These days, with so many different economic data points to
analyze and numerous global externalities commanding attention, it can be
difficult to ascertain both the health of the national economy as well as the
trajectory of the housing market.
In
summary, however, most signs point to a market which continues to gain
strength, and in some ways is actually better than it may look at first glance.
For example, let’s look at U.S. GDP. Although the disappointing first quarter of
2015 initially showed U.S. GDP contracting by 0.7 percent, in the third and
final estimate – which includes more accurate information from various
reporting agencies – the contraction was closer to 0.2 percent. And, while negative GDP growth is certainly
not a worthy goal, over the last several years economic growth in the first
quarter of the calendar year has consistently under-performed due to a variety
of factors including extreme winter weather, port strikes and consumers nursing
post-holiday financial hangovers.
Even better, it’s not like U.S. consumers are showing
concern over this temporary swoon, and during the first half of this year have
actually shown the largest and most sustained increase in economic optimism in
over a decade.
Even more encouraging to
note is that this optimism is shared by the top, middle and bottom third of all
incomes. Consequently, look for consumer spending – which powers about 70
percent of the U.S. economy – to grow about three percent this year.
Builders are also regaining their confidence, with the
NAHB/Wells Fargo Housing Market Index rebounding to 59 in June – the highest
reading in nine months. For those
indices specifically measuring current and future sales expectations, you’d
have to go back to the last quarter of 2005 to find similarly optimistic
responses, which means that builders are certainly looking for their businesses
to improve in the months ahead.
Sales of new single-family homes, which have continued to
ebb and flow in recent years, reached a seasonally adjusted annual rate of 546,000
units in June, which was nearly 20 percent higher than the same month of 2014
and leaves a supply timeline of just 4.5 months at current sales rates.
Although this rate of sales is certainly far
less than the nearly 1.4 million new homes per year sold during the last peak
in mid-2005, it’s more than double the trough of 270,000 units noted in early
2011.
At the same time, sales of existing homes have been even
stronger, rising in May to their highest pace in nearly six years, and rising
year-over-year for eight straight months to post a 9.2 percent increase over
May of 2014. It also seems that
first-time buyers are re-entering the market, accounting for 32 percent of
sales in May versus 27 percent a year earlier.
If there is a concern here, it would be that the current
pace of new home sales is about half of what it was during the last peak, and
given the huge multiplier effect that new home construction has on local
economies, regaining some or all of that historical share of 15 to 20 percent
is critical.
Yet improvement is already
underway:
After shedding more than two
million jobs during the recession and its aftermath, construction companies
have regained about a half-million positions in the last two years alone.
Peering ahead, builders pulled 1,275,000 building permits in
May, which is not only 11.8 percent above April’s total, but over 25 percent
higher than during May of 2014. Of this
total, just 683,000 units were for single-family homes, which suggests that the
popularity of the multi-family market still has plenty of demand behind
it. At the same time, housing starts
sputtered in May, falling by about 11 percent from the previous month to
1,036,000 units (of which 680,000 were single-family homes) but still about
five percent higher than May of 2014.
Finally, there is also the issue of low inflation, which is
a primary reason why the Federal Reserve continues to keep interest rates at
historic lows.
Through the 12-month
period ending in May 2015, the Consumer Price Index was flat, and the Producer
Price Index fell by over one percent for the fourth straight month.
However, given that various indices show
housing prices continuing to rise at annual rates ranging from five to eight
percent, this disconnect between increasing housing prices versus low inflation
and flat wages is unlikely to last.
Still, because new home construction remains relatively subdued while
household formations rise, demand should continue to improve even with moderately
higher interest rates and inflation.
