Housing Markets Send Mixed Messages
The latest set of data released about the housing markets is sending somewhat conflicting signals. Construction of single-family houses rose in August by nearly 2 percent (+1.6%), to an annual rate of 876,000 units, following a slightly smaller increase in July (+0.9%). Despite these gains, the pace of construction is slower than what it was in the first half of the year, when it averaged an annualized rate of 893,000 starts.
Housing permits fell to a rate of 820,000 homes, the slowest pace in over a year.
At the same time, sales of existing homes remained flat for August, for an annual rate of 5.34 million units. As illustrated clearly by the red line in the chart below, they’ve been declining since the beginning of the year. So far this year, sales of existing homes have been running just under last year’s total of 5.51 million houses sold.
Even though the overall economy appears to be booming — employment has been rising, GDP growth is strong, and some incomes appear to be increasing — the housing markets are not generally enjoying this boom. The relatively weak demand for new as well as existing homes, is driven by weakness in two fundamental factors. The first is the low rates of household mobility that was reported last week. The second is the low number of new households being formed.
Most housing economists predicted that we should see new households being formed at the rate of around 1.5 million annually — resulting in the need for an additional 1.5 million housing units annually. But for the 12 months ended in the second quarter of this year, only 1.26 million new households were created — short of expectations by about 250,000 households.
Mortgage Rates Rise Again
The 30-year fixed rate rose last week by another five basis points, bringing it closer to the level reached in May of this year.
The chart below may help clarify the focus on only one of the many possible mortgage rates available, specifically the 30-year fixed rate. Simply stated, it’s because interest rates tend to move together over time, although occasionally the differences among them do change.
Normally, longer-term rates carry higher interest, thus the 30-year fixed rate is roughly 0.5 to 1 percentage point higher than the 15-year plan. The 15-year is also higher than the 1-year Adjustable Rate Mortgage, but the difference is less because there is additional risk to borrowers of an ARM — the rate is adjustable after one year. Another reason for focusing on the 30-year rate is that this is the most popular mortgage term taken out by consumers.
Manuel Gutierrez, Consulting Economist to NKBA
Explanation of NKBA’s Economic Indicators Dashboard
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 $500,000 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.
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.
