Market Shows Cautious Optimism As Sign Of Recovery Accumulate
Signs of a housing market rebound have begun to accumulate in the first half of 2012. Rental demand was up and vacancies down in 2011, leading to a jump in multi-family construction. With the economy steadily adding more jobs, home sales picking up, and new home inventories at record lows, the single-family market may also be reviving. Still, the persistent weakness in existing home prices, the large backlog of foreclosures, and the tight lending environment are restraining the recovery.
The housing market has performed relatively well in the current environment supported by record affordability and very low interest rates, with home sales up year over year, but from very depressed levels in numeric terms. In turn, cautious optimism remains in place for continued gradual healing of the housing market, albeit in the face of various headwinds, including tepid employment growth, rising student loans, concern over slowing economies in Europe and China, and a continuing stream of foreclosed households.
Main measures of home prices have firmed in recent months, as the share of distressed sales has declined in a strong seasonal period. The reduced inventories have provided temporary relief creating upward pressure on home prices accompanied by an increased demand for properties.
Now with reduced inventories affecting the market, new construction appears poised to become the driving force in the next phase of the housing market recovery. The National Association of Home Builders housing market index, a measure of builder confidence, increased in June to the highest level in more than five years spurring significant activity in both the single-family and multi-family markets.
New Starts & Building Permits Lead The Way
Since record lows attained in 2011, new construction starts and requests for new building permits for single-family homes have spiked thus far in 2012. Single-family starts are up 19.72% from the year previous to 516,000 in 2012 – a mark not seen in the single-family sector since 2008. Building permits in the single-family sector also registered a notable increase of 17.90% in the first half of 2012 when compared to the year previous.
Dramatic increases were also seen in the more volatile multi-family market segments. The 5-10 unit property class posted a 7.19% increase in new starts and a 44.57% increase in new building permit requests. The 10+ unit property class reported an equally impressive 7.87% increase in new starts and a 38.83% gain in new building permit requests. While the 2-4 Unit property class showed mixed results registering both an 18.18% gain in new starts and -9.09% loss in new building permit activity.
Improving Homes Sales
After hitting a record low of just 305,000 in 2011, sales of new homes in the first half of 2012 stood 20.98% above just a year-earlier reaching a seasonally adjusted 369,000. While the increase occurred from record lows, new home sales appear to be staging a recovery that, for the first time in this cycle, does not depend on the temporary stimulus of federal home buyer tax credits.
Existing home sales show a similar trend. The National Association of Realtors reports that sales of single family homes and condominiums increased 6.73% to 4.55 million in the first half of 2012. This is compared to 4.263 million in 2011 and 4.182 million is 2010. Homes are also selling more quickly. The typical home for sale in the first half of 2012 was on the market for just 8.0 months, compared with 8.7 months in March 2011 and 14.4 months in March 2010.
Inventories Nearly In Balance
Inventories of new single-family homes for sale fell 20% from 2011, sinking to just 143,000 available units in 2012—the lowest level in nearly five decades of recordkeeping. Even with the slow pace of new home sales, this level of inventory equates to less than a 6.0 months’ supply for the first time in more than five years.
The inventory of existing homes for sale also shrank by some 27.5% from 2011 to present, reducing the supply in May to 6.6 months – also the lowest level since 2006. The 6.0-month supply mark is important because it is considered a rough indicator of market balance, where neither buyers nor sellers have the upper hand in price negotiations.
Despite this depletion of the for-sale stock, the inventory of vacant units held off market continued to grow last year. This excess supply is of concern because of its potential drag on the housing recovery. According to the latest Housing Vacancy Survey, the number of vacant units held off the market has risen since 2010, partially offsetting declines in the numbers of “on-market” vacant homes for rent and for sale.
Units held off market now account for 5.5% of the housing stock – nearly a full percentage point more than the same period a decade ago. This increase implies that, relative to that period, there are more than 1.2 million excess off-market vacant units. When these units come on the market, they could exert downward pressure on home prices. For now, though, the decline in vacant units for sale is helping to put a bottom under prices.
Home Prices On The Rebound
After another down year for home prices in 2011, the first glimmers of a turnaround have begun to appear in 2012. The median new single-family home sold for $227,200 in 2011, down 2.4% from 2010 to a new cyclical low. According to the National Association of Home Builders new single-family home median prices have rebounded to $234,500 since the end of 2011 representing a 3.21% increase year-to-date.
Existing home prices also showed continued weakness in 2011 yet the first half of 2012 has seen a welcome upward trend in home prices partially driven by lower inventories. The median existing single-family home price rose 10.05% from $166,200 at the end of 2011, to their current level of $182,900 as June 2012. According to the Case-Schiller 20-City Composite Index, home prices in 2012 have increased in 19 out of the 20 largest metropolitan markets, with only Detroit registering a loss.
Unemployment Still The Most Important Variable
Encouraging signs of recovery, including many housing market indicators, seems to point to an economy that is building momentum month over month. However, any sustained economic rebound is still closely tied to the direction of unemployment. The fact remains that unemployment is still the single most important variable in determining the direction of economy and any associated recovery as we move forward.
The vigor of housing demand hinges on the strength of employment growth. In the current cycle, 22-consecutive months of job gains have brought total employment growth since February of 2010 to a total of 3.7 million new jobs. Even with two-years of moderate job growth under our belts, the US economic recovery remains spotty with unemployment affecting some regions more heavily than others.
Some hard hit states such as Florida, California, Michigan and Nevada have shown recent improvements reporting a more than 2.00% decrease in unemployment from 2011 to 2012, while New York, one of the most populous states actually saw unemployment increase year-over-year. Yet even with notable improvements states like California and Nevada are still reporting unemployment levels over 10% – well above the national average.
A majority of economists in the latest AP Economy Survey expect the national unemployment rate to stay above 6% – the upper bounds of what’s considered healthy – for at least four more years. That could easily retard any momentum the economy has gained in recent months. One factor that could help things out is the housing market itself. With recent rises in new construction starts and building permit activity the housing market could help add to the number of new jobs and make a significant impact.
Even with generally positive data in sales activity, home prices, inventory, and new construction – the economy still remains at a friction point where any change in the delicate balance of economic stimuli could cause a general unraveling of the present situation and a return to stagnation. The US economy has proved to be resilient as displayed by continued growth during the past eleven quarters, albeit unevenly, through shocks that included a devastating natural disaster, a spike in oil prices, and an intensified European sovereign debt crisis.
With an ongoing decline in oil prices and interest rates, the U.S. economy and the financial markets are less vulnerable to shocks than they were a year ago, when growth nearly stalled as consumers sharply pared down their spending. It can be expected that moderate growth will continue in coming quarters, and for all of 2012, with GDP growth projected to come in at 2.2%. While the forecast this year and next year has not changed materially, risk to the forecast is now tilted towards cautious optimism rather than balanced between upside and downside risk as had been the case in previous months.