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16 Percent Rise in Housing Starts, but will it be enough!?
| Housing Data Wrap-Up: October 2012 Wells Fargo Securities Reports... |
Housing Stands Out Amid the Recent Economic Gloom
With housing activity accounting for such a small portion of overall GDP, even the 16 percent rise in housing starts we are now projecting for 2013 is not enough to move the needle in a meaningful way.
Overall economic growth continues to putter along at around a 2 percent pace, as businesses remain reluctant to commit to major capital investments or hire new workers in a significant way. Economic growth in the third quarter was largely supported by continued gains in consumer spending and a rebound in defense spending. Now, with the fiscal cliff nearing and manufacturing activity slowing in response to slower global economic growth, expectations for economic growth for the coming year have been reduced even further. While overall growth is expected to slow, home sales and residential construction in particular are expected to increase.
The divergence between overall economic growth and housing is unusual but not unexpected. We have noted that housing would still likely strengthen even if overall growth weakens. The incongruity between decelerating real GDP growth and an improvement in homebuilding is made possible by the enormous magnitude of the housing bust, which saw residential construction activity tumble from a peak of 6.3 percent of GDP in Q4 2005 to just 2.5 percent in Q3 2012. With housing activity accounting for such a small portion of overall GDP, even the 16 percent rise in housing starts we are now projecting for 2013 is not enough to move the needle in a meaningful way, particularly with exports slowing, government spending contracting and taxes increasing.
Another more fundamental reason homebuilding can improve with even slower economic growth is that new homes now face less effective competition from foreclosures. However, there are still plenty of foreclosures in the pipeline. The latest data from LPS Analytics show more than 2.1 million homes in foreclosure and another 1.57 million homes have mortgages that are 90 days or more past due. The good news, however, is that there has been considerable progress made at clearing out foreclosures, particularly in hard-hit states like Florida and Arizona. With many of the best properties already sold, distressed transactions are now accounting for a smaller share of overall sales. The drop in competition from foreclosures has bolstered builder confidence.
Raising the Ceiling on Our Housing Forecast
September’s housing starts figures were eye-opening. Overall starts surged 15 percent, and previously reported data were revised higher.
We have raised our forecast for new home sales and housing starts in 2013 and 2014 due to recent reports from homebuilders, strong gains in building permits and starts, record low new home inventories, and the Fed’s stated intentions to purchase large quantities of mortgage-backed securities on an ongoing basis. September’s housing starts figures were eye-opening. Overall starts surged 15 percent, and previously reported data were revised higher. With September’s increase, housing starts through the first nine months of 2012 are running 26.6 percent ahead of their year-ago pace. Single-family starts are up 23.5 percent, while multifamily starts are up 34.7 percent. Most of the gain in multifamily starts has been in apartment construction.
The significant September jump in housing starts may exaggerate the extent of the improvement in new home construction. Starts tend to bounce around quite a bit and it is not uncommon to see large revisions to previous months’ data. We are also headed into the seasonally slow months, in which the seasonally adjusted numbers can show wide swings on relatively small changes in actual activity. These swings tend to be amplified by weather conditions. September’s spike in starts did not materially affect our 2012 forecast, but given the strong gain in permits, which are running slightly ahead of starts, the gain in the Wells Fargo/NAHB Homebuilders’ Index and robust orders data from several large homebuilders, we raised our expectations for 2013 and 2014 to 990,000 and 1.17 million homes, respectively.
With foreclosures and short sales accounting for a smaller proportion of overall sales, home prices have also firmed up slightly more than had earlier been expected. The median price of an existing home has risen 11.3 percent over the past year, and the S&P/Case-Shiller 10-city home price index is now up 0.6 percent year over year. New home prices have also improved, reflecting less effective competition from distressed sales. Many of the best properties have already been sold and what is left is either geographically or physically less attractive than new construction.
Our forecast for continued gains in residential construction is predicated on successfully navigating around the fiscal cliff. We forecast real GDP growth will likely slow at the start of 2013, as the economy is hampered by the expiration of the temporary 2 percentage point reduction in Social Security taxes as well as the implementation of the taxes associated with the new health care law. After a sluggish start, economic activity should gain momentum throughout the year, and homebuilding should add modestly to overall growth. Inventories of new single-family homes remain near all-time lows in an absolute sense, at just a 4.5 month supply relative to recent sales. With the Fed committed to purchasing mortgages and keeping interest rates low, builders should be slightly more confident about building inventory going into the key spring selling season, and builders have better access to credit today than at any time since the building boom ended.
The recent strength in the apartment market is another factor that should keep homebuilding humming in 2013. Vacancy rates on apartments have fallen 1.2 percent over the past year, helping drive rents 2.7 percent higher. Interest in developing new apartment communities remains high, and permits are running slightly ahead of starts. We expect multifamily starts to rise 29.2 percent in 2013, following a 25.8 percent gain this year. Over the long term, we expect apartments to account for a larger proportion of homebuilding than they have in the past, reflecting an increased preference for rental housing, particularly among younger households.
Release Consensus Actual Prior Revised Next Release NAHB Sentiment Index October 41 41 40 n/a Nov-19 Housing Starts, Thousands of Units September 770K 872K 750K` 758K Nov-20 Housing Permits September 810K 894K 803K 801K Nov-20 Existing Home Sales, Millions of Homes September 4.75M 4.75M 4.82M 4.83M Nov-19 Percent Change September -1.6% -1.7% 7.8% 8.10% Nov-19 New Home Sales, Thousands of Units September 385K 389K 373K 368K Nov-28 Percent Change September 3.2% 5.7% -0.3% -1.3% Nov-28 S&P Case/Shiller Composite-20 YoY July 1.1% 1.2% 0.5% 0.6% Oct-30
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