Flat Conditions for Custom Home Building


By Robert Dietz on August 18, 2022 • NAHB’s analysis of Census Data from the Quarterly Starts and Completions by Purpose and Design survey indicates custom home building registered relatively flat conditions for the second quarter of 2022. There were 53,000 total custom building starts during the second quarter of the year. This marks a 2% decline compared to the first quarter of 2021. Over the last four quarters, custom housing starts totaled 204,000 units, a 9% gain from the prior four-quarter total. After market share declines due to a rise in spec building, post-covid the market share for custom homes has increased slightly. As measured on a one-year moving average, the market share of custom home building, in terms of total single-family starts, was flat at 18%. This is down from a cycle 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 ‹ Townhouse Construction SlowsTags: custom, custom building, economics, home building, housing, single-family

Flat Conditions for Custom Home Building2022-08-18T08:26:23-05:00

Townhouse Construction Slows


By Robert Dietz on August 17, 2022 • According to NAHB analysis of the most recent Census data of Starts and Completions by Purpose and Design, during the second quarter of 2022 single-family attached starts totaled 38,000, which is 9.5% lower than the second quarter of 2021. Nonetheless, over the last four quarters, townhouse construction starts totaled 148,000 units, 7% higher than the prior four quarter total (138,000). However, these totals will slow in the quarters ahead as the overall building market slows. Using a one-year moving average, the market share of newly-built townhouses decreased to 12.5% of all single-family starts. This represents a slight weakening of market share after recent gains for medium-density housing demand. The peak market share of the last two decades for townhouse construction was set during the first quarter of 2008, when the percentage reached 14.6%, on a one-year moving average basis, of total single-family construction. This high point was set after a fairly consistent increase in the share beginning in the early 1990s. The long-run prospects for townhouse construction remain positive given growing numbers of homebuyers looking for medium-density residential neighborhoods, such as urban villages that offer walkable environments and other amenities. This will be particularly true for prospective first-time buyers in high cost metro areas. Related ‹ Single-Family Built-for-Rent Construction SurgingTags: economics, home building, housing, single-family, townhouse, townhouses

Townhouse Construction Slows2022-08-17T08:16:05-05:00

Single-Family Built-for-Rent Construction Surging


Single-family built-for-rent sector construction surged during the second quarter of 2022 as homebuying affordability declined on higher mortgage interest rates. According to NAHB’s analysis of data from the Census Bureau’s Quarterly Starts and Completions by Purpose and Design, there were approximately 21,000 single-family built-for-rent (SFBFR) starts during the second quarter of 2022. This is a 91% gain over the second quarter 2021 total. Over the last four quarters, 69,000 such homes began construction, which is a 60% increase compared to the 43,000 estimated SFBFR starts in the prior four quarters. The SFBFR market is a means to add inventory amid challenges over housing affordability and downpayment requirements in the for-sale market, particularly during a period when a growing number of people want more space and a single-family structure. Single-family built-for-rent construction differs in terms of structural characteristics compared to other newly-built single-family homes, particularly with respect to home size. Given the relatively small size of this market segment, the quarter-to-quarter movements typically are not statistically significant. The current four-quarter moving average of market share (6%) is nonetheless higher than the historical average of 2.7% (1992-2012) and sets a data series high as this submarket expands. Importantly, as measured for this analysis, the estimates noted above only include homes built and held by the builder for rental purposes. The estimates exclude homes that are sold to another party for rental purposes, which NAHB estimates may represent another five percent of single-family starts based on industry surveys. Indeed, the Census data notes an elevated share of single-family homes built as condos (non-fee simple), with this share averaging 4% over recent quarters. Some, but not all, of these homes will be used for rental purposes. Additionally, it is theoretically possible some single-family built-for-rent units are being counted in multifamily starts, as a form of “horizontal multifamily,” given these units are often built on single plat of land. However, spot checks by NAHB with permitting offices indicate no evidence of this data issue occurring at scale thus far. With the onset of the Great Recession and declines in the homeownership rate, the share of built-for-rent homes increased in the years after the recession. While the market share of SFBFR homes is small, it has clearly been trending higher. As more households seek lower density neighborhoods and single-family residences, a growing number will do so from the perspective of renting. This will be particularly true as mortgage interest rates remain elevated and increase. Thus, the SFBFR market will expand in the quarters ahead. Related ‹ Housing Starts Weaken in JulyTags: economics, home building, housing, SFBFR, single family built for rent, single-family

Single-Family Built-for-Rent Construction Surging2022-08-16T10:25:11-05:00

Housing Starts Weaken in July


A sharp decline in single-family home construction is another indicator that the housing slowdown is showing no signs of abating, as rising construction costs, elevated mortgage rates and supply chain disruptions continue to act as a drag on the market. Overall housing starts fell 9.6% to a seasonally adjusted annual rate of 1.45 million units in July, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. The July 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. Single-family starts decreased 10.1% to a 916,000 seasonally adjusted annual rate and are down 2.1% on a year-to-date basis. This is the lowest reading for single-family home building since June 2020. More declines lie ahead, as single-family permits decreased 4.3% to a 928,000 unit rate and are down 5.9% on a year-to-date basis. NAHB is forecasting 2022 to be the first year since 2011 to record an annual decline in single-family home building. A housing recession is underway with builder sentiment falling for eight consecutive months, while the pace of single-family home building has declined for the last five months. The decline in single-family starts is reflected in the HMI measure of builder sentiment, as housing demand continues to weaken on higher interest rates while on the supply side builders continue to grapple with higher construction costs. Builders are reporting weakening traffic as housing affordability declines. The multifamily sector, which includes apartment buildings and condos, decreased 8.6% to an annualized 530,000 pace. Multifamily construction remains very strong given solid demand for rental housing. The number of multifamily 5+ units currently under construction is up 24.8% year-over-year. Multifamily development is being supported by a substitution effect, with frustrated or priced out prospective home buyers seeking rental housing. The number of single-family homes permitted but not started construction has likely peaked after rising over pervious quarters due to supply-chain issues. In July, there were 146,000 homes authorized but not started construction. This reading is flat year-over-year. In contrast, the number of multifamily 5+ units permitted but not started construction continues to rise, up 47% year-over-year to 147,000 units. On a regional and year-to-date basis, combined single-family and multifamily starts are 10.7% higher in the Northeast, 0.4% lower in the Midwest, 6.5% higher in the South and 2.2% lower in the West. Looking at regional permit data on a year-to-date basis, permits are 1.9% lower in the Northeast, 1.9% higher in the Midwest, 2.6% higher in the South and 0.2% higher in the West. As an indicator of the economic impact of housing and as a result of accelerating permits and starts in recent quarters, there are now 816,000 single-family homes under construction. This is 17% higher than a year ago. There are currently 862,000 apartments under construction, up 25% from a year ago with this number continuing to rise. Total housing units now under construction (single-family and multifamily combined) is 21% higher than a year ago. The number of single-family units in the construction pipeline is now falling and will continue to decline in the months ahead given recent declines in buyer traffic. Related ‹ Builder Confidence Falls for Eighth Consecutive MonthTags: economics, home building, housing, multifamily, starts

Housing Starts Weaken in July2022-08-16T09:21:54-05:00

Builder Confidence Falls for Eighth Consecutive Month


Builder confidence fell for the eighth straight month in August as elevated interest rates, ongoing supply chain problems and high home prices continue to exacerbate housing affordability challenges. In another sign that a declining housing market has failed to bottom out, builder confidence in the market for newly built single-family homes fell six points in August to 49, marking the first time since May 2020 that the index fell below the key break-even measure of 50, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). The August buyer traffic number in the builder survey was 32, the lowest level since April 2014 with the exception of the spring of 2020 when the pandemic first hit. Tighter monetary policy from the Federal Reserve and persistently elevated construction costs has brought on a housing recession. The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011. However, as signs grow that the rate of inflation is near peaking, long-term interest rates have stabilized, which will provide some stability for the demand-side of the market in the coming months. Roughly one-in-five (19%) home builders in the HMI survey reported reducing prices in the past month to increase sales or limit cancellations. The median price reduction was 5% for those reporting using such incentives. Meanwhile, 69% of builders reported higher interest rates as the reason behind falling housing demand, the top impact cited in the survey. 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. All three HMI components posted declines in August and each fell to their lowest level since May 2020.  Current sales conditions dropped seven points to 57, sales expectations in the next six months declined two points to 47 and traffic of prospective buyers fell five points to 32. Looking at the three-month moving averages for regional HMI scores, the Northeast fell nine points to 56, the Midwest dropped three points to 49, the South fell seven points to 63 and the West posted an 11-point decline to 51. The HMI tables can be found at nahb.org/hmi. Related ‹ Building Materials Prices Increase in July as Concrete SurgesTags: economics, hmi, home building, housing

Builder Confidence Falls for Eighth Consecutive Month2022-08-15T09:18:05-05:00

Credit for Builders Less Available, Costs More


During the second quarter of 2022, credit became both tighter and more costly on loans for Acquisition, Development & Construction (AD&C) according to NAHB’s Survey on AD&C Financing. The average effective rate (based on rate of return to the lender over the assumed life of the loan taking both the contract interest rate and initial fee into account) increased substantially from the prior quarter on all four categories of loans tracked in the AD&C Survey: from 6.32 percent to 8.19 percent on loans for land acquisition, from 7.85 to 9.55 percent on loans for land development, from 7.38 to 8.48 percent on loans for speculative single-family construction, and from 7.90 to 8.63 percent on loans for pre-sold single-family construction. Changes in the effective rate may be due to changes in either the contract interest rate, or  in the initial points charged on the loans.  In the second quarter, average points were unchanged from the previous quarter at 0.63 percent on loans for speculative single-family construction, and actually down slightly on the other three categories of AD&C loans: from 0.90 to 0.86 percent on loans for land acquisition, from 0.95 to 0.90 percent on loans for land development, and from 0.63 to 0.51 percent on loans for pre-sold single-family construction.  However, these relatively small changes were overshadowed by strong surges in the average contract interest rate changed on the loans:  from 4.36 to 6.19 percent on  loans for land acquisition, from 4.60 to 6.27 percent on loans for land development, from 4.63 to 5.39 percent on loans for speculative single-family construction, and from 4.61 to 5.24 percent on loans for pre-sold single-family construction. The NAHB survey also produces a net easing index  that summarizes the change in credit conditions, similar to the net easing index constructed from the Federal Reserve’s survey of senior loan officers (SLOOS).  The second quarter of 2022 was the second consecutive quarter during which both the NAHB and Fed indices were negative, indicating tightening credit conditions.  Moreover, both indices were substantially more negative in the second quarter than they had been  in the first.  In the second quarter, the NAHB net easing index stood at -21.0 while the Fed index was -48.4—compared to -2.30 and -4.7, respectively, in the first quarter of 2022. The most common ways in which the lenders tightened in the second quarter were by increasing the interest rate on the loans (cited by 68 percent of the builders and developers who reported tighter credit conditions), lowering the allowable Loan-to-Value or Loan-to-Cost ratio (65 percent) and reducing amount they are willing to lend (61 percent). The results of the second quarter AD&C survey are consistent with the general tightening of financial conditions and rising interest rates reported in a previous post.   More detail, including a complete history for every question in the survey, is available on NAHB’s AD&C Financing Survey web page. Related ‹ Housing Affordability Falls to Lowest Level Since Great RecessionTags: ad&c lending, ad&c loans, ADC, construciton loans, construction lending, credit conditions, economics, home building, housing, interest rates, lending

Credit for Builders Less Available, Costs More2022-08-11T12:16:12-05:00

Headship Stabilizes During the Pandemic Housing Boom


Headship rates for all age groups have been trending lower over the last two decades, with important implications for the demand for home building. The latest Current Population Survey (CPS) Annual Social and Economic Supplement (ASEC) data show that the pandemic housing boom brought this trend to a halt, with adults ages 35-64 now registering higher headship rates than they were pre-covid. For the younger group ages 25-34, headship rates bounced back to pre-pandemic levels. The only two age groups that saw a decline in their headship rates over the pandemic-fueled housing boom are college-age (18-24) adults and the 65+ cohort. Headship rates – share of people who are household heads – tell us how many households are formed for a given population. The higher the headship rate, the more households are formed, the more housing units are occupied and the more housing is needed to be built. For decades, US headship rates have been declining, suggesting the US housing market has been missing millions of households and any gains in new households can be largely attributed to population growth. This problematic trend was particularly pronounced among young adults ages 25-34. This group registered the steepest declines in their ability to create and lead independent households, highlighted by the 4 percentage point drop in their headship rates over the last two decades. Immediately before the Covid-19 pandemic, declining young adult headship rates reversed this trend and registered an uptick. At that time, it was a hopeful indicator that the troublesome trend of rising shares of young adults living with parents, relatives or sharing house with roommates finally reversed. Then, the rollercoaster 2020 and 2021 saw headship gains among young adults first eliminated early in the pandemic, only to be later restored to the pre-pandemic levels. It is worth noting that while headship rates for adults 35-64 years of age are now higher than they were before the Covid-19 pandemic, they remain historically low across every age group. It remains to be seen whether recent headship gains fueled by the pandemic housing boom can be sustained through the ongoing housing slowdown and probable recession. The data used in this post come from the 2021 CPS ASEC. Typically, NAHB Economics relies on the American Community Survey (ACS) to estimate headship rates across all age groups. The ACS is less timely but has a much larger sample and aligns better with the Decennial Census. Even though the ACS estimates show lower headship rates across all age groups, the long-run trends are similar in both surveys. Because of data collection issues during the early pandemic, the 2020 ACS data are largely unreliable, and the 2021 data will only become available in the Fall of this year. In the interim, the CPS estimates provide an early indicator where the U.S. headship rates are heading. Related ‹ High Home Prices Is Main Reason Active Buyers Can’t Seal the DealTags: headship rates, home building, household formation, housing, young adults

Headship Stabilizes During the Pandemic Housing Boom2022-08-05T08:15:34-05:00

Housing Share of GDP Edges Lower in the Second Quarter of 2022


Housing’s share of the economy edged lower at the end of the first half of 2022. For the second quarter of 2022, overall GDP declined at a 0.9% annual rate, following a 1.6% decrease in the first quarter. Housing’s share of GDP decreased to 16.6%, slightly below the first quarter share of 16.7%. In the second quarter, the more cyclical home building and remodeling component – residential fixed investment (RFI) – decreased to 4.7% of GDP. Home construction will face growing challenges as higher interest rates due to tightening monetary policy increase housing affordability challenges. RFI subtracted 71 basis points from the headline GDP growth rate in the second quarter of 2022. Housing-related activities contribute to GDP in two basic ways. The first is through residential fixed investment (RFI). RFI is effectively the measure of the home building, multifamily development, and remodeling contributions to GDP. It includes construction of new single-family and multifamily structures, residential remodeling, production of manufactured homes and brokers’ fees. For the second quarter, RFI was 4.7% of the economy, recording a $1.2 trillion seasonally adjusted annual pace. The second impact of housing on GDP is the measure of housing services, which includes gross rents (including utilities) paid by renters, and owners’ imputed rent (an estimate of how much it would cost to rent owner-occupied units) and utility payments. The inclusion of owners’ imputed rent is necessary from a national income accounting approach, because without this measure, increases in homeownership would result in declines for GDP. For the second quarter, housing services represented 11.9% of the economy or $3.0 trillion on seasonally adjusted annual basis. Taken together, housing’s share of GDP was 16.6% for the quarter. Historically, RFI has averaged roughly 5% of GDP while housing services have averaged between 12% and 13%, for a combined 17% to 18% of GDP. These shares tend to vary over the business cycle. However, the housing share of GDP lagged during the post-Great Recession period due to underbuilding, particularly for the single-family sector. The recent expansion in housing activity has increased these shares to near historic norms. Related ‹ Banks Report Unchanged Home Lending StandardsHigh Home Prices Is Main Reason Active Buyers Can’t Seal the Deal ›Tags: home building, housing, housing share of GDP, housing share of the economy

Housing Share of GDP Edges Lower in the Second Quarter of 20222022-08-04T09:16:52-05:00

Federal Reserve Raises by 75 Basis Points and Notes Slowing Economy


Continuing its tightening of financial conditions to bring the rate of inflation lower, the Federal Reserve’s monetary policy committee raised the federal funds target rate by 75 basis points, increasing that target to an upper bound of 2.5%. This move matches the June rate hike as the largest increase for the funds rate since 1994. While committing to a policy path that will slow demand and reduce inflation pressure, the Fed also, in the first sentence of its July policy statement, acknowledged signs of slowing economic activity (“Recent indicators of spending and production have softened.”). Among the clear signs of this slowing are just about every housing indicator, including seven straight months of declines for home builder sentiment. Indeed, an open macro question is whether the economy experienced a recession during the first half of 2022. GDP data for the second quarter published tomorrow will provide additional evidence (although a rising unemployment rate remains missing for the NBER call). However, given declines for single-family permits, single-family starts, pending home sales, and rising sales cancellations rates, it is clear a housing industry recession is ongoing. Market participants have reduced their expectations for future Fed rate hikes, which is perhaps a sign of renewed confidence in the ability of the Fed to bring inflation down (even if it means a recession in the so-called hard landing scenario). Higher interest rates and lower economic growth will eventually bring inflation rates down. The path of required additional tightening will depend on economic growth and inflation data, moving the Fed to a more data dependent stance. Thus, the chance of the Fed decelerating to a 50 basis point hike in September is increasing. It is important to note that there is not a direct connection between federal fund rate hikes and changes in long-term interest rates. During the last tightening cycle, the federal funds target rate increased from November 2015 (with a top rate of just 0.25%) to November 2018 (2.5%), a 225 basis point expansion. However, during this time mortgage interest rates increased by a proportionately smaller amount, rising from approximately 3.9% to just under 4.9%. Moreover, the spread between the 30-year fixed rate mortgage and the 10-year Treasury rate has expanded to more than 270 basis points as of this week. Before 2020, this spread averaged a little more than 170 basis points. This elevated spread is a function of MBS bond sales as well as uncertainty related to housing market uncertainty. While the 10-year rate has flattened in recent weeks on growth concerns, a reduction in this spread would be a positive sign for mortgage rates and housing demand. Finally, the Fed has previously noted that inflation is elevated due to “supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.” While this verbiage may incorporate policy failures that have affected aggregate supply and demand, the Fed should explicitly acknowledge the role fiscal, trade and regulatory policy is having on the economy and inflation as well. Related ‹ Share of New Home Sales Backed by FHA Loans Reaches 14-Year LowTags: economics, FOMC, home building, housing, interest rates

Federal Reserve Raises by 75 Basis Points and Notes Slowing Economy2022-07-27T18:19:04-05:00

New Home Sales Plunge in June


By Danushka Nanayakkara-Skillington on July 26, 2022 • New single-family home sales declined in June due to rising mortgage rates and worsening affordability conditions. Per Freddie Mac, the 30-year fixed rate mortgage was 5.10% at the end of May and climbed to 5.70% by the end of June. The U.S. Department of Housing and Urban Development and the U.S. Census Bureau estimated sales of newly built, single-family homes in June at a 590,000 seasonally adjusted annual pace, which is a 8.1% decline over the downwardly revised May rate of 642,000 and is 17.4% below the June 2021 estimate of 714,000. Sales-adjusted inventory levels are at an elevated 9.3 months’ supply in June. The count of completed, ready-to-occupy new homes is just 39,000 homes nationwide. Moreover, sales are increasingly coming from homes that have not started construction, with that count up 25.1% year-over-year, not seasonally adjusted (NSA). The median sales price dipped to $402,400 in June, down 9.5% compared to May, but up 7.4% compared to a year ago. Nationally, on a year-to-date basis, new home sales are down 13.4% for the first half of 2022. Regionally, on a year-to-date basis, new home sales fell in all four regions, down 12.1% in the Northeast, 24.8% in the Midwest, 12.6% in the South and 9.6% in the West. Related ‹ Housing Demand Flattens as 1st-Time Buyers RetreatTags: economics, home building, housing, new home sales, sales, single-family

New Home Sales Plunge in June2022-07-26T23:18:50-05:00

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