New Houses Get Slightly Smaller

For the second consecutive year, 2017 saw the size of new single-family houses shrink from the prior year. Last year’s decline was a minimal 5 square feet, but in 2016, the average house size fell by 74 square feet.

New single-family homes have shrunk nearly 3% from their peak of 2,724 square feet reached in 2015. But over the last 40 years, house size has increased by nearly 900 square feet. Houses today are 51% larger than those built in 1978.

Moreover, as can be seen in the chart above, last year’s decline was the first time that new houses have gotten smaller during an economic expansion. Historically, the size of houses declines during recessions.

This is in synch with the changing size of the average U.S. household, which continues to get smaller. Last year, there were 2.54 people per household — fewer than 40 years before, when the average was 2.81 people per household.

By geographic area, three of the four U.S. regions saw declines in house size. The only exception is the Northeast, where, surprisingly, the average new home grew by 249 square feet, or 9.4%. Builders in the Northeast build the largest single-family houses.

Sales of Building Materials

In May, building materials recovered most of the losses suffered in the preceding two months. Still, sales did not reach the peak level seen last December, when they were nearly 1% higher.

Despite this, sales of building materials have grown faster than most retail categories. Since 2013, sales at building-materials stores have risen 35%, indicated by the red line in the chart below. They are only exceeded by growth of internet sales and mail-order houses that are a whopping 69% above 2013.

Note that each of the gray lines in the chart above represents a different product group. The lowest line represents sales at department stores that are currently running 15% below their level five years ago.

Mortgage Rates Rise…Again

Last week’s increase of 8 basis points in mortgage rates more than erased the declines of the preceding two weeks. This increase was not unexpected, given the tightening posture maintained by the Federal Reserve Bank (Fed). But in fact, this is not the end of the rates’ upward movement; at its meeting last week, the Fed moved to raise interest rates.

The policy move sets its target for the Federal Funds rate to the 1.75% to 2% range. It is expected that the Fed board will continue to raise rates further this year. At this time, the bank is projecting that the Federal Funds rate will be around 3.1% next year. Given the strength of the economy, low unemployment, strong GDP growth and inflation on the rise, the Board feels that the time is appropriate for raising rates.

While the higher rates, including the mortgage rate, will dissuade consumers from engaging in high-cost purchases, many consumers (i.e., savers) will benefit as they will begin to see reasonable return on their savings.

Manuel Gutierrez, Consulting Economist to NKBA 

Explanation of NKBA’s Economic Indicators Dashboard

The dashboard displays the latest value of each economic indicator with a colored triangle that highlights visually the recent trend for each of the drivers. “Green” is a positive signal, indicating that the latest value is improving; “Yellow,” as it’s commonly understood, denotes caution because the variable may be changing direction; “Red” indicates that the variable in question is declining, both in its current value and in relation to the recent past.

Note that all the data, except for “mortgage rate” and “appliance-store sales” are seasonally adjusted and are represented at annual rates.

Remodeling Expenditures. This is the amount of money spent on home improvement projects during the month in question. It covers all work done for privately owned homes (excludes rentals, etc.). The data are in billions of dollars and are issued monthly by the U.S. Department of Commerce.

Single-Family Starts.  This is the number of single-family houses for which construction was started in the given month. The data are in thousands of houses and are issued monthly by the U.S. Department of Commerce.

Existing-Home Sales. These data are issued monthly by the National Association of Realtors and capture the number of existing homes that were sold in the previous month.

High-End Home Sales. This series are sales of new homes priced at $750,000 and higher. The data are released quarterly by the U.S. Department of Commerce and are not seasonally adjusted. Thus, a valid comparison is made to the same quarter of prior year.

Mortgage Rate. We have chosen the rate on 30-year conventional loans that is issued by the Federal Home Loan Mortgage Corporation (known popularly as Freddie Mac.) Although there are a large number of mortgage instruments available to consumers, this one is still the most commonly used.

Employees in Residential Remodeling. This indicator denotes the number of individuals employed in construction firms that do mostly residential remodeling work.

Building-Materials Sales. These data, released monthly by the Department of Commerce, capture total sales of building materials, regardless of whether consumers or contractors purchased them. However, we should caution that the data also includes sales to projects other than residential houses.

Appliance-Store Sales. This driver captures the monthly sales of stores that sell mostly household appliances; the data are stated at an annual rate. We should not confuse this driver with total appliance sales, since they are sold by other types of stores such as home centers, for instance.

We hope you find this dashboard useful as a general guide to the state of our industry. Please contact us if you would like to see further detail.