How times have changed.
With data in from the Bureau of Economic Analysis (BEA), it is becoming clear that home building is a leading source of economic growth for 2012.
According to the BEA, Gross Domestic Product (GDP) increased at a 2% annualized rate during the third quarter. This was an improvement, albeit a small one, from the 1.3% rate of growth during the second quarter and matches the 2% rate for the start of 2012. GDP growth has only exceeded 2.6% for one quarter (the final quarter of 2011) since the start of 2010.
As the overall economy has slowed, housing has generated an outsized share of the expansion. Home building and remodeling (residential fixed investment or RFI) added 0.33 percentage points to the final tally of GDP growth, or 17% of the total. In the second quarter, RFI yielded 15% of net growth and 22% in the first quarter of 2011. These numbers are impressive considering that RFI remains only 2.5% of GDP as of the third quarter and housing starts remain half the size of a normal, healthy market.
Of the three primary elements of the housing sector (new-home construction, remodeling, and existing home sales), new-home sales continue to experience the largest gains, increasing in September 5.7% to an annual rate of 389,000, the highest level since the home buyer tax credit expired in early 2010. The three-month moving average of new-home sales has steadily increased for more than a year as more housing markets begin to see rising home prices and improving consumer sentiment.
The supply of new homes for sale fell to a seven-year low of 4.5 months as the pace of sales picked up, but the inventory advanced by only 2,000. The number of completed homes for sale and ready for immediate move-in remains at a record low of 38,000 as builders remain cautious about building ahead of the market and as credit access remains tight.
Remodeling Sector Showing Signs of Life
In the remodeling sector, recent indicators suggest expansion after two years of moving sideways. For example, the NAHB Remodeling Market Index (RMI) climbed to 50 in the third quarter of 2012, up from 45 in the previous quarter. At 50, the RMI is at its highest point since the third quarter of 2005.
In the third quarter of 2012, the major RMI component on current market conditions rose from 46 to 52, while the future indicators component increased from 44 to 49. Each of the major RMI components is now higher than it has been at any time over the past six years.
The RMI reading for current remodeling activity was particularly strong in owner-occupied housing during the third quarter. The subcomponents of the current conditions index for owner-occupied housing were all well over 50, ranging between 55 and 60.
Existing homes sales, as reported by the National Association of Realtors (NAR), decreased 1.7% in September month over month, but are up 11% from the same period a year ago. NAR reported that September total existing home sales were at a seasonally adjusted rate of 4.75 million units combined for single-family homes, townhouses, condominiums, and co-ops. That compares to an upwardly revised 4.83 million units in August and 4.28 million units during the same period a year ago.
The total existing housing inventory at the end of September decreased 3.3% from the previous month to 2.32 million homes for sale. At the current sales rate, the September inventory represents a 5.9-month supply, down from a revised six-month supply in August and much improved from the 8.1-month supply of homes a year ago.
NAR reported 24% of September sales were distressed, defined as foreclosures and short sales sold at deep discounts. This level was up from 22% in August, and down from 30% a year ago. In September 2012, all cash sales increased to 28%. Investors accounted for 18% of home sales, and first-time buyers accounted for 32% of sales, according to the NAR.
Existing Home Sales Rebounding
Despite the September decline, there was good news for future existing home sales. The NAR Pending Home Sales Index (PHSI), a forward-looking indicator based on signed contracts, increased 0.3% in September to 99.5, up from 99.2 in August. The September PHSI was 14.5% higher than the same period a year ago. Year over year, the PHSI has increased for 17 straight months.
Further, there was more good news for housing prices. August data from the Federal Housing Finance Agency indicate house prices increased nationally 0.7% from July levels on a seasonally adjusted basis. This brings the cumulative gain for 2012 to 4.6% after being essentially flat through 2011.
All nine Census divisions followed the national pattern with a relatively flat performance in 2011, but the year-to-date gains in 2012 have been somewhat uneven, ranging from a low of 0.9% in the Middle Atlantic division to a high of 10.4% in the Mountain division.
It is important to note however, the general pattern that emerges: The areas with the largest recent percentage gains are those that rose the highest during the boom and fell the most during the bust. Those areas where the rise and fall was less extreme are recovering less lost ground and posting smaller percentage gains.
With prices rising and new home construction increasing, housing is finally provided the boost to economic growth that the sector typically provided at the end of a recession. This did not occur at the end of the Great Recession due to historic price declines, excess inventories, and pent-up housing demand associated with a weak labor market.
Now that the virtuous circle of home building and economic growth is beginning to take hold, it is useful to keep in mind factors that could hold back the growth for housing. These negative factors include policy uncertainty (particularly relating to finance and taxes), lack of builder and land developer credit, and mortgage access for prospective home buyers.
Mortgage data from the Mortgage Bankers Association still do not indicate an expansion for home purchase debt, suggesting that home sales are still relying on investors and cash buyers to a greater degree than history would suggest is normal. And lack of builder lots and home inventory is holding back new and existing home sales in some markets as pent-up housing demand increasingly unlocks with an improving labor market. —David Crowe is the chief economist for the National Association of Home Builders.
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