Builder Optimism Returning to Historical Levels

The Mortgage Corner

After holding steady for the past four months, builder confidence in the market for newly constructed single-family homes rose two points in June to a level of 60 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is the highest reading since January 2016.

And it’s for an obvious reason, as the just released privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,164,000. This is 0.3 percent below the revised April estimate of 1,167,000, but is 9.5 percent above the May 2015 rate of 1,063,000. But mostly large, expensive homes are being built to date, which is hurting affordability.

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Graph: Calculated Risk

“Rising home sales, an improving economy and the fact that the HMI gauge measuring future sales expectations is running at an eight-month high are all positive factors indicating that the housing market should continue to move forward in the second half of 2016,” said NAHB Chief Economist Robert Dietz.

In fact, the HMI builder optimism index is returning to a range that prevailed from 1970s to early 2000, in the run up to the housing bubble. It means that 60 percent of the builders surveyed are seeing increased business activity.

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But what kind of activity? Mostly larger, even very large homes are being built, rather than the more traditional 16-1800 sf single family homes of yore. Of the estimated 648,000 single-family homes completed last year, just 136,000, or 21 percent, were homes with square footage of less than 1,800.

The number of “moderately-sized” single-family homes completed in 2015 was little changed from 2011, when overall single-family home completions hit at a “record” low. In contrast, the number of homes with 3,000 or more square feet of floor area last year was up 76 percent from 2011’s level.

This is obviously a problem for younger, first-time buyers entering the housing market. Sales of new single-family houses in April 2016 were at a seasonally adjusted annual rate of 619,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 16.6 percent (±15.4%) above the revised March rate of 531,000 and is 23.8 percent (±22.8%) above the April 2015 estimate of 500,000, said the Census Bureau.

The result has been that there is a severe shortage of affordable new housing, driving prices higher. The median sales price of new houses sold in April 2016 was $321,100; the average sales price was $379,800. The seasonally adjusted estimate of new houses for sale at the end of April was 243,000. This represents a supply of 4.7 months at the current sales rate, below the normal 5-6 month supply.

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Graph: Calculated Risk

So if builders’ optimism holds we can be sure that new-home construction and sales will provide more homes for buyers—maybe even affordable homes if current construction levels hold.

The Fed has to cooperate by holding interest rates low, of course, but St. Louis Fed President James Bullard said on Friday the current economic trend of tepid 2 percent growth, coupled with a low unemployment rate and quiet inflation are likely to persist and, as a result, the U.S. central bank can sit on its hands.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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