The Mortgage Corner

The recovery road may remain bumpy for real estate in 2012 but construction spending continues to increase from low levels of activity, and so housing starts. Much of it is multi-family apartments going to both new households and those who have lost their homes. This should mean replacement of sadly depleted housing inventories, as new construction is not replacing the units taken out of circulation through deterioration or outright destruction.

The total residential stock in the United States is approximately 127 million units – around 75 million owner occupied, some 32 million rentals and 10 million “other” (second / holiday homes etc) – so that conservatively – at least 0.5 percent - or 635,000 units of this stock (depending on age within specific markets) should be replaced annually, said a recent housing study.

Despite the low baseline, activity is stronger than expected as construction spending in November jumped 1.2 percent after slipping 0.2 percent in October (originally up 0.8 percent). The market consensus called for a 0.5 percent increase in November.

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Graph: Calculated Risk

The November increase was led by a 2.0 percent gain in private residential outlays, following a 2.3 percent boost in October. Both the single-family and multifamily subcomponents showed strength. Public outlays rebounded 1.7 percent, following a 1.8 percent decline in October. On a year-ago basis, overall construction outlays improved to up 0.5 percent in November from down 0.6 percent in October.

That may be because housing prices are still falling overall. In real terms, the S&P Case-Shiller Home Price Index is back to Q1 1999 levels, the Composite 20 index is back to April 2000, and the CoreLogic index back to March 2000. In real, inflation-discounted terms, all appreciation in the ’00s is gone, says Calculated Risk.

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Graph: Calculated Risk

Another sign that housing is coming off a second bottom is that pending existing home sales rose a very strong 7.3 percent in November on top of October’s 10.4 percent gain.

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Graph: Econoday

November’s gains were led by the West and include the Northeast and Midwest with the South showing no change. November and October taken together show solid gains for all regions.  The index is at its highest level since April 2010, during the federal homebuyer tax holiday.

This is while the seasonally adjusted estimate of new houses for sale at the end of November was 158,000. This represents a supply of 6.0 months at the current sales rate, which is the long term supply average. But 158,000 for sale is far below the replacement rate needed for population growth, hence the increase in new construction.

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Graph: Calculated Risk

Most of the increase this year has been for multi-family starts, but single family starts are increasing too. Single-family housing starts in November were at a rate of 447,000; this is 2.3 percent above the revised October figure of 437,000. The November rate for units in buildings with five units or more was 230,000.

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Graph: Calculated Risk

Builder confidence in the market for newly built, single-family homes has edged up two points from a downwardly revised number to 21 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for December. This marks a third consecutive month in which builder confidence has improved, and brings the index to its highest point since May of 2010, said Calculated Risk.

“This is the first time that builder confidence has improved for three consecutive months since mid-2009, which signifies a legitimate though slowly emerging upward trend,” said NAHB Chief Economist David Crowe. “While large inventories of foreclosed properties continue to plague the most distressed markets and consumer worries about job security and the challenges of selling an existing home remain significant factors, builders are reporting more inquiries and more interest among potential buyers than they have seen in previous months.”

Existing-home sales might also pick up, because of the fire-sale prices. Total housing inventory at the end of November fell 5.8 percent to 2.58 million existing homes available for sale, which represents a 7.0-month supply at the current sales pace, down from a 7.7-month supply in October.

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Graph: Calculated Risk

So it does look like additional housing stock will be needed in 2012 just to fill the rising demand for rental properties. And the construction industry will benefit, which has lost more than 2 million jobs during the Great Recession.

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Graph: Calculated Risk

Construction employment declined by 20 thousand jobs in October, and is now down 2.2 million jobs from the peak in April 2006. However construction employment is up 27 thousand this year through the October BLS report. After five consecutive years of job losses for residential construction (and four years for total construction), says Calculated Risk, it looks like construction employment will increase this year. However there will not be a strong increase in residential construction until the excess supply of housing is absorbed.

Harlan Green © 2011