The National Association of Home Builders Housing Market Index for June fell by two points to 67 after a revision of May’s reading. Components of the Housing Market Index were lower for June with builder confidence in current market conditions two points lower at 73; June’s reading for builder confidence in market conditions for the next six months also fell two points to 76. Builder confidence in buyer traffic fell two points to 49. According to the Index, any reading over 50 indicates that more builders are confident than those who are not.
Labor and Lot Shortages Continue to Stifle Single–Family Home Building
NAHB Chief Economist Robert Dietz said that builder confidence remains high despite ongoing shortages of buildable lots and skilled labor. Meanwhile, NAHB reported lower readings for its regional 3-month rolling average of home builder confidence. The Northeast region was two points lower at 46; Builder confidence in the Midwest was one point lower at 67 and the Southern region was also one point lower with a 3-month reading of 70. The West had the highest builder confidence with a three-month average reading of 70.
Mortgage and consumer credit interest rates are likely to move higher after the Federal Reserve’s decision to raise its target federal funds rate by 0.25 percent on Wednesday. This was the third uptick for the Fed rate this year. As interest rates and other consumer costs increase, would-be buyers of new homes may be sidelined. Future builder confidence readings could be influenced by a variety of economic factors including employment, interest rates and consumer confidence.
Housing Starts Expected to Lag Behind Pre–Bubble Level
While housing starts are expected to increase to approximately 1.23 million on a seasonally-adjusted annual basis, they are significantly lower than the near 2-million housing starts reported prior to when the housing bubble burst. Analysts noted that the overall economic recovery remains steady with some glitches expected along the way. Closing the gap between builder confidence and housing starts is seen as the solution for easing high demand for homes and unusually low inventories of homes on the market.
December home prices continued to rise per December readings for Case-Shiller’s National and 20-City Home Price Indices. On average, national home prices increased by 5,80 percent year-over-year and exceeded November’s year-over-year reading of 5.60 percent. The 20 City Index, which analysts follow more closely than the National Home Price Index, posted a year-over-year gain of 5.60 percent in December, which exceeded an expected reading of 5.40 percent and November’s year-over-year reading of 5.20 percent growth.
West Posts Highest Home Price Growth
The West continued to dominate home price growth rates with Seattle, Washington posting 10.80 percent year-over-year growth while Portland, Oregon and Denver, Colorado posted year-over-year gains of 10.00 percent and 8.90 percent respectively. New York, New York posted the lowest year-over-year gain in home prices with year-over-year growth of 3.10 percent. Washington, D.C. followed with 4.20 percent growth in home prices; Cleveland, Ohio posted a year-over-year gain of 4.40 percent.
Home Price Growth Rate Doesn’t Indicate a New Housing Bubble
David M. Blitzer, Chairman and Managing Director of the S&P Indices Committee that oversees Case-Shiller Home Price Indices, said that home prices adjusted for inflation averaged a year-over-year growth rate of 3.80 percent. While higher than average, Mr. Blitzer said the current rate of home price growth “is not alarming.”
While rising home prices may sideline moderate-income and first-time homebuyers, high demand for homes and ongoing shortages of homes for sale continued to drive prices up. Real estate pros typically consider a six-month supply of available homes an average inventory reading, but the current supply of homes for sale averages three to four months. Recently rising mortgage rates were also cited as contributing to higher home prices; rates for a 30-year fixed rate mortgage average 4.20 percent as compared to 6.40 percent on average since 1990.
Questions of affordability and rising rates could impact first-time buyers who enable current homeowners to sell their homes and “move up.” If large numbers of first-time buyers are sidelined by rising home values and mortgage rates, home prices could be impacted if investors and cash buyers fail to fill in gaps between high home prices and affordability.
Home increased in October according to Case-Shiller’s 20City Home Price Index. Home prices rose from September’s annualized reading of 5.40 percent to 5.60 percent. Factors contributing to rising home prices include stronger economic conditions and outlook along with short inventories of available homes coupled with high demand. On average, October home prices rose 5.10 percent on seasonally adjusted annual basis, which was unchanged from September’s reading.
West Continues to Lead Home Price Growth
Top home price growth rates were in Seattle, Washington at 10.70 percent, Portland, Oregon at 10.30 percent and Denver, Colorado with a seasonally-adjusted annual price increase of 8.30 percent. New York, New York had the lowest home price growth in October with a reading of 1.70 percent.
In a separate report, December consumer confidence exceeded expectations with an index reading of 113.70 as compared to an expected reading of 110.00 and November’s reading of 109.40. This was the highest reading for consumer confidence since 2001. Analysts said that the strong reading for consumer confidence was a sign that consumers will increase their spending in 2017, but what will happen with mortgage rates is a big question.
Rising Mortgage Rates May Slow Home Prices, High Demand for Homes
With the Federal Reserve’s decision to raise its target federal funds range in December comes a question of how rising mortgage rates will affect housing markets. Rising fed rates typically lead to increases in consumer lending rates including rates for home loans and refinancing. Combined effects of rising home prices and mortgage rates create challenges for first-time and moderate income home buyers. While higher mortgage rates have not impacted buyer demand so far, rising mortgage rates could sideline some buyers.
A recent compilation of the most expensive places to live in America illustrates the imbalance of home prices as compared to consumer incomes. Brooklyn, NY topped this list with a reading of 127.70 percent of average household income earned in Brooklyn to buy an average priced home in Brooklyn. Analysts reporting this data noted that many Brooklyn homeowners work in Manhattan and earn more than those who work in Brooklyn. Disparities in average home prices and home buyer incomes could “trickle down” to less expensive areas if mortgage rates and home prices continue to rise.
Meanwhile, builder confidence is strong and is expected to lead to higher levels of home construction in 2017.
September’s 20-City Housing Market Index from Case-Shiller showed signs that rapidly rising home prices in some metro areas may be losing momentum. San Francisco, California, posted a month-to-month reading of -0.40 percent and a year-over-year reading of 5.70 percent. Home prices stayed flat in Seattle Washington from August to September, but posted the highest home price gain of 11.00 percent year-over-year. Slowing home price growth in high-demand areas suggest that affordability concerns are impacting rapid gains in home prices seen in recent years.
Case-Shiller’s National Home Price Index achieved its highest gain with a reading of 5.50 percent as compared to August’s reading of 5.10 percent.
Year–over–Year: Western U.S. Holds Highest Gains in Home Prices
In addition to Seattle’s year-over-year home price growth rate of 11 percent, Portland, Oregon closely followed with a year-over-year reading of 10.90 percent. Denver, Colorado rounded out the top three cities in the 20-City Home Price Index with a year-over-year growth rate of 8.70 percent. September was the eighth consecutive month that the top three cities held their places in the 20-City Index. Case-Shiller’s 20-City Home Price Index posted a year-over- year gain of 5.10 percent.
September Home Prices Cap Recovery, Usher in New Progress for Housing Market
According to David M. Blitzer, Chairman of S&P Dow Jones Index Committee, September’s record national reading for home prices marks a transition from housing recovery to “the hoped for start of a new advance.” Mr. Blitzer cited recent data on sales of new and pre-owned homes and said that housing starts reached a post-recession peak.
September’s peak in national home prices was 0.10 percent above the pre-recession peak set in 2006. Adjusted for inflation, the September peak remains approximately 16 percent below the pre-recession peak. During the recession, national home prices reached a trough that was 27 percent lower than Case-Shiller’s September reading. Analysts expressed some caution and noted headwinds to housing markets including slower-than-normal rates of homes construction, higher mortgage rates and strict mortgage approval requirements.
According to the National Association of Home Builders Housing Market Index for November, builder sentiment was unchanged at a reading of 63. Readings above 50 indicate that a majority of builders are confident about housing market conditions. Readings for three sub-indexes used to calculate the Housing Market Index Readings for builder confidence in current market conditions and market conditions within the next six months were posted at 69. The reading for buyer foot traffic in housing developments was 47. Buyer traffic has not reached the benchmark reading of 50 since the peak of the housing bubble approximately 10 years ago.
NAHB Chair Ed Brady noted that survey information provided by most participating builders was gathered prior to the presidential election. Mr. Brady also noted that Housing Market Index readings have exceeded 60 for the past three months, which indicates slow but steady growth in housing markets.
Analysts: Builder Sentiment and Building Activity Inconsistent
While positive builder sentiment readings seem to contribute to stronger housing markets, analysts pointed out that housing starts are not consistent with high builder sentiment levels. Reasons for fewer home starts than the Housing Market Index suggests include approaching winter weather and ongoing shortages of labor and buildable lots.
Real estate pros count on building more homes (and building them faster) as the only solution to tight supplies of available homes and rising demand. These conditions create highly competitive markets that present obstacles to moderate income and first time home buyers. NAHB said that rising incomes, expanding labor markets and relatively low mortgage rates are fueling demand for homes. While mortgage rates have remained near historic lows, home prices have risen quickly in high-demand areas. This creates affordability challenges for home buyers, who also face strict home loan approval requirements.
3 Month Rolling Averages Show Regional Confidence Readings
NAHB reported its three-month rolling averages according to four regions included in Housing Market Index readings. The Northeast reading was 45; the Midwest region’s confidence reading was 58 and the Southern region reported a reading of 66. The West, which includes high-demand metro areas such as Portland, Oregon and San Francisco, California, had a November builder confidence reading of 77.
According to the National Association of Home Builders, overall builder confidence in housing markets dropped two points in October to an index reading of 63. September’s reading of 65 was the highest posted since the housing bubble peak. Component readings for October’s housing market index were mixed; the reading for builder confidence in market conditions over the next six months rose one point to 72. Builder confidence in current housing market conditions fell two points to 69. Builder outlook for buyer traffic in new home developments over the next six months fell by one point to an index reading of 46.
Approaching winter weather likely contributed to lower readings, but builder confidence remained strong. Any reading above 50 signifies that more builders are confident about specific index components than fewer. While home builders continue to be encouraged by low mortgage rates and a stronger job market, they also face obstacles including shortages of labor and buildable lots for development.
High Demand, Low Inventory of Homes Present Ongoing Challenges
High demand for homes coupled with depleted inventory of available homes is sidelining some buyers. As demand continues to drive home prices higher first-time and moderate income buyers are faced with affordability and mortgage qualification challenges. Limited inventory also makes it difficult for home buyers to find homes they want and contributes to competition for available homes. Buyers depending on mortgage financing typically compete with investors and cash buyers for homes in high demand areas.
Real estate pros and analysts monitor home builder sentiment as an indicator of future home supplies, but builder sentiment and housing starts don’t necessarily correspond. Given high home prices and strict mortgage qualification standards that sideline some buyers, it appears that home builders are taking a moderate stance toward ramping up construction.
In addition to boosting real estate markets, building homes provides jobs and supports local economies. Building homes creates demand for construction materials and related products and services.
The National Association of Home Builders reported that home builder confidence in the U.S. housing market conditions held steady for the fourth consecutive month in May. Builder confidence stayed at a reading of 58, which was the number expected by analysts and was also the reading for April. Analysts said that the consistency in readings signified expansion in housing markets. Any reading over 50 indicates that more builders than not are confident about market conditions.
Components of the NAHB Housing Market Index include readings on builder confidence in current market conditions which held steady at 63 and builder confidence in market conditions over the next six months, which gained three points to a reading of 54. Builder confidence in foot traffic for new home developments was unchanged at a reading of 44.
NAHB Chief Economist Robert Dietz said that the higher reading for future sales indicates growing builder confidence in housing market conditions. In recent months, housing markets have been fueled by low mortgage rates and high demand, but supplies of available homes are dwindling. Housing industry analysts have identified building new homes as a major solution for the shortage of homes for sale.
Analysts note that while new homes represent a small part of the residential real estate market, each new home constructed contributes an average of three jobs for a year and yields an average of $90,000 in tax revenue for each home built. Builders repeatedly cite a lack of workers and buildable lots as a concern for building more homes. An NAHB analysis of the Bureau of Labor Statistics’ report on Job Openings and Labor Turnover indicated that there were 210,000 unfilled construction jobs in March, which was the highest reading since May 2007.
Regional surveys of home builder sentiment were mixed. The reading for the Northeast fell by 3 points to 41 while readings for the Midwest and South rose by one point each with readings of 58 and 59 respectively. The reading for the West was unchanged at 67.
Low Mortgage Rates: Will the Fed Raise Rates in June?
In other housing related news, analysts’ predictions are mixed regarding whether or not the Federal Reserve will raise its target funds rate next month when the Federal Open Market Committee (FOMC) meets. Uncertainties over the United Kingdom’s upcoming vote about leaving the European Union and mixed economic data appear likely to nix a rate increase, but improving labor markets could be a plus for a fed rate increase. Raising the federal funds rate would cause mortgage rates to rise and is considered a further concern for the gap between growing wages and rapidly rising home prices.