Disappointing December Sales Give Way to a Brighter January

Obstacles still exist but demand is strong, consumers are motivated, and the industry is responding
By Genevieve Smith

Here we are, three months into 2017 already, preparing to close Q1… how time flies. As it’s flown, it seems changes in our political and economic climates have done their best to keep pace. What has all this meant for the building industry so far?

Predictions at the beginning of the year seemed optimistic, though they acknowledged incoming headwinds: labor shortages, supply constraints, mortgage increases, etc. The general consensus at the moment seems to point out that those headwinds may have been stronger than initially anticipated.

January start numbers fell 2.6 percent, led by a large drop in multi-family construction (7.9 percent), as reported by the Commerce Department in mid-February. However, even though multi-family starts brought the cumulative number down, the same report noted a 1.9 percent rise in single-family starts.

So, despite some less than ideal numbers, it’s not all doom and gloom. Let’s not forget that supply and demand is on the industry’s side. The supply of existing homes was at its lowest level since 1999 in December, and there are a lot of people looking to buy who are now increasingly motivated by the whispers (ok, shouts) of imminent increases to mortgage rates. While still at historical lows (the average fixed-rate 30-year mortgage was 4.17 percent most recently), it’s well above the 2016 average of 3.65 percent.

Although the increasing rates and competition for supply are driving home prices into the realm of discouraging potential buyers (sales fell 2.8 percent in December despite the tight supply), the latest numbers from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development show January home sales rose slightly, up 3.7 percent at 555,000.

“We can expect further growth in new home sales throughout the year, spurred on by employment gains and a rise in household formations,” said NAHB Chief Economist Robert Dietz. “As the supply of existing homes remains tight, more consumers will turn to new construction.”

If current sales rates continue, with the seasonally-adjusted estimate of new houses for sale at the end of January at 265,000, there is a 5.7 month supply.

The industry has responded by ramping up construction. Even taking the January start decline into account, new home construction has jumped 10.5 percent in the past year, as reported by Reuters.

Labor shortage doesn’t help matters, but the call to arms (or hammers, as the case may be) can only be good for the rest of the economy in the long run, as more jobs are created. A good indication of a rally, building permits rose 4.6 percent, especially apartment permits.

“The big uptick in permits should be good news for inventory-constrained homebuyers, as permits eventually become starts, which in turn become new homes for sale,” said Ralph McLaughlin, chief economist at Trulia. “As a result, we shouldn’t be surprised to see a strong uptick in starts in mid-2017.”

Encouraging the uptick, builders should note that U.S. home values are up 7.2 percent over the past year, to a Zillow Home Value Indexii of $195,300, with some new growth leaders seeing annual home values leap by double-digits, as reported by Yahoo Finance.

The numbers in the January Zillow® Real Estate Market Reports indicate that the nation’s fastest-growing home values have moved from western to southern markets in Florida, Texas, and Tennessee.

Even though the West Coast metros have been replete with new residents flocking to tech-hubs for jobs in recent history, as the cost of living becomes increasingly expensive, potential buyers are having a hard time finding affordable housing in these areas – today, just four of the 10 fastest appreciating housing markets are in the West. Southern markets, like Nashville and Dallas, are desirable for home shoppers in search of job opportunities, reasonably priced homes, and an overall good quality of life.

If you’re inclined to optimism, you should feel pretty comfortable coming up to the industry’s Q1 closings. In addition to good sales numbers and positive forecasts, in following the major averages, homebuilding ETFs are also posting gains. The ITB was at its highest level since the summer of 2007 as of late February. Yes, there’s a month left to go, but, as of right now, the numbers look good.

 

Genevieve Smith is the Editor of Builder and Developer magazine. She may be reached at gen@penpubinc.com.

 

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