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Homebuilder Confidence Jumps In June 2015

Law360

Publication
July 07, 2015

According to recently released data from the U.S. Commerce Department, homebuilders have ratcheted up construction in April to a seasonally adjusted annual rate of 1.135 million units. This is a 20.2 percent increase from March and is the highest level of housing production since November 2007.

Both housing sectors registered production gains in April. Single-family housing starts increased 16.7 percent to a seasonally adjusted annual rate of 733,000 in April while multifamily starts rose 27.2 percent to 402,000 units.

Combined single and multifamily starts were up in three out of the four geographic regions in April. The Northeast posted an 85.9 percent gain, the Midwest rose 27.8 percent and the West increased 39 percent. Housing production dropped 1.8 percent in the South. Overall permit issuance rose 10.1 percent in April to a rate of 1.143 million.

The data also reflected that construction spending jumped 2.2 percent in April to an annual rate of $1.0 trillion, the highest level since November 2008. This percentage increase was the largest since May 2012.

As employment grows, wages increase and home equity improves, the expectation is that the upward momentum will continue in the months ahead. The increases, particularly in the single-family market, are indicative of continued market healing as consumers are slowly returning to the market. Purchases of new homes in April rose more than projected, increasing 6.8 percent to a 517,000 annualized pace from 484,000 the prior month, according to Commerce Department figures. Helping sustain the momentum is that fact that employers added 280,000 jobs in May, the highest number in the past five months, after a 221,000 April advance. Relatively inexpensive borrowing costs also are supporting homebuyers. The average rate on a 30-year fixed mortgage was 4.04 percent in the week ended June 11, according to data from Freddie Mac in McLean, Virginia. Finally, wage growth appears to be gaining traction. Average pay for all civilian workers climbed 4.2 percent in the first quarter from the same period in 2014 to $22.88 an hour according to Labor Department figures released on June 10. That compares with a 4 percent year-over-year gain in the fourth quarter and is the strongest since July-September 2006.

According to the Federal Reserve Bank of St. Louis, the inventory of unsold new homes remained unchanged at 206,000 in May, which combined with an increase in overall sales, resulted in the months' supply of new homes available for sale edging downward to 4.5 months from 4.6 months in April. When compared to the longer-run average of six month's supply, this represents a tight supply of unsold new homes.

It's no wonder that homebuilder sentiment hit a yearly high in June according to the latest National Association of Home Builders/Wells Fargo Housing Market Index released on June 15. The HMI rose five points in June to 59, hitting a nine-month high. The Housing Market Index is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next six months as well as the traffic of prospective buyers of new homes. Any number over 50 indicates that more builders view conditions as good rather than poor, a sign that indicates optimism about future sales.

All three HMI components posted healthy gains in June. The component gauging current sales conditions jumped seven points to 65, the index charting sales expectations in the next six months increased six points to 69 and the component measuring buyer traffic rose five points to 44.

The data is also in line with the latest Leading Market Index, which was released on May 6 by the National Association of Home Builders. The report revealed that out of 360 metropolitan areas evaluated across the country, 68 housing markets have returned to or have exceeded their last normal level of economic and housing activity seen before the recession. This represents a net gain of seven metro areas year over year.

The LMI evaluates and identifies those metro areas that are now approaching and exceeding their previous normal levels of economic activity. The index factors in average single-family permits, home prices and employment levels for the past 12 months and then compares that to the market’s historical levels.

Overall, markets nationwide are running at about 91 percent of normal economic and housing activity. Sixty-eight percent of the 360 metro areas tracked by the index have shown improvement over the past year.

"The number of markets on this quarter’s Leading Markets Index at or above 90 percent of previous normal levels has reached 157 — a sign that the recovery is spreading to a wide range of markets," said Kurt Pfotenhauer, vice chairman of First American Title Insurance Company, which co-sponsors the LMI report.

Topping the list of major metros on the LMI is Baton Rouge, Louisiana, with a score of 1.43 — or 43 percent better than its last normal market level. Other major metros at the top of the list include Austin, Texas; Honolulu; Houston; and Oklahoma City. Rounding out the top 10 are San Jose, California; Los Angeles; Salt Lake City; Charleston, South Carolina; and Nashville — all of whose LMI scores indicate that their market activity now equals or exceeds previous norms.

During the coming quarters, homebuilders should remain sensitive to homebuyers' ability to buy a new home. Housing affordability headwinds are likely to intensify as the Federal Reserve prepares to increase a key interest rate for the first time in nearly a decade. Moreover, the sales gains of recent months could be short-lived if new home prices increase so sharply that buyers are priced out of the market. Nonetheless, the expectation is that the upward momentum will continue in the months ahead and underlying housing demand will remain firm as employment grows, wages increase and home equity improves.

This article is reprinted with permission from Law360.

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Manuel Gonzalez

Manuel Gonzalez

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