The short holiday week isn’t halfway done, but three new data reports have given new signals about the housing recovery.
Yesterday NAR reported the fifth straight monthly drop in pending home sales. Today, however, Census reported a big jump in new building permits, to the highest level in 5 years, and Case-Shiller reported the largest month-over-month increase in home prices since April. What should we make of these mixed signals?
•Some of the weakness in the October pending home sales data was probably due to the government shutdown. Watch next month’s data closely for signs of a rebound.
•The October existing home sales data – released last week – were also down, but the overall number masked a key trend: the continued shift from distressed (foreclosure and short sales) to conventional sales. While overall existing sales rose just 6% year-over-year, conventional sales were up 22% year-over-year.
•The shift from distressed to conventional sales is a key part of the housing recovery. Sales data that combine distressed and conventional sales – like pending sales index and the existing home sales index – understate the recovery in home sales.
•Today’s October 2013 permit data showed multifamily permitting the highest in 5 years, with single-family permits just shy of their 5-year high. This was a strong report for construction. The housing starts data for September and October won’t be released until December 18, however.
•These solid permits data are not just due to monthly volatility. The three-month average for total building permits (i.e., Aug-Oct) is also at a 5-year high.
•The construction recovery is uneven. Permits are now above local norms in metro Boston, NYC, San Francisco, Austin, Houston, Oklahoma City, and San Jose. However, permits are still way below local norms in Atlanta, Phoenix, Las Vegas, Sacramento, Chicago, and Detroit.
•Today’s Case-Shiller report for September showed the biggest month-over-month increase since April for the 20-metro index. The more reliable national quarterly report showed Q3 prices rising slightly faster than in Q2 – and the second-highest quarterly gain since 2005 Q4.
•Price gains are clearly slowing in California. In the rest of the country, though, prices are accelerating in some markets and slowing in others.
•Case-Shiller data show what was happening in the market several months ago. The Trulia Price Monitor shows the current trend: October asking prices slowed slightly, but prices are still rising at a fast pace. We’ll report November’s Price and Rent Monitors next Wednesday, December 4.
Overall, this has been a strong 24 hours for housing data. The broader trend in sales data is better than the pending home sales report appears because of (1) the shift from distressed to conventional sales and (2) some of the drop is probably temporary impact of the shutdown.
Price data show healthy slowing from unsustainable levels earlier this year but no signs of a crash. The best news for the housing recovery, though, is the strong permits data. Construction has been the laggard of the recovery, with starts still 40% below normal (as of August), held back by high vacancy rates and slow household formation. The jump in permits points to more construction activity in the next month or two and more inventory coming onto the market next year.0 comments
Construction won’t fully recover until housing and labor market fundamentals improve. Nationally, the vacancy rate is still too high, and household formation is too low to support normal levels of construction activity.
New home construction starts and new home sales are recovering much more slowly than other housing indicators. In August, new home starts and new home sales were 40-50% below normal levels, in contrast with existing home sales, which were just 2% below normal. (By “normal,” we always mean the long-term historical average, not the peak of the bubble, which was anything but normal.) Likewise, Trulia’s latest Bubble Watch reported that prices look just 5% undervalued. What’s holding construction back? The vacancy rate and household formation are two fundamental drivers of construction demand, and both still look weak.
A Brief Soak in the Bathtub of Housing Data
To understand why the vacancy rate and household formation matter for new construction, here’s a simple analogy. Think of the vacant housing stock as water in a bathtub. The bathtub fills when new homes are built. The bathtub drains as vacant homes are occupied, which depends on how fast the overall number of households is increasing – “household formation.” (Side note #1: Newly formed households, who tend to be young, might not be the actual people moving into the newly constructed homes, which tend to be more expensive; rather, this is about aggregate numbers of housing units and households. Side note #2: for simplicity, we’re ignoring the fact that some obsolete vacant homes get demolished.)
When new construction runs ahead of household formation, more water fills the bathtub than drains out – which means the number of vacant homes grows. But when new construction is slower than household formation, the level of the bathwater falls. There’s no magical level of bathwater that’s perfect, but too little water in the tub means a housing shortage, and when the bathtub overfills, that glut of vacant homes might cause a price crash. In the long run, to keep the bathwater from being too high or too low, the “right” level of new construction depends on BOTH the vacancy rate (how full the bathtub is) AND on household formation (how fast the tub is draining).
In the U.S. today, the bathtub is fuller than normal (high vacancy) and is draining slowly (slow household growth). If the faucet were on full force (normal construction levels), our bathtub would soon overflow. Now let’s all towel ourselves dry and look at the two key facts:
1. High vacancy rate means no housing shortage, despite inventory shortage.
The national vacancy rate in 2013 is above its pre-bubble level. The share of all housing units that stood vacant (year-round vacancies only, not “seasonal” vacancies like beach homes) was 10.3% in 2013 Q2 according to the Census, closer to its high point after the bubble burst (10.9% in 2010) than to its pre-bubble level (8.9% in 2000).
If you’ve been house hunting recently, you’re probably surprised that vacancies are high because relatively few homes are listed for sale. Even though inventory has been recently trending upward a bit, for-sale listings are still well below normal. The share of all for-sale homes each year (based on NAR inventory for June and Census total housing stock for Q2) peaked in 2007 but is now at lowest level since 2000.
That means there’s an inventory shortage, not a housing shortage. Despite the shortage of listed inventory, there are plenty of vacant homes NOT listed for sale. Many of those vacant, off-market homes could come onto the market, especially if their owners are just waiting for prices to rise enough to make selling worthwhile. This graph tells the story:
In short: the vacancy rate – or, the level of the bathwater – is still relatively high.0 comments
Even though construction employment is rebounding more slowly than construction activity, there are more construction jobs per unit under construction than normal
In the monthly employment report for March, the Bureau of Labor Statistics (BLS) reported this morning that residential construction jobs increased 3.8% year-over-year. (We include both “residential building construction” and “residential specialty trade contractors” – here’s why.) That’s faster than the overall employment increase of 1.4% – reflecting that housing is now a critical part of the economic recovery.
A quick glance suggests that construction jobs aren’t keeping up with construction activity. Even though residential construction employment growth is outpacing overall employment growth, it’s puny relative to the rebound in construction activity, measured in housing units or dollars:
The Housing Recovery: Jobs, Housing Units, and Dollar Value
% Change since bottom
|Residential construction jobs||
|New housing units under construction||
|Dollar value of residential construction
(new construction only)
|Dollar value of residential construction
(new construction plus improvements)
|Note: Jobs data through March 2013, from BLS; units under construction and dollar values through February 2013, from Census. Dollar values are adjusted for inflation and reflect the cost of labor, materials, contractor’s profit, and more. “Bottom” was January 2011 for jobs; Aug 2011 for units; May 2011 for dollar value (new only); and July 2011 for dollar value (new plus improvements).|
New home construction starts in 2012 reached their highest level since 2008, but remain way below long-term normal levels. Raleigh, Austin, and Houston led the U.S. in construction activity.
This morning the Census reported that there were 780 thousand new housing starts in 2012, a 28% increase over 2011 and the highest level since 2008. (Census also reported that the seasonally adjusted annualized rate for December was 954 thousand.) However, construction activity is still far below normal levels in most of the country. Here are the key takeaways about 2012’s construction rebound:
Originally published in The Atlantic Cities on May 4, 2012.
Construction activity came to a near-halt after the housing bubble burst. The number of new residential units authorized in 2009, 2010, and 2011 was less than one-third of the level during the boom. In 2011, construction activity picked up slightly from 2009 and 2010, as the housing recovery began, with permits for new multifamily buildings leading the construction recovery. Multifamily construction has increased because rental demand rose during the recession as people chose not to – or were unable to – buy or keep their homes. Just this past year, rents rose 5.6 percent nationally according to the Trulia Rent Monitor, and that encourages builders to construct new multifamily buildings.
As always, housing is local. Construction is gearing up in some markets and remains dormant in others. These patterns are critical for understanding the future of cities, for two reasons.
First: construction activity is a bet on future growth. Developers will build only in areas where they expect housing demand in the future. Of course they can bet wrong, and that’s what happened during the housing bubble; construction in many metros far exceeded housing demand, and lots of newly built homes were (and still are) vacant. Still, construction is a clear signal of builder confidence in an area.
Second: construction shapes urban form. Housing units live a long time and are rarely destroyed, so new construction has a long-term impact on density and sprawl. The primary tool that officials have to affect density, sprawl and urban form is deciding what type of new construction, if any, to allow in different communities.
What do construction patterns say about the future of cities in America? This week the U.S. Census Bureau released data on construction permits issued by localities in 2011, including whether those permits were for single-family homes or units in multi-family buildings.
Metros with the Most Construction Permits
|Metro||Construction permits, 2011||Percent of permitted units in
multi-family buildings, 2011
|Houston, TX||31,271||27 percent|
|Dallas, TX||18,686||49 percent|
|Washington, DC||16,501||51 percent|
|New York, NY||13,973||91 percent|
|Austin, TX||10,239||39 percent|
|Los Angeles, CA||9,895||77 percent|
|Phoenix, AZ||9,081||20 percent|
|Seattle, WA||8,664||47 percent|
|Atlanta, GA||8,634||28 percent|
|San Antonio, TX||7,127||38 percent|
More permits were issued in the Houston metro area than in any other metro, by far. Four of the top ten metros were in Texas. But this list is dominated by large metro areas, and we’d expect bigger areas to have more construction activity. Looking instead at the number of permits issued per 1,000 existing housing units shows the impact of construction on metro areas relative to their size. Here are the top and bottom ten metro areas by construction activity, among the largest 100 metro areas:
Most Construction Activity
|Metro||Construction permits per 1000
housing units, 2011
|El Paso, TX||15.36|
|Little Rock, AR||10.53|
|Baton Rouge, LA||9.51|
Least Construction Activity
|Metro||Construction permits per 1000
housing units, 2011
|Long Island, NY||1.65|
|New Haven, CT||1.90|
|Ventura County, CA||2.02|
The rate of construction is highest in metros within Texas and the Carolinas and lowest in the Northeast and Midwest. The map shows the pattern across America. The rate of construction is higher across the Texas, the mid-South and Mountain states, but lower in New England, the Great Lakes, South Florida and most of coastal California.
Two factors stand out to explain which areas have the most construction. The first is long-term employment growth, which is the best guide to future housing demand. The second is smaller recent price declines: metros where prices fell less during the bust had less overbuilding and are therefore ready to absorb new housing. Among the ten metros with the highest rate of construction, all had above-average job growth over the past ten years, and none had experienced the huge home price declines that the hardest-hit areas did during the crash. Builders and developers are betting on metros with solid histories of job growth that escaped the worst of the housing crisis.
What does construction activity mean for urban form? The mix of single-family versus multi-family permits is a strong guide. Multifamily construction is higher density than single-family construction, and single-family construction is more sprawling. For the U.S. overall, one-third of the construction permits in 2011 were for multi-family units. But the multi-family share ranged widely among the largest metros, from 91 percent of permits issues in the New York metro and 86 percent in San Francisco all the way down to 2 percent in Dayton, OH, and 3 percent in Palm Bay-Melbourne-Titusville, FL. In Houston, where more permits were issued in 2011 than anywhere else, just 27 percent were for multi-family units. But not all of Texas is sprawling: in Dallas, 49 percent of permits were in multi-family units, well above the national average. In Los Angeles – which used to be the poster-child for sprawl – 77 percent of new permits were for multifamily units. Among the top permit-issuing places, Phoenix has the lowest share of multi-family permits at 20 percent, along with Houston (27 percent) and Atlanta (28 percent).
The future of sprawl, therefore, is not California. Houston, Phoenix, and Atlanta are America’s current capitals of low-density construction. Builders are betting on future growth in the South, in Texas, and in the Southwest, and they’re building single-family homes to meet that demand.