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New Home Sales Remain Relatively Flat in February

Robert Dietz2023-03-23T10:23:51-05:00

Higher mortgage rates and home prices, as well as increased construction costs contributed to lackluster new home sales in February, but signs point to improvement later in the year. Sales of newly built, single-family homes in February increased 1.1% to a 640,000 seasonally adjusted annual rate from a downwardly revised reading in January, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. However, new home sales are down 19% compared to a year ago. Builders continue to face challenges in terms of higher interest rates, elevated construction costs, and access to critical materials like electrical transformers. Access to AD&C financing will also be a challenge for builders in the coming months due to recent banking system stress. Nonetheless, the lack of existing home inventory means demand for new homes will rise as interest rates decline over the coming quarters. Indeed, there was an increase for sales of homes not yet started construction in February. There were 15,000 such sales in February (non seasonally adjusted). This is the highest monthly total since March 2022. A new home sale occurs when a sales contract is signed or a deposit is accepted. The home can be in any stage of construction: not yet started, under construction or completed. In addition to adjusting for seasonal effects, the February reading of 640,000 units is the number of homes that would sell if this pace continued for the next 12 months. New single-family home inventory fell for the fifth straight month. The February reading indicated an 8.2 months’ supply at the current building pace. A measure near a 6 months’ supply is considered balanced. However, single-family resale home inventory stands at a reduced level of 2.5 months per NAR. The median new home sale price rose in February to $438,200, up 2.5% compared to a year ago. Elevated costs of construction have contributed to a rise in home prices. A year ago, roughly 15% of new home sales were priced below $300,000, while that share is now just 10% of homes sold. Regionally, on a year-to-date basis, new home sales fell in all regions, down 29.2% in the Northeast, 21.3% in the Midwest, 7.3% in the South and 40.6% in the West. Related ‹ The Fed Raises Again but Takes a More Dovish ToneTags: economics, home building, housing, new home sales, new sales, single-family

New Home Sales Remain Relatively Flat in FebruaryRobert Dietz2023-03-23T10:23:51-05:00

The Fed Raises Again but Takes a More Dovish Tone

Robert Dietz2023-03-22T15:18:59-05:00

The Federal Reserve’s monetary policy committee raised the federal funds target rate by 25 basis points but indicated that it was moving to a more data dependent mode as markets digest incoming risks for banks. The Fed is balancing two economic risks: ongoing elevated inflation and emerging risks to the banking system. Chair Powell noted that near-term uncertainty is high due to these risks, as well as impacts from policy actions taken to shore up liquidity. Today’s increase of the fed funds rate moved that target to an upper rate of 5%. The Fed’s projections indicate that additional increases may be in store to achieve the level of tightening necessary to ultimately bring inflation back, over time, to the Fed’s target of 2%. The “may” in the prior sentence is intentional, as the more dovish tone of the Fed’s communication moves away from prior statements that additional firming of monetary policy is required without question. The Fed noted: “The Committee will closely monitor incoming information and assess the implications for monetary policy. The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.” Acknowledging the issues affecting a few regional banks, the Committee wrote: “The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.” These challenges will result in tighter credit conditions, which will slow the economy and reduce inflation. The bond market appears to be expecting the Fed to cut rates during the second half of the year. However, this runs counter to communication from Fed leadership, who have suggested that higher rates need to remain in place over a longer period of time to successfully bring inflation lower. As we noted with the release of the March NAHB/Wells Fargo Housing Market Index, the health of the regional and community bank system is critical to the availability of builder and developer financing, for for-sale, for-rent and affordable housing construction. We expect these conditions to tighten and will continue to monitor lending conditions via NAHB industry surveys. Additionally, financial market stress, and possible sales of mortgage-backed securities (MBS) by some smaller banks, are likely to increase the spread between the 10-year Treasury rate and the typical 30-year fixed rate mortgage. Last week, the spread widened to approximately 300 basis points, which is well above more normalized levels. It is worth noting that the Fed did not provide any guidance indicating that it would accelerate its balance sheet roll off (after a nearly $300 billion increase for the balance sheet last week), which is good news for housing markets. We still forecast that the top interest rates for mortgages this cycle were experienced last October, and that mortgage rates will trend lower from current levels later in 2023. The Fed also issued its new summary of economic projections. The Fed is projecting only 0.4% GDP growth in 2023 and just 1.2% for 2024. The unemployment rate is expected to increase only to 4.6% by 2024, which is below the NAHB economic outlook for labor markets given ongoing tightening of financial conditions. The Fed sees the core PCE measure of inflation of 3.6% in 2023, and then declining to 2.6% in 2024 and 2.1% in 2025 as inflation, grudgingly, returns to the Fed’s target. Slowing rent growth will be an important element of this slowing of inflation pressure. The Fed’s projected top federal funds rate is 5.1% for 2023 and then falling as the Fed eases to 4.3% to 2024 and 3.1% in 2025. The long-term rate is projected to be 2.5% suggesting easing will occur from 2024 through 2026 as markets normalize. This suggests a good runway for home building growth during the second half of the 2020s, a period of time when the structural housing deficit will be reduced. Related ‹ Existing Home Sales Surged in FebruaryTags: economics, FOMC, home building, housing

The Fed Raises Again but Takes a More Dovish ToneRobert Dietz2023-03-22T15:18:59-05:00

Single-Family Starts Remain Lackluster but Will Rebound Later This Year

Robert Dietz2023-03-16T09:18:45-05:00

Single-family production remained at an anemic pace in February as builders continue to wrestle with elevated mortgage rates, high construction costs and tightening credit conditions that threaten to be exacerbated by recent turmoil in the banking system. Led by gains in apartment construction, overall housing starts in February increased 9.8% to a seasonally adjusted annual rate of 1.45 million units, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. The February reading of 1.45 million starts is the number of housing units builders would begin if development kept this pace for the next 12 months. Within this overall number, single-family starts increased 1.1% to an 830,000 seasonally adjusted annual rate. However, this remains 31.6% lower than a year ago. The multifamily sector, which includes apartment buildings and condos, increased 24% to an annualized 620,000 pace. Despite persistent supply-side challenges, rising builder confidence is signaling a turning point for home building later in 2023. A significant amount of housing demand exists on the sidelines and resale inventory is limited. Starts were up in February given a limited pullback for interest rates. We expect volatility in the months ahead as ongoing challenges related to construction material costs and availability continue to act as headwinds on the housing sector. However, interest rates are expected to stabilize and move lower in the coming months, and this should lead to a sustained rebound for single-family starts in the latter part of 2023. On a regional basis compared to the previous month, combined single-family and multifamily starts were 16.5% lower in the Northeast, 70.3% higher in the Midwest, 2.2% higher in the South and 16.8% higher in the West. Overall permits increased 13.8% to a 1.52 million unit annualized rate in February. Single-family permits increased 7.6% to a 777,000 unit rate. Multifamily permits increased 21.1% to an annualized 747,000 pace. Looking at regional permit data compared to the previous month, permits were 2.8% lower in the Northeast, 9.6% higher in the Midwest, 10.9% higher in the South and 30.0% higher in the West. The number of single-family units under construction is 734,000 homes. This is down 11.4% from May 2022, the cycle peak. The number of apartments under construction is 957,000. This is the highest total since Nov 1973. Given the declining pace for single-family starts in 2022, more homes are being completed than starting construction. In February, 58,600 single-family homes started construction. However, 77,100 completed construction. This difference is responsible for the ongoing decline in the number of single-family units under construction, as displayed in the chart above. Related ‹ Concrete Products Lead Building Materials Prices HigherTags: home building, housing, housing starts, multifamily, single-family, starts

Single-Family Starts Remain Lackluster but Will Rebound Later This YearRobert Dietz2023-03-16T09:18:45-05:00

Builder Confidence Edges Higher in March but Future Outlook Uncertain

Robert Dietz2023-03-15T09:17:34-05:00

Although high construction costs and elevated interest rates continue to hamper housing affordability, builders expressed cautious optimism in March as a lack of existing inventory is shifting demand to the new home market. Builder confidence in the market for newly built single-family homes in March rose two points to 44, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This is the third straight monthly increase in builder sentiment levels. While financial system stress has recently reduced long-term interest rates, which will help housing demand in the coming weeks, the cost and availability of housing inventory remains a critical constraint for prospective home buyers. For example, 40% of builders in our March HMI survey currently cite lot availability as poor. And a follow-on effect of the pressure on regional banks, as well as continued Fed tightening, will be further constraints for acquisition, development and construction (AD&C) loans for builders across the nation. When AD&C loan conditions are tight, lot inventory constricts and adds an additional hurdle to housing affordability. Meanwhile, the HMI survey shows that builders had better than anticipated new home sales during the past two months because of continued use of incentives and price discounts. Thirty-one percent of builders said they reduced home prices in March, the same share as in February, but lower than the 36% that was reported last November. And 58% provided some type of incentive in March, about the same as the 57% who did in February, but lower than the 62% of builders who offered incentives in December. Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor. The HMI index gauging current sales conditions in March rose two points to 49 and the gauge measuring traffic of prospective buyers increased three points to 31. This is the highest traffic reading since September of last year. The component charting sales expectations in the next six months fell one point to 47. Looking at the three-month moving averages for regional HMI scores, the Northeast rose five points to 42, the Midwest edged one-point higher to 34, the South increased five points to 45 and the West moved four points higher to 34. The HMI tables can be found at nahb.org/hmi Related ‹ Inflation Eased Despite Sticky Housing CostsTags: hmi, home building, housing, single-family

Builder Confidence Edges Higher in March but Future Outlook UncertainRobert Dietz2023-03-15T09:17:34-05:00

Permits Decline At The Start of 2023

Danushka Nanayakkara-Skillington2023-03-14T09:27:13-05:00

By Danushka Nanayakkara-Skillington on March 14, 2023 • Over the first month of 2023, the total number of single-family permits issued year-to-date (YTD) nationwide reached 53,062. On a year-over-year (YoY) basis, this is 36.4% below the January 2022 level of 83,404. Year-to-date ending in January, single-family permits declined in all four regions. The Northeast posted a decline of 20.3%, while the West region reported the steepest decline of 46.9%. The Midwest declined by 39.1% and the South declined by 33.5% in single-family permits during this time. The South posted an increase of 16.4% in multifamily permits while the other three regions posted declines. Multifamily permits were down 33.1% in the Northeast, down 24.2% in the Midwest, and down 11.1% in the West. Between January 2022 YTD and January 2023 YTD, the District of Columbia, North Dakota, and New Mexico saw growth in single-family permits issued. The District of Columbia recorded the highest growth rate during this time at 20.0% going from 10 permits to 12. Forty-eight states reported a decline in single-family permits during this time ranging from 2.9% decline in New Jersey to 60.7% decline in Arizona. The ten states issuing the highest number of single-family permits combined accounted for 65.6% of the total single-family permits issued. Year-to-date, ending in January, the total number of multifamily permits issued nationwide reached 47,936. This is 2.0% below the January 2022 level of 48,912. Between January 2022 YTD and January 2023 YTD, 23 states and the District of Columbia recorded growth, while 26 states recorded a decline in multifamily permits. Rhode Island reported no change. The District of Columbia led the way with a sharp rise in multifamily permits from four to 788 while Maine had the largest decline of 83.0% from 147 to 25. The ten states issuing the highest number of multifamily permits combined accounted for 69.1% of the multifamily permits issued. At the local level, below are the top ten metro areas that issued the highest number of single-family permits. Top 10 Largest SF Markets January 2023 (# of units YTD, NSA) YTD % Change(compared to Dec 2021) Houston-The Woodlands-Sugar Land, TX 2,692 -40% Dallas-Fort Worth-Arlington, TX 2,244 -44% Atlanta-Sandy Springs-Roswell, GA 1,348 -41% Charlotte-Concord-Gastonia, NC-SC 1,324 -19% Phoenix-Mesa-Scottsdale, AZ 1,102 -63% Orlando-Kissimmee-Sanford, FL 1,077 -32% Tampa-St. Petersburg-Clearwater, FL 954 -35% New York-Newark-Jersey City, NY-NJ-PA 945 -4% Nashville-Davidson–Murfreesboro–Franklin, TN 900 -34% Austin-Round Rock, TX 892 -59% For multifamily permits, below are the top ten local areas that issued the highest number of permits. Top 10 Largest MF Markets January 2023 (# of units YTD, NSA) YTD % Change(compared to Dec 2021) Houston-The Woodlands-Sugar Land, TX 3,574 147% Atlanta-Sandy Springs-Roswell, GA 2,359 318% Dallas-Fort Worth-Arlington, TX 2,336 -18% New York-Newark-Jersey City, NY-NJ-PA 1,638 -55% Washington-Arlington-Alexandria, DC-VA-MD-WV 1,430 2% Miami-Fort Lauderdale-West Palm Beach, FL 1,384 21% Denver-Aurora-Lakewood, CO 1,367 162% Raleigh, NC 1,223 112% Tampa-St. Petersburg-Clearwater, FL 1,156 1462% San Antonio-New Braunfels, TX 983 -38% Related ‹ Employment Situation in January: State-Level AnalysisTags: home building, multifamily, single-family, state and local markets, state permits

Permits Decline At The Start of 2023Danushka Nanayakkara-Skillington2023-03-14T09:27:13-05:00

Significant Drop for Construction Job Openings

Robert Dietz2023-03-08T20:15:46-06:00

The count of open, unfilled jobs for the overall economy declined slightly in January, falling to 10.8 million, after an 11.2 million reading in December, which was the highest level since July. The count of total job openings should fall in 2023 as the labor market softens and the unemployment rises. From an inflation perspective, ideally the count of open, unfilled positions slows to the 8 million range in the coming quarters as the Fed’s actions cool inflation. While higher interest rates are having an impact on the demand-side of the economy, the ultimate solution for the labor shortage will not be found by slowing worker demand, but by recruiting, training and retaining skilled workers. The construction labor market saw a more significant decline for job openings in January as the housing market cools. The count of open construction jobs decreased from a revised data series high of 488,000 in December to just 248,000 in January. Not only is this a significant decline from the January 2022 reading of 396,000, but the January 2023 levels marks the lowest estimate for construction sector job openings since October 2020. The construction job openings rate declined to 3% in January after a 5.8% data series high in December 2022. The January 2023 job openings rate was the lowest since April 2020. The combination of these estimates points to the construction labor market having peaked in 2022 and now entering a cooling stage as the housing market weakens. Despite the weakening that will occur in 2023, the housing market remains underbuilt and requires additional labor, lots and lumber and building materials to add inventory. Hiring in the construction sector increased to a 5% rate in January. The post-virus peak rate of hiring occurred in May 2020 (10.4%) as a post-covid rebound took hold in home building and remodeling. Construction sector layoffs ticked up to a 2.2% rate in January. In April 2020, the layoff rate was 10.8%. Since that time, the sector layoff rate has been below 3%, with the exception of February 2021 due to weather effects. Nonetheless, the layoff rate has been above 2% for four of the last five months, which is consistent with a weakening trend. Looking forward, attracting skilled labor will remain a key objective for construction firms in the coming years. While a slowing housing market will take some pressure off tight labor markets, the long-term labor challenge will persist beyond the ongoing macro slowdown. Related ‹ Mortgage Activity Increases Despite Mortgage Rate VolatilityTags: economics, home building, housing, JOLTS

Significant Drop for Construction Job OpeningsRobert Dietz2023-03-08T20:15:46-06:00

Missing Middle Housing Production Lags

Robert Dietz2023-02-24T07:30:23-06:00

By Robert Dietz on February 23, 2023 • The missing middle construction sector includes development of medium-density housing, such as townhouses, duplexes and other small multifamily properties. While townhouse construction has trended higher in recent quarters, the multifamily segment of the missing middle (apartments in 2- to 4-unit properties) has disappointed. For 2021, there were only 12,000 starts of such residences. This is flat from from 2020, during a period of time when most construction segments expanded. For 2022, the total increased but to only 16,000. Nonetheless, this marks the best year for this type of multifamily construction since the Great Recession. For the fourth quarter of 2022, there were just 3,000 2- to 4-unit housing unit construction starts. This is flat from a year prior. As a share of all multifamily production, 2- to 4-unit development was only 2.2% of the total for the fourth quarter. In contrast, from 2000 to 2010, such home construction made up a little less than 11% of total multifamily construction. Construction of the missing middle has clearly lagged during the post-Great Recession period and will continue to do so without zoning reform focused on light-touch density. Related ‹ Multifamily Built-for-Rent Share RisesMultifamily Developer Confidence Remains in Negative Territory in Fourth Quarter ›Tags: economics, home building, housing, missing middle, multifamily

Missing Middle Housing Production LagsRobert Dietz2023-02-24T07:30:23-06:00

Multifamily Built-for-Rent Share Rises

Robert Dietz2023-02-22T08:15:30-06:00

By Robert Dietz on February 22, 2023 • According to NAHB analysis of quarterly Census data, the count of multifamily, for-rent housing starts remained elevated during the fourth quarter of 2022. For the fourth quarter, 133,000 multifamily residences started construction. For 2022 as whole, 525,000 rental apartments started construction. The market share of rental units of multifamily construction starts increased to almost 98% as the already small condo market retreated on higher interest rates. In contrast, the historical low share of 47% was set during the third quarter of 2005, during the condo building boom. An average share of 80% was registered during the 1980-2002 period. For the fourth quarter, there were just 3,000 multifamily condo construction starts. This is less than half the total from a year ago. An elevated rental share of multifamily construction is holding typical apartment size below levels seen during the pre-Great Recession period. According to fourth quarter 2022 data, the average square footage of multifamily construction starts ticked down to 1,042. The median increased to 1,001 square feet. Related ‹ Existing Home Sales Continue to Fall in JanuaryTags: economics, home building, multifamily, multifamily built for rent, multifamily size

Multifamily Built-for-Rent Share RisesRobert Dietz2023-02-22T08:15:30-06:00

Additional Declines for New Home Size

Robert Dietz2023-02-21T08:16:33-06:00

By Robert Dietz on February 21, 2023 • An expected impact of the pandemic was a need for more residential space, as people use homes for more purposes including work. During the housing boom after covid, this led to a rise for new single-family home size. However, as the housing market weakens on lower affordability conditions, this trend has reversed. According to fourth quarter 2022 data from the Census Quarterly Starts and Completions by Purpose and Design and NAHB analysis, median single-family square floor area declined significantly to 2,203 square feet (the lower level since 2011). Average (mean) square footage for new single-family homes fell to 2,472. Since Great Recession lows (and on a one-year moving average basis), the average size of new single-family homes is now 4.7% higher, while the median size is 8.2% higher. However both measures will weaken in the coming months. Home size rose from 2009 to 2015 as entry-level new construction was constrained. Home size declined between 2016 and 2020 as more starter homes were developed. Going forward we expect home size to face opposing determinants. A shift in consumer preferences for more space due to the increased use and roles of homes (for work among other purposes) will increase the demand for space, while tighter budgets due to elevated interest rates will reduce demand. The tighter budget factor is likely to dominate in coming quarters. Related ‹ Custom Home Building Posts Small Gain in 2022Tags: economics, home building, home size, housing, new home size, single family home size, single-family

Additional Declines for New Home SizeRobert Dietz2023-02-21T08:16:33-06:00

Custom Home Building Posts Small Gain in 2022

Robert Dietz2023-02-20T08:20:38-06:00

By Robert Dietz on February 20, 2023 • NAHB’s analysis of Census Data from the Quarterly Starts and Completions by Purpose and Design survey indicates custom home building gained market share during 2022. There were 44,000 total custom building starts during the fourth quarter of the year. This marks a 10% decline compared to the fourth quarter of 2021 as the overall home building market softened. Nonetheless, over the course of 2022, custom housing starts totaled 203,000 homes, a 4% gain compared to the 2021 total (195,000). After market share declines due to a rise in spec building in the wake of the pandemic, the market share for custom homes has increased. As measured on a one-year moving average, the market share of custom home building, in terms of total single-family starts, has increased to 21%. This is down from a recent high of 31.5% set during the second quarter of 2009. Note that this definition of custom home building does not include homes intended for sale, so the analysis in this post uses a narrow definition of the sector. It represents home construction undertaken on a contract basis for which the builder does not hold tax basis in the structure during construction. Related ‹ Market Share of All-Cash New Home Sales Hits 32-Year HighTags: custom, custom building, custom home building, economics, home building, housing, single-family

Custom Home Building Posts Small Gain in 2022Robert Dietz2023-02-20T08:20:38-06:00

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