2015 Reflects Gradual Progress for Housing Industry

Confidence for both builders and consumers remains positive as housing rebound continues

By Patrick S. Duffy

At this same time a year ago, I wrote about a housing rebound that had continued its slow yet gradual climb back to normal. The good news is that 2015 was more of the same, and yet it may take another two years until single family housing starts manage to exceed 90 percent of a normal market.

According to the Leading Market Index, which measures how well metropolitan areas are performing relative to their last ‘normal’ market, industry health rose to .93 in the third quarter of 2015. This means that the combination of permits, prices and employment levels are back to 93 percent of where they should be at a national level, with employment gains making more headway this year than last. In addition, more markets are now returning to greater health, with almost half of all markets nationwide at or above 90 percent. However, much of that gain has been due to the multi-family sector, as single family permits continue to remain at less than half of their historical norm.

Job growth, which disappointed in September, rebounded strongly by October, rising to 271,000 while the unemployment rate remained mostly unchanged at 5.0 percent–which is technically full employment. Over the 12 months ending in October, job growth averaged 230,000 per month, while the unemployment rate dipped by 0.7 of a percentage point.

Despite the strengthening job market, inflation remains very low by historical standards, which is one reason why the Federal Reserve keeps punting on its first Federal Funds interest rate hike since lowering them to near zero in December of 2008. For the 12-month period ending in October 2015, the Consumer Price Index rose by just 0.2 percent, although much of that stability was due to declining energy prices; when subtracting out food and energy, the CPI rose by 1.9 percent. At the same time, however, the index for final demand from the Producer Price Index fell by 1.6 percent, which is the sharpest decline noted since this index was introduced in late 2009.

Confidence for both builders and consumers remains positive, with the NAHB Housing Market Index falling slightly to 62 in November but still having remained in the 60s for six consecutive months, and indicating slow but steady progress in the months ahead. Consumer sentiment has been even stronger and beat expectations in November, with projections for personal consumption expenditures growing by nearly three percent in 2016.

If there is a point of concern, it would be the future of housing affordability, given that higher interest rates are likely just around the corner and home prices which continue to firm up in many markets. According to the Wells Fargo Housing Opportunity Index, during the third quarter of 2015, 62.2 percent of families earning the median income could afford to buy the median-priced home of $231,000 at current interest rates. While down sharply from the last high of 77.5 noted in the first quarter of 2012, however, the index is still far above the previous trough of 40.4 set in the third quarter of 2006.

Single family new home sales, which rose sharply during the summer selling season, dipped 11.5 percent in September to an annual rate of 468,000, but were still up two percent versus the same month of 2014. At current sales rates, existing inventory would take 5.8 months to sell versus 4.9 months in August.

For existing homes, sales dipped 3.4 percent in October but were still about four percent higher than the previous year, while sales prices rose for the 44th straight month and were up 5.8 percent from the same time period. Although the inventory of existing homes at the end of October rose slightly to 4.8 months, the market still strongly favors sellers. Adds NAR’s economist Lawrence Yun, the combination of continued job creation and easier credit standards should support continued demand even with moderately higher mortgage rates.

Looking ahead to 2016, forecasts are generally suggesting slow but steady expansion for both the U.S. economy and its housing market. With more economic cylinders now firing, the NAHB is calling for single family starts to jump by an impressive 27 percent in 2016, whereas multi-family starts are projected to post a modest decline of about three percent after two years of running at rates far above the historical norm of production. For people planning to stay in place, remodeling activity is projected to rise another 6.1 percent in 2016 after posting a similar increase in 2015.


Patrick S. Duffy
is a Principal with MetroIntelligence Real Estate and Economics Advisors, authors The Housing Chronicles Blog, and contributes to BuilderBytes. He may be reached at pduffy@metrointel.com.

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