Contracts for new single-family home sales fell more than expected in April, declining 11.4% to a 569,000 seasonally adjusted annual rate according to estimates from the joint data release of HUD and the Census Bureau. The decline occurred after solid, positive revisions for new home sales for the first three months of the year.
All told, total new home sales for 2017 stand at 210,000, a 11.3% gain over the 2016 comparable total of 189,000.
NAHB expects new home sales to continue to progress along the established, modest growth trend due to ongonig job growth, improving household formations, continuing favorable housing affordability conditions, and tight existing home inventory.
Inventory growth continued in April. After hovering near 240,000 for most of 2016, inventory has now risen to 268,000. The current months’ supply number stands at a healthy 5.7. Given tight existing inventory, more new homes are required to meet housing demand.
The most recent data also indicate a growing share of homes not-started in builder inventory. For example, on a year-over-year basis, homes under construction in inventory have increased by a little more than 6% over the last year. Completed, ready-to-occupy homes (there are only 59,000) are up 2% since April of last year. In contrast, homes not-started listed in inventory have increased 42%, from 36,000 in April of 2016 to 52,000 last month.
Pricing data in the April report find that the median sales price of new homes sold in April was $309,200, while the average price was $368,300. These levels are below the 2016 annual totals but remain higher than the 2015 data.
Regionally, all areas saw monthly declines in sales in April. Sales were down 26% in the West, 13% in the Midwest, 8% in the Northeast and 4% in the South. As with the national headline number, the monthly numbers obscure growth for 2017. On a year-to-date basis, new home sales are up 26% in the Midwest, 15% in the Northeast, 10% in the South and 7% in the West compared to April of 2016.
If you own a home and you’ve visited real estate information websites Zillow, Trulia, Redfin, or any of the like recently, you’ve probably noticed an interesting trend: Your home is increasing in value at a rate that’s far and away higher than the national rate of inflation.
Is housing bubble 2.0 around the corner?
According to the S&P Case-Shiller Home Price Index, which tracks residential real estate prices nationally, as well as within 20 large metropolitan regions, residential real estate prices rose 5.3% between Aug. 2015 and Aug. 2016. By comparison, the national measure of inflation, the Consumer Price Index, has moved higher by a little more than 1% over the trailing 12-month period.
If we back the data out a bit further, the outperformance of housing prices becomes even more apparent. Real housing prices — essentially home price increases with inflation backed out — have risen by 25% just since 2012, and are now sitting at their highest point since the Great Recession. This is noteworthy considering that in the 107 years between 1890 and 1997, housing prices generally tracked the national inflation rate very closely, at least based on data from Robert Shiller in the book Irrational Exuberance. Only over the past two decades have we witnessed a diversion from the mean, with the first diversion leading to a massive housing bubble that’s still fresh in the minds of many homeowners.
This latest outperformance in housing prices, as well as the fresh memory of the recent housing collapse less than one decade prior, has some pundits predicting that housing bubble 2.0 could be right around the corner. A Dec. 2015 interview with 66 industry experts conducted by Zillow found that more than 10 believed the Boston, Los Angeles, and Miami markets were at risk of entering a bubble, while even more pundits believed New York and San Francisco were already there.
However, it’s possible these industry experts could be completely wrong. Based on the evidence available at the moment, I’d contend that we’re not even close to a bubble in housing prices, and that home prices could very well outpace the national rate of inflation for many years to come.
Let’s have a closer look at why home prices could keep soaring.
1. Supply constraints
The biggest factor that could push home prices continuously higher is the trade-off between homebuilder supply and homeowner demand. According to Jesse Edgerton, an economist at J.P. Morgan, most national markets simply don’t have the homebuilder supply to meet demand, and that’s unlikely to change anytime soon.
One might wonder if these high prices reflect growing demand that could soon elicit a wave of construction that would prove our forecasts wrong. We find, however, that high prices are concentrated in markets where supply is constrained by geography or regulation, suggesting there may be little room for additional construction.
Data from J.P. Morgan indicates that while housing prices are rebounding rapidly from their recessionary lows, homebuilders appear content in increasing their supply at only a modest pace. Furthermore, the areas where an expansion of construction would appear to be beneficial — San Jose, Los Angeles, San Francisco, and so on — are also the areas that are the most limited in their ability to respond to an increase in demand.
It’s tough to predict how homebuilders will respond if prices continue to climb. For some builders, the allure of profits may be too great to ignore. However, if homebuilders can prudently manage their supply growth, they’ll likely encourage home prices to head higher at a rate that handily outpaces inflation.
2. A continuation of the low-lending-rate environment
Secondly, the ongoing low-lending-rate environment should continue to spur demand for new homes.
A home is arguably the largest purchase Americans will make during their lifetimes, and historically low mortgage rates could be the catalyst that coerces prospective homeowners to pull the trigger. Even more appealing is the fact that many Americans have far better FICO credit scores than they had a decade prior, meaning they’d probably qualify for sweeter deals from lenders.
Based on data released by FICO last year, the national average FICO score of 695 was an all-time high. Comparatively, the national average FICO score in Oct. 2005 was 688. FICO’s data showed a 3% increase in the number of consumers with a FICO score above 800 compared to the prior decade (FICO scores max out at 850), with a 2.1% decline in consumers with a FICO score under 550. Long story short, Americans appear to be in better shape than ever when it comes to getting a mortgage.
Though the Federal Reserve is the “X factor” here, and it can be completely unpredictable, the case for raising the federal funds target rate isn’t that strong. Inflation remains below the Fed’s target level, job creation has been up and down in 2016, and external factors, such as Brexit and China’s slowing GDP growth, could weigh on the growth outlook in the United States. After aiming for four interest-rate hikes in 2016, it’s quite possible the Fed ends the year without making a single move, which favors the continuation of a low-lending-rate environment.
3. The “rent” vs. “buy” trade-off
Over the longer term, the trade-off between renting and buying a home would also seem to favor rising housing prices.
If interest rates do normalize over the long term and head back to around 3%, it would presumably work in favor of the rental market. Higher interest rates mean higher mortgage rates, which in turn should push on-the-fence homebuyers back into renting. When this happens, landlords become privy to significant rental pricing power and are able to increase rental rates well above the national rate of inflation. Just the expectation of rising interest rates at some point soon has been pushing rental prices around the country higher, at a pace that’s well above the national inflation rate.
However, there comes a tipping point in the renting vs. buying trade-off where rental prices increase enough that buying a home actually becomes the cheaper option on a monthly basis. It happened to me in 2007, and it could very well happen to millions of Americans as rental inflation increases.
The September pace of total housing starts decreased 9% due a substantial decline in multifamily production. Single-family construction continues, as expected, along a positive trend.
According to estimates from the Census Bureau and the Department of Housing and Urban Development, single-family starts increased 8.1% to a 783,000 seasonally adjusted annual rate in September. Year-to-date, single-family housing starts are running almost 10% higher than the year-to-date total for September of 2015.
Single-family permit growth points to additional growth. On a year-to-date basis, single-family permits from January to September of 2016 are more than 8% higher than this time in 2015.
Multifamily starts (units in 2+ properties) posted a large decline in September after a few months of strength. Apartment construction starts declined 38% in September to a seasonally adjusted annual rate of 264,000. Multifamily permits on a year-to-date basis are about 11% lower than this time in 2015.
Taken together, these trends are consistent with the NAHB forecast, which sees gathering strength for single-family construction and a leveling off of multifamily production as the market finds a balance between housing demand and supply.
Regionally, single-family starts showed strength in the Northeast, increasing 20%% on a monthly basis. Gains for single-family starts were also realized in the South (12%) and Midwest (6%). The West posted a slight drop of 2% after a strong August.
On a year-to-date basis, however, all regions have posted gains. Single-family starts are up 12% in the Northeast, 12% in the Midwest, 8% in the South and 6% in the West when comparing the September 2016 year-to-date total relative to the comparable September 2015 year-to-date totals.
Taking the long view, an examination of the count of homes currently under construction provides the degree of market mix and momentum of the recovery in home construction. As of September, 58% of units under construction in the nation were multifamily (605,000). The count of 605,000 is a 13% gain over a year earlier.
New homes with 5,000 square feet or more of living space increased both as a share of all new construction and in absolute number in 2015, according to the Census Bureau’s Survey of Construction. In 2015, the share of new homes this size reached a post-recession peak of 3.9% of new homes started. The total number of 5,000+ square-foot homes started that year was 28,000 units.
In 2012, the number of new homes started with 5,000+ square feet rose to 15,000 units, yet their share remained at only 2.8%. In 2015, while the number of 5,000+ square feet homes started (28,000) was the highest since 2008, their share of the new market (3.9%) was the highest since 2004. A previous postdiscussed the declining trend in the median and average size of new single-family homes due to an expansion in entry-level market wherein home size is expected to trend lower. This is not necessarily a contradiction, because 5,000+ square foot homes are relatively uncommon and represent the extreme upper tail of the distribution. The extreme upper tail can behave differently than the center of the distribution, measured by the average or median.
In the boom year of 2006, 3.0% or 45,000 new homes started were 5,000 square feet or larger. In 2007, the share of new homes this size was 3.6%, yet the total number of 5,000+ square-foot homes started that year fell to 37,000. In 2008, only 20,000 such homes were started or 3.2% of the total. From 2009 to 2011, fewer than 13,000 of these large homes were started every year, accounting for less than 3% of all new construction during this period. The extent to which the 5,000+ square foot homes have recovered, roughly to where they were in 2008, shows a growing trend at the top of the market at least through 2015.
NAHB’s analysis of Census Data from the Quarterly Starts and Completions by Purpose and Design survey indicates that the number of custom home building starts (homes built on an owner’s land, with either the owner or a builder acting as the general contractor) posted a slight increase on a year-over year basis as of the second quarter of 2016. There were 47,000 total custom starts for the quarter, compared to 45,000 for the second quarter of 2015.
Over the course of the last four quarters, there were 167,000 total custom single-family home construction starts. Note that this definition of custom home building does not include homes intended for sale, so the analysis uses a narrow definition of the sector.
As measured on a one-year moving average, the market share of custom home building in terms of total single-family starts is now 22%, down from a cycle high of 31.5% set during the second quarter of 2009.
The onset of the housing crisis and the Great Recession interrupted a 15-year long trend away from homes built on the eventual owner’s land. As housing production slowed in 2006 and 2007, the market share of this not-for-sale new housing increased as the number of single-family starts declined. The share increased because the credit crunch made it more difficult for builders to obtain AD&C credit, thus producing relatively greater production declines of for-sale single-family housing.
The market share for custom home building will likely experience ups and downs in the quarters ahead as the overall single-family construction market expands. Recent declines in market share are due to an acceleration in overall single-family construction.
The number of homes in some stage of foreclosure and the number of seriously delinquent mortgages continued to decline in May, falling to the lowest level since October 2007, according to the latest data from CoreLogic.
CoreLogic’s May 2016 National Foreclosure Report shows the national foreclosure inventory, which is the total number of homes at some stage of the foreclosure process and completed foreclosures, hovers around 390,000 homes.
According CoreLogic’s report, May’s foreclosure inventory hit the lowest level in nearly nine years.
CoreLogic’s report also showed that in May, the foreclosure inventory declined by 24.5% and completed foreclosures declined by 6.9% compared with May 2015.
The number of completed foreclosures nationwide decreased year over year from 41,000 in May 2015 to 38,000 in May 2016, which represents a decline of 67.9% from the peak of 117,813 in September 2010.
CoreLogic’s report also showed the sustained improvement in the number of mortgages in serious delinquency, defined as loans that are 90 days or more past due, and loans in foreclosure or Real Estate Owned.
According to CoreLogic’s report, the number of mortgages in serious delinquency fell by 21.6% from May 2015 to May 2016, with 1.1 million mortgages, or 2.8% of all mortgages, in this category.
The May 2016 serious delinquency rate is also the lowest in nearly nine years, reaching the lowest level since October 2007.
“The foreclosure rate fell to 1% in May, which is twice the long-term average of 0.5%. However, this masks the underlying progress at the state level,” said Frank Nothaft, chief economist for CoreLogic. “Twenty-nine states had foreclosure rates below the national average, and all but North Dakota experienced declines in their foreclosure rate compared to the prior year.”
New homes surged in April, a sign that builders are stepping up as demand for housing remains robust.
Sales soared 16.6% to a seasonally adjusted annual rate of 619,000, the Commerce Department said Tuesday. That was the biggest monthly jump in 24 years and trounced estimates of a 525,000 pace.
The median price also jumped, rising 9.7% from 12 months ago to $321,100.
The big increase in sales took supply sharply lower. At the current pace, it would take 4.7 months to exhaust all inventory.
March numbers were revised up to a 531,000 annual pace. The April figures were 23.8% higher compared to a year ago.
Regional performance was mixed, from a 52.8% surge in the Northeast to a 4.8% decline in the Midwest. The South saw a 15.8% increase, while in the West sales were up 18.8%.
Demand for housing has run much hotter than supply for the past few years, in part because home builders have been reluctant to ramp up to the brisk level of activity they enjoyed before the recession.
Before beginning the hunt for their first house, Tennessee residents Brittany and Craig Murphy pared their student debt, saved for a down payment and got an income boost from her new job. The major hurdle was what came next.
In the last month, the couple lost two bidding wars on Nashville homes to competitors willing to pay more than 10 percent above the asking price.
“I was not expecting the actual finding of the house to be the difficult part,” said Brittany Murphy, a 26-year-old Web designer whose husband, 27, is a software developer.
Steady job growth, low mortgage rates and record apartment rents are turning millennials like the Murphys into homebuyers — if they can find a house. As the key U.S. spring sales season gets under way, robust real estate demand is being outweighed by a persistent lack of lower-priced supply that’s poised to limit transactions and worsen an affordability crunch for young people. They’re faring worse than purchasers at the higher end of the market, where inventory is piling up.
Rising interest in home tours indicates prospective buyers are coming out in droves. An index by Redfin that measures requests for property visits rose in the first two months of the year to the highest level since at least 2012, when the data began.
“As soon as a house hits the market, it will be eaten by the huge demand appetite,” said Nela Richardson, Redfin’s chief economist.
Surging homebuying interest won’t necessarily translate into a big jump in sales. Prices will rise while limited inventory will put a cap on transactions, said Doug Duncan, chief economist of Fannie Mae. He estimates that U.S. single-family home prices will climb 5 percent this year, about the same as in 2015, while sales will increase 3 percent. That’s a slowdown from 2015, when existing-home purchases jumped 7 percent.
“Affordability is a challenge this spring,” Duncan said. Prospective buyers “would have gotten their credit in shape and they’ll have a job. But they will be frustrated because, in their market, there simply won’t be affordable homes.”
Average appraised values in December were 1.8 percent lower than homeowners’ opinion of their home’s value, marking the 11th straight month when appraised values were lower than homeowners expected, although the gap between the two values has narrowed since August.
The Quicken Loans’ national Home Value Index (HVI) – a measure of home values based on recent appraisals used in to refinance mortgages – showed that home values continuing to climb in December. Appraised values increased a modest 0.18 percent from November, but have risen a steady 5.81 percent since December 2014 and 3.8 percent since the beginning of the year.
Appraised values continued to fall below homeowner estimates in December. On average, appraiser opinions were 1.8 percent lower than the value homeowners expected, according to the national HPPI. Many of the metro areas studied also showed perception moving closer to equal. Appraisals remained higher in Western cities, while homeowner expectations topped appraised values in many of the Northeastern and Midwestern cities examined.
“The narrowing of the perceived vs. appraisal value gap is an excellent way to end the year,” said Quicken Loans Chief Economist Bob Walters. “The more homeowners are in line with appraisers, and understand the equity in their home, the easier it will be to refinance their mortgage. In the same vein, if homebuyers understand how the local market is performing, they will be better equipped to come in with a strong offer on the home of their dreams.”
Appraisals remain a significant cause of delay or termination of sales contracts. Of all contracts settled or terminated, financing, appraisal, and home inspection issues were the major problems: 18 percent had financing issues, 13 percent had home inspection issues, and 11percent had appraisal issues, said the National Association of Realtors in its October Realtor Confidence Index.
Consumer confidence improved in December after the previous two months declines. The Consumer Confidence Index, recently released by the Conference Board, rose to 96.5 in December from 92.6 in November. Both subcomponents, the present situation and expectations indices, rebounded in December as well. The present situation index rose to 115.3 in December from 110.9 in November; the expectations index climbed up to 83.9 in December from 80.4 in November.
The figure below shows that the real GDP growth rate and consumer confidence are highly correlated over the past three decades. When GDP growth is negative, consumer confidence declines sharply; when growth resumes, consumer confidence increases as well. During the recent recession, as the real GDP growth rate dropped to -8.2%, consumer confidence fell to the historically lowest level in the early 2009. After that, the real GDP growth rate rebounded back to the positive levels and consumer confidence also slowly recovered. As the recovery from the Great Recession continues, consumer confidence is climbing up toward to the pre-recession levels.
The Conference Board also reports the shares of respondents planning to buy a lived-in home within six months. The shares of respondents planning to buy a lived-in home within six months fell to 3.4% in December, from 4.0% in November. The trends in the shares of respondents planning to buy a lived-in home within six months and the growth rate of the Case-Shiller Home Price Index (the dash lines) are very similar. When there is high demand for housing house price appreciation accelerates; when there is lower demand for housing house price appreciation decelerates.