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.