Housing & Construction January 2017
HOUSING STARTS FALL 18.7%
Housing starts fell 18.7% in November to a seasonally adjusted annual rate of 1.09 million units after rising to 1.32 million units in October. Single-family starts fell 4.1% to a seasonally adjusted annual rate of 828,000 units after rising to 869,000 in October. Year-to-date single-family starts were up 9.6%. Multifamily starts plunged 45.1% to 262,000 units after rising 68.8% to 454,000 units in October. Starts fell in all regions. Starts were down 52.1% in the Northeast, 14.2% in the Midwest, 9.3% in the South and 22.1% in the West. NAHB says that strong builder confidence, a firming job market, growing economy, rising household formation and a reduction in red tape and regulations should keep the housing recovery on track into next year.
BUILDING PERMITS FALL 4.7%
Building permits fell 4.7% in November to a seasonally adjusted annual rate of 1.20 million after inching up to 1.23 million in October. Single-family permits rose 0.5% to a rate of 762,000 and multifamily permits fell 3.3% to 467,000. Regional permit issuance was mixed. Permits fell 12.1% in the Midwest, 6.1% in the West and 4.0% in the South. Permits rose 2.8% in the Northeast. Permits have been above the one million level for seventeen consecutive months, the longest stretch in seven years.
NEW-HOME SALES RISE 5.2%
Sales of new single-family homes rose 5.2% in November to a seasonally adjusted annual rate of 592,000 units after falling to 563,000 units in October. The inventory of new homes for sale rose to 250,000 in November after rising to 246,000 in October, a 5.1-month supply at the current sales pace, down from a 5.2-month supply in October. Regional sales were mixed. Sales increased 43.8% in the Midwest and 7.7% in the West. Sales were unchanged in the Northeast and fell 3.1% in the South. NAHB expects an increase in new home construction this year, fueled by a growing economy and solid job growth, as long as prospective first-time buyers have access to affordable home loans. Sales of new homes are tabulated when contracts are signed and are considered a more timely barometer of the housing market than purchases of previously-owned homes, which are calculated when a contract closes.
EXISTING HOME SALES RISE 0.7%
Existing home sales rose 0.7% in November to a seasonally adjusted annual rate of 5.61 million from a downwardly revised 5.57 million in October. November’s sales pace was the highest since February 2007, and was up 15.4% from November 2015. Total housing inventory at the end of November dropped 8.0% to 1.85 million existing homes available for sale, 9.3% lower than in November 2015 and a 4.0-month supply at the current sales pace, down from a 4.3-month supply in October and unchanged from November 2015. Housing supply is very tight, which is impacting affordability and driving up rents as well. The median price of an existing single-family home was up 6.8% from November 2015. Wells Fargo notes that as the population has aged, fewer people are moving, lessening turnover and making people less willing to part with their current home. Also the number of homes that have been converted to rentals has reduced the supply of fixer-uppers on the market that provided a gateway to ownership for many first-time buyers. Inventory has fallen year-over-year for 18 consecutive months. Regional sales were mixed. Sales rose 8.0% in the Northeast and 1.4% in the South. Sales fell 2.2% in the Midwest and 1.6% in the West.
BUILDER CONFIDENCE JUMPS TO 70
Builder confidence jumped seven points in November to 70 after falling to 63 in October, according to the HMI (National Association of Home Builders/Wells Fargo Housing Market Index). The component measuring buyer traffic rose six points to 53, the first time this gauge has been over 50 since October 2005. The index gauging current sales conditions rose seven points to 76 and the index charting sales expectations in the next six months jumped nine points to 78. The three-month moving averages for HMI scores rose six points in the Northeast (51), three points in the Midwest (61), two points in the West (79) and one point in the South (67). It was the twentieth consecutive month the HMI remained above 50 and the highest level of confidence since July 2005. Analysts say that the big 7-point jump can largely be attributed to a post-election bump, as builders are reportedly hopeful that the new administration will reduce regulatory burdens that have been weighing on housing affordability. Unseasonably mild weather during November most likely also boosted sentiment.
MORTGAGE RATES RISE
The 30-year mortgage rate rose to 4.32% at the end of December after rising to 4.03% in November. In November of last year 30-year rates averaged 4.01%. Though still extremely low by many measures, rates have gone up more than half a point since Trump’s election, and as of the end of December were at the highest level since October of 2014.
FREDDIE MAC MORTGAGE RATES REVIEW
The biggest economic surprise for 2016 was the decline in interest rates throughout most of the year. In December of 2015, the Federal Reserve Open Market Committee (FOMC) raised the federal funds rate for the first time since 2006 and most analysts expected to see more increases in 2016. However, concerns about overseas economic growth, particularly in Europe, contributed to declines in mortgage rates to start the year and they continued to drift down through early summer. But the late June Brexit vote shook up markets, sending the 10-year Treasury to its lowest-ever yield and pushing 30-year fixed mortgage rates below 3.5%. Rates remained low throughout the rest of the summer and into early fall. At the beginning of September, rates drifted upward until they stood at 3.54% on the Tuesday before the U.S. election. Interest rates rose substantially following the election, increasing by more than 0.5% in just a few weeks.
FREDDIE MAC HOUSING FORECAST
Over the next two years, Freddie Mac expects that the economy will keep growing at a modest pace, inflation will pick up and the labor market will stay at full employment. Interest rates will gradually rise as the Federal Reserve continues on its path of policy normalization. Housing markets will slow a bit in 2017 but they will recover after they absorb the initial shock of higher interest rates. Mortgage origination activity will slow significantly in 2017 as refinancing activity slows. In 2018, mortgage origination activity will increase slightly, but the composition will shift to a purchase-dominated market last seen in the 1990s.
WELLS FARGO HOUSING OUTLOOK
The higher-interest rate environment largely expected to prevail in 2017 will create some challenges for the housing market, according to the 2017 Housing Market Outlook from Wells Fargo. Housing affordability, while near historic highs, has been falling as home prices have risen much faster than incomes in recent years. The inevitable rise in mortgage rates will further reduce affordability. The strengthening of the dollar will also reduce sales to international buyers. Within starts, Wells Fargo says there is a subtle shift toward less expensive homes. Builders, particularly in the South, the nation’s largest housing market, are focusing more intently on homes priced at or below the median new home sales price, currently at a near historic premium relative to existing homes.
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