Friday, January 3, 2014

Economic Outlook - January 2014

Economic Outlook is a monthly review of economic and housing statistics and housing policy issues. It is a digest of selected posts from Eye on Housing, a blog featuring news and analysis from NAHB Chief Economist David Crowe and Senior Economist Joshua J. Miller.

Recent economic and housing market data suggests the long-run recovery is back on track after a brief pause. Many indicators show improvements over the prior month data which was impacted by a partial government shut-down. Moving into 2014, consumers and builders expect conditions to improve while uncertainty persists in the labor market.

Although new home sales declined slightly from an unusually high October, housing starts bounced back in November. According to the Census Bureau and HUD, single-family starts rose to 727,000, the highest level since December 2007. Multifamily starts increased 26.8% over October. The Census Bureau’s latest release shows the number of homes under construction has now increased for 27 months in a row.

Pending home sales ticked up in November. According to the National Association of Realtors (NAR), the Pending Home Sales Index (PHSI) ticked up 0.2% in November. The month-over-month increase in the PSHI follows two months of decline.

Broader economic indicators also showed improvement. The Bureau of Economic Analysis (BEA) revised upward the annual seasonally adjusted real GDP growth rate to 4.1%, the highest reading in seven quarters. The unemployment rate declined to 7.0%, although the result was likely skewed by the misclassification of furloughed federal government workers in October.

Builders expressed confidence in buyers returning to the market after a drop in October and November. Builder confidence rose by four points in December to 58. An index above 50 indicates more builders see improvement than not.

Although builders remain optimistic, concerns persist as skilled labor remains in short supply. The number of construction sector job openings reached a five year high in October at 124,000. The inability of home builders to hire qualified labor remains a top concern.

The Federal Housing Finance Agency (FHFA) reported a decline in mortgage interest rates for both new and existing homes. According to the FHFA’s Monthly Interest Rate Survey (MIRS), the November data shows a 6 basis point decline in the average contract interest rate on loans to purchase newly-built homes.

The decline in mortgage interest rates may be short lived. The Federal Open Market Committee (FOMC) concluded the December meeting announcing it would begin winding down its asset purchase program. The decision to slow the asset purchase program should pass through to longer-term mortgage rates.

In analysis news, our economists examined the implications for builders of another tax proposal published by Senate Finance Committee. The most recent proposal proposes changes tax code rules concerning energy production and energy-efficient improvements. The proposal would replace most existing energy tax incentives with two credits favoring energy production at the expense of energy conservation and retrofitting.

Our economists also examined the impact of a decline in loan limits for mortgages back by the Federal Housing Administration (FHA). Stimulus legislation set to expire January 6, 2014 reduces the cap from $729,750 to $625,500 and the factor translating local home prices to an applicable limit from 125% to 115%. NAHB’s analysis indicates 408 counties will experience a loan limit decrease in excess of 10% if the legislation is allowed to expire. NAHB joined a number of other housing industry groups to extend the deadline.

Additionally, our economists examined the top reasons for moving in 2013. For the third straight year the number and share of movers doing so to own rather than rent a home increased. Between 2012 and 2013, approximately 2.1 million or 5.4% of all movers did so to own rather than rent. This represents an increase of 596,000 movers from the reading between 2010 and 2011. Overall, the new Census data shows household mobility decreased from the prior year. However, the reasons for moving are promising in that the most common reason for moving was to obtain new or better housing, followed by those wishing to establish their own household.

For the full story, check out these Eye on Housing posts.

With the Bump in Interest Rates Behind Us, Sales are Returning to Normal
The Pending Home Sales Index (PHSI), a forward-looking indicator based on signed contracts, ticked up 0.2% in November to 101.7 from a downwardly revised 101.5 in October. With the PHSI essentially flat at the end of the year, it is expected that existing home sales will remain roughly level at least during the first few months of 2014.Posted Dec. 30.

Rates on New Home Loans Join Downward Trend
On Christmas Eve, the Federal Housing Finance Agency (FHFA) reported a 6 basis point decline in the average contract interest rate on loans to purchase newly-built homes, from 4.32 to 4.26 percent. Posted Dec. 26.

Senate Finance Staff Discussion Draft: Energy Tax Incentives
The Senate Finance Committee released a draft proposal to change tax code’s rules concerning energy production and energy-efficient improvements. Under the draft proposal, most existing energy tax incentives would be eliminated or otherwise allowed to sunset and replaced by two credits favoring energy production. Posted Dec. 23.

Existing Sales Down
November existing home sales decreased 4.3% in November, and were down 1.2% from November 2012. All regions declined in November, ranging from an 8.5% decrease in the West to a 2.4% decrease in the South. Posted Dec. 19.

Homes Under Construction: A Good Sign of Recovery
The Census Bureau’s latest release shows that the seasonally adjusted number of homes under construction has now increased for 27 months in a row, going from 413,000 in August of 2011 to (a preliminary estimate of) 685,000 in November of 2013. The increases have come from both single-family and multifamily construction. Posted Dec. 18.

Home Building Passes the One Million Mark
November housing starts and permits reported by Census and HUD were over the one million mark in November. Single-family starts rose to 727,000, a 20.8% increase over October and the highest since December 2007. Multifamily starts rose to 364,000, a 26.8% increase over October. Posted Dec. 18.

Construction Sector Job Openings Reach 5-Year High in October
The number of unfilled construction sector positions (124,000) reached a five-year high, according to the October BLS Job Openings and Labor Turnover Survey. Posted Dec. 10.

Roundtables at IBS will help you evaluate designations

Earning a designation is great way to maximize your professionalism through industry education. If you are unsure which designation is right for you, get the answers to your questions during interactive designation roundtables at the 2014 International Builders’ Show® next month in Las Vegas. You will hear success stories from other designees about how they leveraged their “letters” to grow their companies and enhance their professional brands.

Each roundtable below will be held in the Las Vegas Convention Center:
Roundtable attendees will earn one hour of continuing education credit toward your designation.
While at IBS, consider registering for Pre-Show Education courses like Certified New Home Sales Professional, Design/Build, Green Building for Building Professionals and Universal Design/Build. In addition to earning CE credit, you will move a step closer to earning your next designation.

For more information about designation-related activities at IBS, call the NAHB Professional Designation Help Line at 800-368-5242 x8154 or email

It’s also not too late for your members to register for the 2014 IBS.

New energy standards for water heaters go into effect in April

Home builders and remodelers who install large capacity water heaters (greater than 55 gallons) need to be aware that revised federal energy standards that go into effect in April 2015 are expected to have a significant impact on space requirements for these water heaters and on the way they are installed.

Smaller water heaters must also comply with the increased energy-efficiency requirements and are expected to be more costly as a result. However, they are not expected to have additional space and/or venting requirements like the larger capacity units.

The revised standard was imposed by the Department of Energy and will go into effect following a five-year transition period to allow manufacturers to gear up for production of the more efficient units. As of April 2015, manufacturers will no longer be allowed to construct water heaters not meeting the new requirements, but builders and remodelers will still be able to install the existing stock.

Water heaters that comply with the new energy-efficiency standard are expected to be more costly and bulkier than current models. In particular, some current models of large capacity electric water heaters may no longer be available because the higher energy factor standards will require heat pump water heater technology. This new technology requires the water heater to be installed in an area with sufficient household air volume for heat exchange.

Builders and remodelers whose projects include installation of large capacity gas-fired water heaters must accommodate the positive pressure venting needs of higher efficiency gas- or propane-fired units during installation. And remodelers and home owners replacing a water heater may also find that these bulkier large capacity water heaters are too large to fit into the existing space and/or require new exhaust venting. According to DOE's market assessment, about 4 percent of gas-fired storage water heater shipments and about 9 percent of electric storage water heater shipments fall into the large-volume water heater category.

In preparation for the new energy-efficiency standard, builders and remodelers who routinely install large capacity water heaters are encouraged to reach out to manufacturers for details about availability and space and venting requirements. NAHB will continue to follow this issue and will provide members with information about installation and potential alternatives to the larger capacity units as it becomes available.

Who are your HBA's Associate Members?

Recently we provided a profile of builder members based on an annual survey conducted by NAHB's Economics and Housing Policy Group. Now let's look at associate members, who represent about two-thirds of the total membership and work in a wide range of professions related to home building. Here is a breakdown of the primary work activity among associate members:
  • 40% – subcontractors or specialty trade contractors.
  • 13% – professional specialty.
  • 10% – retail dealerships or distributorships.
  • 9% – financial services.
  • 5% – wholesale dealerships or distributorships.
  • 21% – another type of primary activity.
The median age of associate members is 54, and about half either finished college or have an advanced degree. Another 33 percent have some college education or career technical training. About 82percent of associate members are men and 18 percent are women. In comparison, about 93 percent of builder members are men and 7 percent are women.

The average number of employees on the payroll and company revenues for associate members varies significantly based on the member's business activity; the median number of employees is 8 and the median revenue is about $1.3 million. Detailed information on the survey analysis is available here.

FHFA announces increase in Guarantee Fees

The Federal Housing Finance Agency (FHFA) today took additional steps toward fulfilling the Strategic Plan for Enterprise Conservatorships that FHFA published in February 2012. That Plan established a conservator goal of gradually contracting Freddie Mac and Fannie Mae’s dominant presence in the marketplace while simplifying and shrinking their operations. The basic premise behind the “contract” goal is that with an uncertain future and a general desire for private capital to re-enter the market, the companies’ market presence should be reduced gradually over time.

When FHFA set forth the 2013 Conservatorship Scorecard in March, it also set an expectation that guarantee fees would continue to be gradually increased in 2013 in furtherance of the strategic plan. Today, FHFA directed Freddie Mac and Fannie Mae to raise guarantee fees in three components:
  • The base g-fee (or ongoing g-fee) for all mortgages will increase by 10 basis points;
  • The up-front g-fee grid will be updated to better align pricing with the credit risk characteristics of the borrower; and
  • The up-front 25 basis point adverse market fee that has been assessed on all mortgages purchased by Freddie Mac and Fannie Mae since 2008 is being eliminated except in the four states whose foreclosure carrying costs are more than two standard deviations greater than the national average.
FHFA expects these increases and decreases to produce an overall average g-fee increase of
approximately 11 basis points based on loan purchases of Fannie Mae and Freddie Mac in the
third quarter of 2013. This represents an average increase of 14 basis points on typical 30-year
mortgages and 4 basis points on 15-year mortgages. This increase follows FHFA-directed
increases of 10 basis points each announced in December 2011 and August 2012.

“Today’s price changes improve the relationship between g-fees and risk,” said FHFA Acting
Director Edward J. DeMarco. “The new pricing continues the gradual progression towards
more market-based prices, closer to the pricing one might expect to see if mortgage credit risk
was borne solely by private capital. The price changes provide better protection of and return
to taxpayers, who are providing the capital support that keeps these companies operating.

These changes should encourage further return of private capital to the mortgage market,”
DeMarco said.  Today’s increases not only advance the previously stated conservatorship goals and
commitments, they also advance:
  • the statutory directive in the Temporary Payroll Tax Cut Continuation Act of 2011 foradjusting g-fees based on risk levels;
  • the 2013 Financial Stability Oversight Council recommendation that g-fee increases beused to attract private capital to the mortgage market; and
  • the President’s August, 2013 request for FHFA to reduce taxpayers’ credit exposure by accelerating actions to draw private capital into the market to stand ahead of the Fannie Mae and Freddie Mac guarantee.
The g-fee changes being made today, including the improved risk sensitivity of the pricing
framework, are important steps to enabling Freddie Mac and Fannie Mae to deepen and
broaden the risk-sharing transactions with private investors they initiated this year. In the
coming years, FHFA expects risk-sharing transactions to cover a growing portion of the
companies’ new business and for the amount of risk transferred to private capital to continue to

Elimination of the across-the-board adverse market fee (except as noted) provides recognition that the nationwide stress in housing markets has eased. The experience with mortgage defaults the past several years, however, has amply demonstrated that mortgage investors and guarantors have significantly greater costs carrying out foreclosures in the few states that stand far apart from the rest of the country. As described in more detail in the paper entitled State-Level Guarantee Fee Analysis, maintaining the 25-basis-point adverse market fee in New York, Flordia, New Jersey, and Connecticut will provide taxpayers, as investors in Freddie Mac and Fannie Mae, an approximate compesnation for the difference in foreclosure costs in those states relative to the average costs across the country. FHFA anticipates that this adverse market fee will be re-evaluated and refined at least annually. While the broad adverse market fee is being eliminated, other changes to the up-front pricing grid offset this decrease for certain mortgages.

For loans exchanged for mortgage-backed securities, the price changes will be effective with
settlements starting April 1, 2014. For loans sold for cash, the price changes will be effective
with commitments starting March 1, 2014. Freddie Mac and Fannie Mae will work directly
with lenders to implement the changes.

Also today, FHFA released its fifth annual report on single-family guarantee fees, covering the
years 2011 and 2012. The g-fee changes being announced today respond in part to the findings
in this report regarding shortfalls in the risk-based pricing at the two companies.

C. Dan Joyner Company affiliates with Berkshire Hathaway

Prudential C. Dan Joyner will have a new name in 2014: Berkshire Hathaway Home Services/C. Dan Joyner Realtors.  The company is one of 12 real estate brokerages that will join the brand in 2014.  Click here to read more at GSA Business.

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When using these programs, please identify yourself as a member of the National Association of Home Builders.

Click here for a full list of member discounts.