2013 in Review

A year ago, I wrote about the excitement of a housing rebound that finally seemed to have legs, with all relevant indices showing positive growth.  Today, despite numerous economic and political headwinds that have been regularly buffeting the demand for new homes, I think it’s safe to say that the rebound is here to stay, but is transitioning into the next stage which will likely face steeper interest rates, tighter lending standards and higher building costs.

For the month of August 2013, seasonally adjusted annual new home sales rose by 7.9 percent over July totals to 421,000 units, and are up by 12.6 percent year-over-year.  At the same time, however, median sales prices rose by just 0.55 percent over the last year, while inventory rose from 4.6 to 5.0 months.  While the relatively tight inventory levels can be traced mostly to negative equity, fewer distressed sales and a depressed supply of new construction, the combination of higher interest rates and slumping consumer confidence is certainly contributing to a potential but temporary pull-back in activity.

According to the most recent outlook from Freddie Mac, we should expect the housing recovery to take some time, especially since the economy won’t be running at its full potential until after 2015.  Nonetheless, their chief economist notes that the market should continue to absorb these economic shocks and improve further in 2014, with 1.15 million new housing units added to the existing stock.

Builder confidence, which had climbed to 58 last August on the NAHB Housing Market Index (HMI), has since settled back to 54.  This recent dip has been largely attributed to the cost and availability of labor and buildable lots, as well as ongoing political uncertainty in Washington.  Still, according to the newly minted NAHB/First American Leading Market Index (LMI), 52 of the 350 metro areas tracked regularly have returned to or exceeded pre-recessionary levels of activity.  With a score of .85 in October based on current permits, prices and employment data, the national housing market is thus operating at 85 percent of normal capacity.

That improvement is also due to builders continuing to pull more permits and start more homes.  In August 2013, they pulled a seasonally adjusted annual total of 918,000 permits, which was down 3.8 percent from July but 11 percent higher than the same month of 2012.  Housing starts totaled 891,000 units per year in August, for an increase of just 0.9 percent since July but up by 19 percent over the last year.

For builders, however, there is definitely a concern about future profit margins, mostly due to these higher costs for materials, labor and especially land.  The Dow Jones U.S. Home Construction Index, which tracks major public builders, has also taken notice, declining by over 20 percent since last peaking at in May 2013.  Nonetheless, there is still enough confidence in the rebound for Toll Bros. to recently snap up California’s Shapell Industries and its 5,200 lots for $1.6 billion as well as for TRI Pointe Homes’ $2.7 billion merger with Weyerhauser’s own homebuilding business, which gives it access to 27,000 lots sold under brands including Pardee, Winchester and Trendmaker Homes.

After hitting the highest level in nearly four years during August, existing home sales fell for the second consecutive month in October to an annual rate of 5.12 million units. Even with this pullback, these sales have remained above year-ago levels for the last 28 months, with monthly sales totals up by 6.0 percent over October 2012.  With just 14 percent of distressed sales in the mix, sales prices rose for the 11^th consecutive month to $199,500, up 12.8 percent over the past year.
  

However, one important consequence of these rising prices has been lower affordability, which has fallen to a five-year low as home price gains have easily outpaced income growth.  According to the NAHB/Wells Fargo Housing Opportunity Index (HOI), 64.5 percent of potential homebuyers nationwide could afford the median-priced home during the third quarter of 2013 -- up substantially from the last trough of 40.4 noted in the same quarter of 2006 but down 13 percentage points from the first quarter of 2012.

Still, for the 49 percent of buyers paying cash in September – at least according to RealtyTrac – rising interest rates aren’t relevant, especially for the institutional funds which have invested up to $20 billion for over 200,000 homes added to the nation’s rental stock.  What remains to be seen is what happens when the low-hanging fruit has been picked off and these deals no longer pencil.

Indeed, may we continue to live in interesting times.