At this same time a year ago, I wrote about an economy that
was improving enough that the Federal Reserve was about to raise interest rates
for the second time since 2006, followed by up to three more hikes in 2017. However, there has also been a consequence of
this growth in the form of higher costs for land, labor and materials, making it
challenging for builders to build the types of affordable housing at a time
when new home starts are predicted to jump sharply in 2018.
U.S. GDP growth – which averaged about two percent in both
2015 and 2016 and was just 1.2 percent in 1Q 2017 ---- surged to three percent
in the second and third quarters, due mostly to increased consumer spending,
inventory investments, exports and federal government outlays. Current forecasts are suggesting this rate of
growth to improve even further to 3.3 percent in the final quarter of 2017.
Job growth, which rose by 261,000 in October, averaged 169,000
per month through the first ten months of 2017 (down 12.2 percent from the same
period of 2016), and would likely have been higher without the negative impacts
from a particularly harsh hurricane season.
Had job growth stayed on track with the average through August, job
growth through October would have been closer to 185,000 jobs per month. Moreover, October’s official unemployment
rate of 4.1 percent is the lowest reported since December 2000.
Not surprisingly, consumer confidence from both The
Conference Board and the University of Michigan surveys has risen to the
highest levels since the early 2000s, boosted in large part by the
strengthening job market. In turn, wages
have come under increasing pressure, with average hourly earnings up 2.2
percent for the 12 months ending in October.
Still, because the Federal Reserve-preferred PCE price index rose by
just 1.6 percent per year through September, it’s not clear just how many
interest rate increases we’ll see in 2018.
Complicating matters further are higher inflation indicators from both the
Producer Price Index and Consumer Price Index, which rose by 2.6 and 2.2 percent
per year through September, respectively.
Certainly one area in which we’ve seen higher inflation is
in the cost for building a new single-family home, which as of September 2017
was up by 5.2 percent year-on-year and 29.2 percent over the previous five
years. Combine that increase with tight
supply in most markets, and the result has been a decline in home affordability.
As of 3Q 2017, the NAHB/Wells Fargo Housing
Opportunity Index fell to 58.3 percent, for the lowest rate since the same
quarter of 2008, and down sharply from the last peak of 77.5 in 1Q 2012. Since 3Q 2008, median national home prices
tracked by the same report rose by 26 percent.
Single-family new home sales, which dipped in July and
August, rebounded by nearly 19 percent in September to 667,000 per year, and
were up 17 percent year-over-year. So
far in 2017, new home sales have averaged 609,000 per month, up nine percent
from the same period of 2016. At
current sales rates, existing inventory would take 5.0 months to sell, down
slightly from 5.1 a year ago.
For existing homes, lack of inventory at the lower end of the
market and rising prices have recently stunted sales, with September’s pace
down 1.5 percent from a year ago and the share of first-time buyers declining
to 29 percent from 34 percent.
Although September’s inventory did rise slightly
to 1.90 million homes – or a timeline of 4.2 months at current sales rates --
it has fallen year-over-year for 28 consecutive months. While pending home
sales in September were flat from August, they were still down 3.5 percent from
a year ago, and have fallen on an annual basis in five of the past six months.
Thankfully, there does seem to relief on the horizon. Looking ahead to 2018, FreddieMac is
predicting home builders to take up much of this slack in overall housing
inventory. Annualized housing starts, which
averaged 1.19 million for the first nine months of 2017, are forecast to rise by
another nine percent to 1.33 million in 2018, with total single-family home
sales rising by about two percent to 6.30 million units even as mortgage rates
trend slowly upward.
As for potential consequences of tax reform on the housing
market, given the high level of push-back from multiple interest groups, and with
the Senate and House versions still far apart as of mid-November, that analysis
must wait for another day.
