The markets are looking good, but future residential growth will continue to be hampered by shortages of labor and lots and higher regulatory costs
By Patrick S. Duffy
In its July monthly meeting, the Federal Reserve Open Market Committee—which decides on interest rate policy—left the door open to whether or not we’ll see another rate hike in 2016. The good news is that the expected impacts from Brexit have been largely subdued. In addition, the economy seems to be on a more normal path, with both June and July showing monthly job growth of 255,000 to 287,000, and an official unemployment rate of 4.9 percent.
GDP, which was just 0.8 percent in the first quarter of the year, was initially reported to have risen to 1.2 percent by the second quarter. Moreover, in mid-August, the Federal Reserve Bank of Atlanta had estimated third-quarter GDP growth at 3.6 percent, and boosted its forecast for residential investment growth from 0.4 to 2.4 percent.
Inflation is also stable, with the Consumer Price Index flat in July but rising by just 0.8 percent over the previous 12 months. However, when subtracting out the more volatile indicators for food and energy, prices have risen by 2.2 percent over the previous year. With an annual inflation target of 2.0 percent, the Federal Reserve may hike interest rates before the end of 2016, provided job growth reports remain positive in the coming months. Still, not all sectors of the economy are feeling the inflation pinch, with the Producer Price Index falling 0.4 percent in July and still down 0.2 percent for the previous 12 months, which is also why a rate hike is not a given.
For now, consumers remain cautious, with The Conference Board’s Consumer Confidence holding steady at just over 97 on a 100-point scale in July after rising in June. This latest survey suggests that although the economy will continue expanding at a moderate pace, attitudes regarding the job market and personal incomes remain cautiously optimistic.
Builder confidence is also positive, rising by two points to 60 in August, in which anything over 50 is positive. The index measuring current sales rose two points to 65, while the index for sales expectations over the next six months rose one point to 67.
In the commercial real estate sector, CoStar’s value-weighted U.S. Composite Index, which focuses on the sales prices of higher-quality assets, advanced by 3.3 percent during the second quarter of 2016, while the equal-weighted U.S. Composite Index, which includes more sales of smaller properties, rose 2.1 percent. While the office, industrial and retail indices all rose by 1.9 percent and the multi-family index increased by a close 1.8 percent, by far the most improved sector was hospitality, rising 4.5 percent to within one percent of its former peak.
Looking closer at housing, sales of new single-family homes rose for the fifth straight month in July to surpass 650,000 annual units, for a notable jump of over 31 percent from July 2015 and reaching the highest pace of new home sales since October 2007. In addition, at this sales rate, existing inventory would take just 4.3 months to sell, versus 5.2 months a year earlier, and falling to the lowest inventory level since June 2013. For all of 2016, the NAHB is forecasting single-family home starts to rise by about 10 percent, as those in the multi-family sector level off. Nonetheless, future residential growth will continue to be hampered by shortages of labor and lots, as well as higher regulatory costs.
In the existing home market, after four consecutive months of increases, July sales not only tumbled by 3.2 percent from June, but were also down 1.6 percent from the same month of 2015. NAR is blaming this on a lack of affordably priced inventory, especially for starter condominium homes. As proof of this, the Wells Fargo Home Opportunity Index fell to 62.0 percent in the second quarter of 2016, the lowest rate since the third quarter of 2014. Over the last year, inventory levels have fallen by 5.8 percent and have declined year-over-year for the last fourteen months. Consequently, with some buyers priced out of the market even at low interest rates, overall inventory levels would take 4.7 months to sell, up from 4.5 months in June.
Of course, this demand for new supply is certainly good news for builders! Although July housing starts were up 5.6 percent year-on-year, building permits inched up only 0.9 percent for the same time period. Yet given the challenges facing the industry including regulations, labor shortages and the difficulty finding affordably priced land, the lack of available housing supply may be with us for some time.
Patrick Duffy is a Principal with MetroIntelligence Real Estate Advisors and contributes to BuilderBytes. He can be reached at firstname.lastname@example.org or at 310–666–8288.