Housing Making Convincing Progress toward Normalcy
The Harvard Joint Center for Housing Studies' most recent edition of The State of the Nation's Housing deals first with the current status of the housing market. Some of it is a restatement of previous information, but with added perspective that makes it worth a recap.
The report said that after the strength of housing in 2013, the fact that residential construction, home sales and prices faltered at the beginning of this year has raised fears about the recovery. Still there has been convincing progress toward normalcy, particularly the downturn of metrics regarding distressed loans.
Despite a strong growth in residential construction in 2013 it was the sixth consecutive year that constructions starts fell short of one million, finishing the year at 925,000. This is unprecedented in records dating back to 1959 where the historical average is 1.46 million.
Single family starts were up 15 percent from 2012 to 2013 but remain depressed. The 618,000 total is a record low compared to years prior to 2008. Also, the 18 percent increase in 2013 was considerably lower than the 24 percent gain in 2011-12 and the cool down continued into the first quarter of this year, with starts down 3 percent from the same period in 2013.
Multifamily construction had its third consecutive year of solid growth, up 62,000 units or 25 percent to 307,000 units. That brought multifamily starts back to the 2000s average, still well below levels in the 70s and 80s. At the same time renter household growth is far above that in the two earlier decades, so overbuilding, at least nationally, is not a concern.
About one-third of total residential construction (310,000 units) in 2013 was intended for the rental market, a record share for data going back to 1974. The Center comments that this actually reflects the weakness of single-family rather than the strength of multifamily starts. The share of multifamily units intended as rentals, however, was a record at 92.8 percent.
Although just 17 percent above the 2010 low, home improvement spending has recovered better than residential construction and stands only 10 percent below the recent peak. As of March 2014, expenditures for homeowner improvements contributed 39 percent of total residential construction spending-well above its historical average of 30 percent.
The Bureau of Economic Analysis reports that increases in residential fixed investment (RFI) represented 14 percent of the total growth in gross domestic product (GDP) last year even though it made up just 3.1 percent of GDP, well below its historical average share of 4.7 percent.
The 2013 rebound in homebuilding was widespread with single family starts up in all four regions of the country and 90 of the 100 largest metro areas. Permitting, however was 48 percent below average annual levels in most metro areas.
As has been well reported, existing home sales increased 9.2 percent (National Association of Realtors (NAR)) in 2013 but started to slow in the fourth quarter when sales were up only 1 percent from the fourth quarter of 2012. New home sales rose 17 percent in 2013 (Census Bureau) but fell 3 percent in the first quarter of 2014 compared to a year earlier. This cool down, the Joint Center says, is significant because the pace of sales already lagged well below normal, especially new homes sales which were only 17,000 units above the lowest annual level recorded between 1963 and the housing bust. New home sales are fully 67 percent below the recent peak, while existing home sales are down 28 percent.
Homes for sale continued to be in scant supply. NAR reported the average number of available existing homes dropped by more than 200,000 units from 2012 to 2.1 million and was more than 600,000 below the monthly average since 1999. With the pickup in sales, the supply of homes on the market shrank from 5.9 months in 2012 to 4.9 months in 2013. Inventories do seem to be easing in some markets. The number of metros with growing inventories tripled from 33 in 2012-13 to 97 in 2013-14.
Inventory weaknesses arise from several conditions; an unwillingness of many buyers to accept today's prices given their relationship to the market peak; expiration of the Mortgage Forgiveness Debt Relief Act at the end of 2013 created a disincentive for under-water homeowners to pursue a short sale, and owners who have refinanced would have to pay higher interest rates for a new home. Moreover, since the housing crisis, millions of formerly owner-occupied units have been converted to rentals. At last measure, approximately 1.9 million homes switched on net from the owner to the rental stock between 2009 and 2011. Longer-term factors are also at play, including the aging of the population and the consequent decline in the number of households that move each year. The tight inventories feed on themselves, limiting options for trade-up buyers and keeping them from selling as well.
Yet another reason for the shortage of inventory is that millions of homes have been taken off the market and are sitting empty. The Census Bureau's Housing Vacancy Survey says over 7 million homes were held off the market during the downturn and the number is only now beginning to level off. The Center says if the vacant/held-off-market share of the housing stock (currently 5.6 percent) were the same as in 2001 (4.5 percent), an additional 1.4 million homes would now be available for sale or rent.
The composition of home sales does, however, point to improving conditions. Traditionally financed sales increased 15 percent in 2013, while REO sales of foreclosed properties fell 17 percent and short sales were down 13 percent Moreover, distressed sales numbered less than 1.0 million, reducing their share of all existing home sales from 22 per- cent to 18 percent.
The Center reviewed data on housing prices which rose sharply last year but which, at a median existing home price (NAR) of $197,000, are still about 16 percent below the 2006 price peak. Appreciation dramatically reduced the number of homes with negative equity; the share of all mortgaged homes that were underwater shrank from 21.6 percent in the fourth quarter of 2012 to 13.3 a year later.Like home construction and sales, home price appreciation appears to be slowing. If inventories continue to expand and mortgage rates trend upward, price increases should continue to moderate over the coming year.
While still near historic lows, interest rates on 30-year fixed mortgages jumped from 3.6 percent in the first half of 2013 to 4.4 percent in the second half which precipitated a 53.5 percent drop in refinancing applications. Applications for home purchase mortgages also fell 10 percent. As a result, the refinancing share of total lending shrank from 70 percent in the first half of the year to 49 percent in the second half. Both the Mortgage Bankers Association and Freddie Mac expect the refinancing share to dip to near 40 percent in the coming year,