credit is an initial $10.5 billion (subject to later revisions, as more data comes in). But revolving credit, the component that tracks credit cards, fell $1.1 billion in January following December's nearly unrevised $5.5 billion increase (due to holiday spending). Even with January's dip, revolving credit has been showing strength and has been positive for consumer spending, hinting at greater willingness of the consumer to take on credit-card debt.

            And sure enough, ex-gas retail sales month-to-month expanded for seven months in a row which matches the longest streak in five years, as I’ve said. Year-on-year, ex-gas sales are at a very respectable plus 4.5 percent and reflect special strength in vehicle sales, up 6.9 percent on the year.

 

Graph: Econoday

            This is while overall construction spending rose a strong 1.5 percent in January in strength. A one-month surge in highway & street spending skewed the headline higher as did gains for manufacturing and on Federal construction projects.  Year-on-year rates include an impressive 33.9 percent gain for highways & streets which is a big category. Federal, a far smaller category, is up 9.9 percent.

Turning to the private nonresidential components, offices lead at a 24.8 percent year-on-year gain.  Demand on the multi-family side, reflecting strength in rental prices, also has been very strong with year-on-year spending up 30.4 percent vs 6.6 percent for single-family homes. Together, residential spending is up a year-on-year 7.7 percent.

We mention construct spending because construction will continue to add higher paying jobs, so important to income growth, in particular.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Housing Creating More Jobs In 2016

We predict housing in 2016 continuing to grow the economy.  This is mainly because new-home construction should surpass 1 million units again this year, and it is new-home construction (and sales), rather than existing-home sales, that adds to economic growth.

For instance, we see in the December unemployment report that 45,000 new construction jobs were created plus 73,000 jobs in Professional and Business Services, which include attorneys, accountants, insurance agents, architects and designers that work in the real estate industry. 

 

 Graph: Marketwatch

            Much will depend on interest rates this year, of course, but the conforming 30-year fixed rate has barely budged from its record low of 3.50 percent for a one point origination fee.   A 3.375 percent fixed rate is even available in California if a borrower wants to buy down the rate further.

            The best indicator of future sales is the NAR’s Pending Sales Index, which is based on signed contracts, and consistently in 2015 predicted sales in the range of 5 million to 5.5 million, similar to the level in the early 2000s.

            One reason we believe housing has more room to grow is that new-home construction hasn’t fully recovered from the Great Recession, and is the reason for lower sales of new homes. Sales have generally picked up through the year, but are running at half the rate of 2000 and 2001, when nearly 1 million newly built homes were sold. New-home sales rose in November to an annual rate of 490,000, which is far below the peak of around 1.2 million sales in 2005.

            More new-home sales will depend on increased household formation, which economists are predicting will return to 1.2 million new households per year.  Why?  The Millennial generation is beginning to buy as they marry and begin to raise children.

Some 1,071,000 construction jobs have been added since 2011, according to Calculated Risk.  And delinquency rates have returned to pre-recession levels—in fact are the lowest in history, according to Black Knight’s Mortgage Monitor Report, reports Calculated Risk’s Bill McBride.  This is perhaps the most important statistic for the housing recovery, since it means more borrowers are available to buy homes. Black Knight now calculates that approximately 5.2 million borrowers could likely both qualify for and benefit from refinancing at today’s interest rates.

            But if mortgage rates rise by even 50 basis points (i.e., 0.5 percent), some 2.1 million borrowers will no longer be eligible for refinancing, or buying another home, says Black Knight.

            So does the Fed really want to slow down or even kill the housing market, if it continues to raise their interest rates?   That is the real question.  This might not affect mortgage rates all that much, however, as mortgage rates depend on longer term interest rates and the bond market, which follows inflation. 

But we still have almost no inflation.  Higher food prices are balanced by lower gas and commodity prices in general, and which will continue to fall as the oil glut continues this year.  We believe that interest rates will therefore remain low throughout 2016. 

Why?  There is very little growth in the rest of the world, and developing countries like Russia and Brazil are already in recessions, while China’s economy stagnates. That means foreign investors will still flock to the one safe haven in times of uncertainty—U.S. Treasury Bonds—thus keeping our interest rates low.

  

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Construction, Retail Sales Higher

The Mortgage Corner

The strength of the economy right now is in the housing and construction sectors, again areas insulated from global factors, such as China’s slowdown. Construction spending, next to vehicle sales, is perhaps the week's best surprise, rising 0.7 percent for a second straight month, and 13.7 percent annually. Why? Rents are rising fast, which means many householders will start thinking about whether buying with today’s ultra-low mortgage rates as the better alternative.

Graph: Econoday

The Econoday graph shows the slope has steepened nicely in the spring and summer. The latest gain is centered in the most important component of all, single-family homes where construction spending rose 2.1 percent in the month for a year-on-year gain of 15.8 percent. Multi-family homes slowed in the month but the year-on-year rate, reflecting demand tied to high rents, is still outstanding at 21.2 percent.

Graph: Econoday

And auto sales are up a surprising 1.5 percent to a 17.8 million annual rate, with 14.1 million sales of domestic-made vehicles. The gain points to another strong month for retail sales in what would underscore the insulated strength of the domestic economy. It was outsized strength in the auto sector that supported the factory sector in June and July, though August's sales gain was centered in foreign-made vehicles. Still, sales of domestic-made cars and light trucks, which make up 80 percent of all sales, are at very strong levels.

In fact, retail sales just in this morning show a 2.2 percent annual gain, with strong sales in auto and food service. It could ave been above 3 percent if gas prices hadn’t fallen, but then would consumers be buying as much if gas prices were higher? This should mean Q3 GDP growth will again exceed 3 percent, following a revised Q2 reading of 3.7 percent by the BEA.

Graph: Calculated Risk

Will more renters be buying homes this year? The best way to compare rents to housing prices is the price-to-rent ratio. It is leveling off, which means rents are rising as fast as housing prices—some 5 percent of late. Combine that with conforming 30-year fixed mortgage rates of 3.75 percent, and we will have more renters looking to buy a home this year, at least. And the tax advantages of owning vs. renting really mean it’s more advantageous to buy over the longer term, rather than give the tax advantages to a landlord.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Unemployment Report Misleading

Financial FAQs

Today’s lower than predicted payroll creation of 173,000 jobs doesn’t change my prediction of higher jobs growth ahead. My prediction yesterday was for 250,000 payroll jobs in August, but downward seasonal adjustments reduced payrolls by -800,000. In other words 800,000 jobs were stricken from the unadjusted numbers, because it’s the end of summer and lots of summer jobs normally disappear with the back-to-schoolers this month (but -800,000?..I don’t think so.).

In fact, -293,000 construction jobs were subtracted in the seasonal adjustment, because fewer jobs were added in past years. Yet real estate construction is booming in both residential and non-residential sectors this year, so instead of -10,000 fewer seasonally adjusted construction jobs in the report, later adjustments could add some of the -293,000 jobs back.

And confirming this are past months’ revisions. The pace of hiring in July and June was stronger than initially reported, according to a survey of business establishments (i.e., the payroll survey). The Labor Department said 245,000 new jobs were created in July instead of 215,000. June’s gain was revised up to 245,000 from 231,000 for a total of 44,000 jobs added back from the seasonal adjustment figure.

Graph: Marketwatch

The good news was that governments mostly at the local level added 33,000 payroll jobs, and wages are rising. The nation’s unemployment rate fell to 5.1 percent from 5.3 percent, marking the lowest level since April 2008 just as the Great Recession was beginning.

The jobless rate is determined by a separate survey of households that showed a sharp 237,000 drop in the number of people who said they were unemployed. Only a smattering of people dropped out of the labor force.

The improvement in the labor market also appears to be forcing more companies to increase pay to attract or maintain workers. The average hourly wage paid to American workers rose 8 cents, or 0.3 percent, in August to $25.09 an hour. From August 2014 to August 2015 hourly wages rose 2.2 percent, matching the best gain of the past four years.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Construction Leads Housing, GDP Recovery

The Mortgage Corner

Pending home sales are still rising. And that’s in large part because both residential and non-residential commercial construction is in fact soaring. The U.S. Census Bureau of the Department of Commerce announced today that construction spending during July 2015 was estimated at a seasonally adjusted annual rate of $1,083.4 billion, 0.7 percent above the revised June estimate of $1,075.9 billion. The July figure is 13.7 percent above the July 2014 estimate of $952.5 billion.

Graph: Calculated Risk

This is huge, and another sign that housing this year may keep average U.S. GDP growth above 3.5 percent for the rest of 2015 and beyond, as the just revised Q2 growth rate of 3.7 percent is indicating. Housing has been the sluggard as a growth component in this recovery to date, but 2015 looks like the year that it breaks out.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, increased 0.5 percent to 110.9 in July from an upwardly revised 110.4 in June and is now 7.4 percent above July 2014 (103.3). The index has increased year-over-year for 11 consecutive months and is the third highest reading of 2015, according to the National Association of Realtors.

On a year-over-year basis, private residential construction spending is up 16 percent. Non-residential spending is up 18 percent year-over-year, and public spending is up 6 percent year-over-year, reports Commerce.

That’s also why newly built, single-family home sales rose 5.4 percent to a seasonally adjusted annual rate of 507,000 units in July, according to HUD and the U.S. Census Bureau.

“This report is in line with other government data and improving builder sentiment and shows a gradual but consistent housing recovery,” said NAHB Chief Economist David Crowe. “As job growth and consumer confidence continue to strengthen, the housing market should make additional gains this year.”

Economists had forecasted gross domestic product would be revised up to 3.3 percent in Q2, but business investment was stronger than expected. Business investment helped, but it was consumers, buoyed by low interest rates and inflation boosting their confidence in future jobs and rising incomes that got them spending again.

The Commerce Department said investment in nonresidential structures was revised to show an increase rather than a contraction, reflecting stronger spending on commercial and healthcare construction. Spending on residential construction, which includes brokers' commissions, was also raised from 6.6 to 7.8 percent. More gains are likely this quarter after the Pending-Home sale report showed an increase in contracts to purchase previously owned homes (i.e., existing-homes) in July.

The large spending uptick on private construction was at a seasonally adjusted annual rate of +1.3 percent (±1.0%). Residential construction was at a seasonally adjusted annual rate of $380.8 billion in July, 1.1 percent (±1.3%). Nonresidential construction was at a seasonally adjusted annual rate of $407.0 billion in July, 1.5 percent (±1.0%).

This can only mean more jobs are being created in construction and Professional Services in the upcoming Friday unemployment report. More good news for U.S. jobs growth, in other words.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Consumers Lead Growth, and Business Investment

Financial FAQs

The U.S. economy grew at a faster 3.7 percent annual clip in the second quarter, up from the initial estimate of 2.3 percent, the Commerce Department said Thursday. Why was that a surprise to those short sellers afraid of Chinese market contagion, now that the DOW and all stock indexes have soared over the past 2 days?

It’s a repeat performance of the past 2 years. Those severe winters stopped growth in the first quarters of 2014 and 2015, which then snapped back once the Polar Vortex deep freeze melted away. Q1 GDP grew just -0.9 and + 0.6 percent, respectively during those winters. But the Q2s rebounded to 4.6 and 3.7 percent, respectively, once Spring came. So China’s economic ups and downs have had very little effect on U.S. growth.

Graph: Trading Economics

Economists had forecasted gross domestic product would be revised up to 3.3 percent, but business investment was stronger than expected. Business investment helped, but it was consumers, buoyed by low interest rates and inflation boosting their confidence in future jobs and rising incomes that got them spending again. There were no ‘confidence fairies’ worried about budget deficits, in other words.

Consumer spending, always the main engine of U.S. economic activity, led the way. Spending was revised up to 3.1 percent from 2.9 percent in the second quarter after a sluggish 1.8 percent gain in the first three months of the year. No wonder, when eastern and Midwestern shoppers could barely venture from their homes during the deep freeze.

And newly revised figures from the Commerce Department show that businesses invested at a faster rate. Businesses increased investment by 3.2 percent increase instead of a drop of 0.6 percent, with spending on structures such as office buildings rising by 3.1 percent instead of an initial drop of 1.6 percent.

This is huge for real estate, in part due to lower interest rates holding down construction costs. But there was also a large build in retail inventories in anticipation of back to school and holiday shoppers. The value of inventories, which adds to GDP, increased by $121.1 billion in the second quarter instead of a previously estimated $110.0 billion.

In fact, it was real (after inflation) final sales to private domestic purchasers up 3.3 percent, a measure of activity without inventories, that did the most to boost GDP growth.

The bottom line is that consumer confidence is soaring to new heights, as we said yesterday. An enormous improvement in the current labor market (e.g., rock bottom initial unemployment claims) drove the consumer confidence index well beyond expectations, to 101.5 in August for a more than 10 point surge from July. A rare 6.5 percentage point drop to 21.9 percent in those describing jobs as currently hard to get points to outsized gains for the August employment report.

Why is this a surprise? With the unemployment rate down to 5.3 percent, and more than 8 million jobs created since 2008, maybe consumers are finally convinced the U.S. economic growth is for real. The gain for this confidence reading lifts the present situation component, a near term confidence reading, to 115.1 for a more than 11 point increase over July that points to consumer power for August (and maybe September, October, then into the holidays).

Graph: Econoday

With consumer spending soaring, corporate profits continue to surge, hence the increase in business investment. Just reported profits in the second quarter came in at $1.824 trillion, up a year-on-year 7.3 percent.

So let’s not forget that gas prices are closing in on $2 per gallon in many parts of the country, which holds down inflation, which in turn boosts incomes. So consumers are beginning to show they are the real beneficiaries of lower oil-energy prices, no inflation pressures, and rising incomes.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Better Economic Growth Coming?

Popular Economics Weekly

Barron’s economist Gene Epstein forecasts the possibility tomorrow’s Q2 GDP growth could be revised from 2.3 to 3.5 percent. I believe he’s a bit optimistic, but today’s snapback of stocks does mean that emerging market problems may have panicked the day traders that are seldom interested in fundamentals.

Those fundamentals are impressive—durable goods orders are up, and consumer confidence is soaring. New-home sales are advancing due to rock bottom interest rates, thanks in part to plummeting oil prices. And gas prices in some east coast areas are close to $2 per gallon. That is boosting retail sales and Fall season back to school spending.

Consumer confidence is soaring to new heights. Econoday reports “Enormous improvement in the assessment of the current labor market drove the consumer confidence index well beyond expectations, to 101.5 in August for a more than 10 point surge from July. A rare 6.5 percentage point drop to 21.9 percent in those describing jobs as currently hard to get points to outsized gains for the August employment report.”

Econoday

This reading will have forecasters scratching their heads. The gain for this reading lifts the present situation component to 115.1 for a more than 11 point increase from July that points to consumer power for August.

And consumer spending is consequently soaring. Big upward revisions underscore a very solid and very important retail sales report. Retail sales rose 0.6 percent in July with June revised to unchanged from an initial reading of minus 0.3 percent and with May revised to a jump of 1.2 percent from 1.0 percent. The revisions to June and May point to an upward revision for second-quarter GDP.

Exports have been weak but they didn't hold down July's durable orders which, for a second straight month are strong and strong nearly across the board. New orders rose 2.0 percent in the month which easily beat out top-end Econoday expectations for 1.2 percent. Excluding transportation, orders rose 0.6 percent which is near the top-end forecast for 0.7 percent. Capital goods data show special strength with nondefense ex-aircraft orders up 2.2 percent following June's 1.2 percent gain and with related shipments up 0.6 percent following a gain of 0.9 percent.

Lastly, even new-home sales have picked up, which gives a boost to economic growth within the construction, insurance, and professional occupations. New home sales rose solidly in July from a downdraft in June, up 5.4 percent to a 507,000 annual pace. Year-on-year, sales have surged, up 26 percent. The strength in sales has thinned an already tight market where supply is at 5.2 months, down from 5.3 months in June and compared with 6.1 months a year ago.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Higher Birth Rates Are Here

The Mortgage Corner

The mellennial generation, now aged 18 to 36 years, are beginning to drive higher birth rates. And that means more households being formed, which will ultimately create a higher demand for housing. Actually, a 4 million birth rate was breached in 2007, and births then declined due to the Great Recession. But the millennials are back above the 4 million birth rate again.

And housing construction is surging—no coincidence, given the rising demand for housing of any kind—rental as well as for prospective homeowners. Led by a strong jump in single-family production, nationwide housing starts inched up 0.2 percent to a seasonally adjusted annual rate of 1.206 million units in July, according to newly released data from the U.S. Department of Housing and Urban Development and the Commerce Department. This is the highest level since October 2007.

“This month’s drop in the more volatile multifamily side is a return to trend after an unusually high June,” said NAHB Chief Economist David Crowe. “While multifamily production has fully recovered from the downturn, single-family starts are improving at a slow and sometimes intermittent rate as consumer confidence gradually rebounds. Continued job and economic growth will keep single-family housing moving forward.” 

Births had declined for five consecutive years prior to increasing in 2013. They are about 7.7 percent below the peak in 2007 (births in 2007 were at the all-time high - even higher than during the "baby boom"). “I suspect certain segments of the population were under stress before the recession started,” says Calculated Risk’s Bill McBride, “- like construction workers - and even more families were in distress in 2008 through 2012. And this led to fewer babies.”

Graph: Calculated Risk

The above historical graph dates back to 1909, and the largest dip was before and during the Great Depression. It hit bottom in 1933, before beginning to rise again until it hit the baby boomer bulge of the 1950s and 60s.

This has to be the main reason home builder sentiment is at a 10-year high. The new home sector is increasingly a central source of strength for the economy and builders are increasingly optimistic, says the NAHB. The housing market index rose 1 point to a very strong 61 in August with the future sales component leading the way at 70. Current sales are at 66 with traffic continuing to lag but less so, at 45 for a 2 point gain in the month.

“Today’s report is consistent with our forecast for a gradual strengthening of the single-family housing sector in 2015,” said NAHB Chief Economist David Crowe. “Job and economic gains should keep the market moving forward at a modest pace throughout the rest of the year.”

Single-family starts rose 12.8 percent to a seasonally adjusted annual rate of 782,000 units after an upwardly revised June reading while multifamily production fell 17 percent to 424,000 units. And rising single family starts is another sure sign that more families and households are being formed.

What age group is having the most births? It is women in their 30s. The preliminary birth rate for women aged 30–34 in 2014 was 100.8 births per 1,000 women, up 3 percent from the rate in 2013 (98.0). The rate for this group has increased steadily since 2011. The number of births to women in their early 30s also increased in 2014, by 4 percent.

The rate for women aged 35–39 was 50.9 births per 1,000 women, up 3 percent from 2013 (49.3). The rate for this group has increased steadily since 2010. The number of births to women in their late 30s increased 5 percent in 2014.

Need we say more about the rising birth rate? All signs point to another upsurge in new household formation, needless to say, the main driver of real estate sales and the concomitant sectors that aid and drive RE—jobs in construction, insurance, professional fields, and banking, for starters.

Could it be that the real estate industry will drive 3 percent plus GDP growth for the rest of 2015, even if interest rates rise slightly? Rates are still at record lows with the conforming 30-year fixed rate at 3.625 percent for 1 origination point, and purchase mortgage applications still up 19 percent year over year, reports the Mortgage Bankers Association.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Housing Starts, Builder Optimism at Recovery Highs

The Mortgage Corner

Privately-owned housing starts in June were at a seasonally adjusted annual rate of 1,174,000. This is 9.8 percent above the revised May estimate of 1,069,000 and is 26.6 percent above the June 2014 rate of 927,000. This tells us the real estate recovery is beginning to contribute to economic growth as it has in past recoveries.

So-called housing starts surged nearly 10 percent last month to an annual rate of 1.17 million, just a touch below a post- recession high. Builders were especially active in the Northeast and South that suffered so much from last winter.

And single-family housing starts in June were at a rate of 685,000; this is 0.9 percent below the revised May figure of 691,000. The June rate for units in buildings with five units or more was 476,000.

Graph: Calculated Risk

“While builders are reporting overall confidence in the housing market, they continue to note difficulties accessing land and labor,” said NAHB Chief Economist David Crowe. “These headwinds appear to be affecting production gains in the single-family sector.”

Builder confidence was also the highest since 2005, according to the National Association of Home Builders. Builder confidence in the market for newly built, single-family homes in July hit a level of 60 on the just released National Association of Home Builders/Wells Fargo Housing Market Index (HMI) while the June reading was revised upward one point to 60 as well. The last time the HMI reached this level was in November 2005.

“This month’s reading is in line with recent data showing stronger sales in both the new and existing home markets as well as continued job growth,” said NAHB Chief Economist David Crowe. “However, builders still face a number of challenges, including shortages of lots and labor.”

Construction on multi-dwelling projects with five units or more soared to the highest level since 1987. Builders have devoted more effort to these kinds of projects instead of their traditional focus on single-family homes because of a growing trend toward renting, especially among younger millennials, children of the baby boomers. Greater difficulty in obtaining mortgages has also compelled some people to rent.

Yet rising demand for rental units has also forced up the cost of housing, especially amid a shortage of new units available. A separate government report on Friday showed another sizable increase in the cost of shelter in June, with housing expenses up 3 percent in the past year.

It all points to rising demand for shelter for the millennial generation that is seeing better jobs and has to begin to pay off their huge educational loans. It’s a negative sum game for both student-borrowers and the economy. According to the Consumer Financial Protection Bureau, student loan debt has reached a new milestone, crossing the $1.2 trillion mark — $1 trillion of that in federal student loan debt, says Forbes Magazine.

According to The Institute for College Access and Success (TICAS) Project on Student Debt, the average borrower will graduate $26,600 in the red.  While there are lots of stories of graduates with crippling debt of $100,000 or more, this is the case for only about 1 percent of graduates.  Yet 10 percent of college graduates accumulate more than $40,000.

That is the reason so many millennials can only afford to rent at the moment, and why rental housing construction will be the priority for builders, at least until 2020 when most of the so-called echo boomers (now aged 16 to 35) have matured into adults and begin to form their own families.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Consumers Earn and Spend More This Year

Financial FAQs

The consumer came to life in May, boosted by a 0.5 percent rise in personal income and helping to support a 0.9 percent surge in personal outlays that reflects heavy spending on autos and retail goods. The spending surge will also boost housing, already showing much better numbers, and the rest of the economy this year.

This is while the gains are not inflationary, at least yet, based on the very closely watched core Personal Consumption Expenditure (PCE) price index which edged only 0.1 tenth higher in May and is at a very benign 1.2 percent year-on-year rate which is actually down a tenth from an upward revised April.

Also, consumer optimism is absolutely as strong as it gets well beyond forecasts to 96.1, according to the University of Michigan consumer sentiment index. The expectations component, reflecting strong optimism for the jobs market, is an absolute standout, at 97.8 for a 12-year high and an 11.0 point surge from mid-month and a 13.6 point surge from final May, said Econoday. The survey is now back to early 2000 levels in this graph that dates back to 1978 and five recessions.

Graph: Calculated Risk

And such increased household incomes and employment have boosted housing construction and permits, which in turn boosts lots of ancillary sectors, such as Professional Services, Insurance, and Banking. Housing starts came in at a 1.036 million rate in May which is down 11.1 percent from the April rate, as we reported – but the April rate, which was already one for the record books, was revised even  higher to 1.165 million for, and this is no misprint, a 22.1 percent gain from March.

Graph: Econoday

Increased consumer optimism has to be why we see the gigantic surge in permits, up 11.8 percent to 1.275 million following a 9.8 percent gain in April, which means future construction growth. Permits are the leading indicator in the report and the latest permit rate is the best since way back in August 2007. Based if nothing else than on permits, the housing sector, following the heavy weather of the first quarter, is moving to the top of the economy.

For home buying, the 30 to 39 age group (blue line) is important in this Calculated Risk graph.  The population in this age group is increasing, and will increase significantly over the next 10 plus years.   From roughly 2020 this predominately home buying age group will outnumber all the other age groups in this graph that projects out to 2060.

Graph: Calculated Risk

This increase in the demand for goods and services, including housing, is in fact because of the millennial generation, as I’ve said in past columns. Its numbers have now surpassed their parents’ baby boomer generation, and will continue to expand as more become adults, enter the workforce, and raise families.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen