Housing Chartbook: December 2017

Transcription

1 December 14, 217 Economics Group Special Commentary Mark Vitner, Senior Economist (74) Hank Carmichael, Economic Analyst (74) Housing Chartbook: December 217 Homebuilding Is Poised to Take another Step Forward The hurricanes introduced a little bit of volatility into the monthly housing numbers, but the underlying story essentially remains the same. Home sales and new home construction continue to be constrained by supply concerns that are likely to ease only modestly in 218. As a result we continue to look for modest gains in new and existing home sales and look for single-family construction to rise roughly 1.7 percent. Multifamily construction will likely fall slightly in 218, reflecting a sharp increase in apartment completions and rising vacancy rates in many of the more active, large apartment markets. Housing will make a positive contribution to real GDP growth in 218, but the persistence of unusually lean inventories of homes for sale will keep prices rising well ahead of incomes and inflation, exacerbating affordability challenges. Home sales and new home construction appear to have gotten off to a strong start in the fourth quarter. Mild weather in October and November appears to have allowed more sales and more construction to take place than typical at this time of year. One of the most jarring statistics was the huge 3.5 percent jump in pending home sales, which suggests existing home sales will be stronger in November and December (Figure 2). Tax reform might also lead to a surge in closings ahead of the New Year, as sales of higher-price homes would be grandfathered into the current mortgage rules. The Senate version keeps the deduction at its current level but removes the deductibility of home equity lines, which might adversely impact home improvement investment. While tax reform may have some slight negative intermediate impacts on the housing market, we expect it to be a modest positive for the broader economy. Stronger job and income growth and lower unemployment should continue to boost homeownership. Demographics are also becoming more positive. The leading edge of the Millennials are reaching their peak family formation years, which has led to a surge in first-time buyers. As we noted last month, the persistent rise in home prices and rents has brought about the return of the affordability migration. Suburbs of rapidly growing metro areas and lower-cost, mid-sized markets are seeing solid gains in home sales once again, providing a boost to residential development. Moreover, land development is increasingly being sought out by local governments concerned about the lack of affordable housing options. While tax reform may have some slight negative intermediate impacts on the housing market, we expect it to be a modest positive for the broader economy. Figure Multifamily Starts Multifamily Forecast Single-Family Starts Single-Family Forecast Housing Starts Millions of Units Figure Pending vs. Existing Home Sales Index 21=, SAAR in Millions Forecast Pending Home Sales Index: 19.3 (Left Axis) Existing Home Sales: 5.48 Million (Right Axis) Source: U.S. Department of Commerce, National Association of Realtors and Wells Fargo Securities This report is available on wellsfargo.com/economics and on Bloomberg WFRE.

2 Housing Chartbook: December 217 December 14, 217 Both the overall homeownership rate and ownership rate for those under 35 should continue to improve in coming years. Rising home prices and still sluggish income growth will continue to weigh on affordability. Single-family housing appears to be at a key pivot point. The apartment boom appears to be finally winding down, as the key demand driver which has been the influx of millennials into the workforce appears to be shifting more toward homeownership. Apartment net absorption totaled roughly 31,3 units in Q This is the lowest level since Q3-212 and is down from a cycle high of about 63,3 units. Multi-family permits have already pulled back in response to cooling demand. We estimate multi-family permits will decline 8.2 percent this year and look for a 2.7 percent drop in 218. While apartment demand has cooled off, first-time home buyers, most of whom are millennials, are accounting for a rising share of home sales. Homeownership rates have improved modestly but still have plenty of room to run. The homeownership rate has risen.4 percent points over the past year to 63.9 in Q3. That is well below the peak of 69.1 reached in the previous cycle and well below its long-term average of 66.7 percent. Ownership among those under 35 years old appears to have bottomed out about a year ago at 34.1 percent and has risen 1.5 percentage points over the past year to 35.6 percent in Q3 (Figure 4). Both the overall homeownership rate and ownership rate for those under 35 should continue to improve in coming years. Both will likely remain well below their previous highs for quite some time, as renting has become a more viable option for a greater share of population. Home sales continue to be held back by a lack of supply. For-sale inventory remains scarce throughout much of the country. The National Association of Realtors notes that the number of homes available for sale has fallen for 29 consecutive months on a year-to-year basis and now totals just 1.8 million units. The number of homes available for sale has fallen 1.4 percent over the past year. Some of the largest declines have been at lower price points. With fewer homes for sale, homes are selling quickly. The typical home sold in October was on the market for just 34 days. The median price of an existing single-family home has risen 5.4 percent over the past year. With relatively few homes available in the existing home market, homebuilders are seeing strong demand for new homes. Unfortunately, developed lots and construction workers remain in short supply in much of the country, particularly in areas where the population is growing the fastest. The past two months have seen new home sales unexpectedly increase, surging 14.2 percent in September and 6.2 percent in October. The improvement follows an inexplicable lull the prior two months and appears to have been exaggerated by seasonal adjustment. Another quirk was that all of October s increase in new home sales occurred among homes where construction had not yet started. Sales of homes under construction and completed both fell during the month. Our forecast for new home construction remains largely unchanged from last month s. Sales of new homes are expected to rise 9.8 percent next year, while existing home sales increase 3.5 percent. Rising home prices and still sluggish income growth will continue to weigh on affordability. We look for the median sales price of an existing home to rise 5.1 percent in 218 and look for the Case-Shiller 1-city index to rise 5.3 percent. Figure 3 Figure Household Formations Millions, Year-over-Year Difference Renters: -.35M Homeowners: Homeownership Percent Under 35: 35. (Left Axis) 35-44: 59.3% (Right Axis) 72% % 68% % % % 58% Source: U.S. Department of Commerce and Wells Fargo Securities 2

3 Housing Chartbook: December 217 December 14, 217 National Housing Outlook Forecast Real GDP, Percent Change Residential Investment, Percent Change Nonfarm Payroll Change (Avg. Monthly) Unemployment Rate Home Construction Total Housing Starts, in Thousands ,3.3 1, , ,28. 1,37. Single-Family Starts, in Thousands Multifamily Starts, in Thousands Home Sales New Home Sales, Single-Family, in Thousands Total Existing Home Sales, in Thousands 4,19. 4,26. 4,66. 5,9. 4,94. 5,25. 5,45. 5,46. 5,65. 5,85. Existing Single-Family Home Sales, in Thousands 3,78. 3,787. 4,128. 4,484. 4,344. 4,646. 4,838. 4,84. 5,25. 5,21. Existing Condominium & Townhouse Sales, in Thousands Home Prices Median New Home, $ Thousands Percent Change Median Existing Home, $ Thousands Percent Change FHFA Purchase Only Index, Percent Change S&P Case-Shiller C-1 Home Price Index, Percent Change Interest Rates - Annual Averages Federal Funds Target Rate Prime Rate Year Treasury Note Conventional 3-Year Fixed Rate, Commitment Rate Forecast as of: December 14, 217 Source: U.S. Dept. of Commerce, U.S. Dept. of Labor, FRB, FHFA, FHLMC, National Association of Realtors, S&P, Wells Fargo Securities 3

4 Housing Chartbook: December 217 December 14, 217 Mortgages 7% Mortgage Rate vs. 1-Year Treasury Yield Percent 7% Mortgage rates have inched up over recent months, to 3.92 percent. Rates have risen slightly as expectations for how much the Fed will hike the federal funds rate have risen. Despite the recent increases, mortgage rates are slightly lower than this time last year. Mortgage applications for refi rose temporarily in the immediate aftermath of the hurricanes but have since subsided. Mortgage apps for home purchases are up 8.7 percent over the year, in-line with new home sales. Lenders remain cautious as the majority of originations in Q2 were high quality credit borrowers. Applications to refinance remain down roughly 1 percent over the past year but have trended higher in recent weeks, possibly reflecting increased demand for alterations and repairs. 1,5 1,35 New Home Sales vs. Mortgage Purchase Applications Thousands, Index 199=; Seasonally Adjusted % 2% 1% Conv. 3-Year Fixed Mortg. Rate: Year Yield: , 1, Mortgage Apps for Refi and 1-Year Treasury Yield 4-Week Moving Averages Refi Index: 1,276.5 (Left Axis) 1-Year: 2. (Right Axis) 3% 2% 1% ,2 4 8, 5. 1, , , , New Home Sales: 685K (Left Axis) Mortgage Purchase Applications: (Right Axis) Mortgage Applications for Purchase Index Seasonally Adjusted Index, 199= Mortgage Origination by Credit Score Billions of Dollars <62: $15.2B (R) : $22.8B (R) : $73.B (R) : $81.B (R) 76+: $229.4B (R) Subprime Share: 9. (L) 1. $1,2 $1, $ $ $4 2 2 $ Weekly Figure: Mort. Appl.: 4-Week Average: Dec $ Source: MBA, FHLMC, Federal Reserve Board, U.S. Dept. of Commerce, FRBNY and Wells Fargo Securities 4

5 Housing Chartbook: December 217 December 14, 217 Single-Family Construction Single-family starts rose a larger-than-expected 13.7 percent in October to a 1.29-million unit pace, the strongest in over a year. The large percentage gain partly reflects a rebound from storm disruptions in September. The rebound suggests that fourth quarter real GDP growth will benefit from repairs and rebuilding efforts. The South accounted for most of October s rise, but starts also rebounded in the Midwest and Northeast. Building permits have continued to grow as well, rising to an 821,-unit pace in October. This is 8.4 percent higher compared to a year ago and suggests that building activity should hold up well during the normally slow winter months Builder Confidence & Single-Family Starts Diffusion Index; Starts SAAR 3-MMA in Millions NAHB Housing Market Index: 7. (Left Axis) Single-Family Housing Starts: 86K (Right Axis) Single-Family Housing Completions SAAR, In Millions 2, 1,8 1,6 1,4 1,2 1, Single-Family Housing Starts vs. Building Permits SAAR, In Millions, 3-Month Moving Average Single-Family Housing Completions: 793K Single-Family Housing Starts: 86K Single-Family Building Permits: 821K ,4 2, 1,8 1,5 1, Single-Family Housing Starts Annual Average of SAAR SF Housing Starts: 831K 217 is YTD Average of SAAR.4.2 2,4 2, 1,8 1,5 1, Single-Family Housing Permits by MSA Year-to-Date, Total Number of Permits in Thousands Houston, TX Dallas, TX Atlanta, GA Phoenix, AZ Austin, TX Orlando, FL Charlotte, NC-SC Washington, DC-VA-MD-WV Tampa, FL Nashville, TN Raleigh, NC Denver, CO New York, NY Los Angeles, CA Riverside, CA October Source: U.S. Department of Commerce, National Association of Home Builders and Wells Fargo Securities 5

6 Housing Chartbook: December 217 December 14, 217 Multifamily Construction 6 Multifamily Housing Starts vs. Building Permits SAAR, In Thousands, 3-Month Moving Average 6 Multifamily starts rose 7.3 percent in October. This mostly reflects a return to the previous norm, following significant drops the prior two months due to the impact of the storms. Apartment construction is clearly moderating from its earlier breakneck pace. Vacancy rates have inched higher in many of the largest apartment markets and thousands more units are slated for completion during the coming year. New York City, Dallas, Los Angeles and Denver will see some of the greatest increases. Vacancy rates in many mid-tier and smaller metro areas remain relatively low, however, as these cities have not seen much new construction. Multifamily Housing Permits by MSA Year-to-Date, Total Number of Permits in Thousands New York, NY-NJ-PA Dallas, TX Los Angeles, CA Denver, CO Seattle, WA Miami, FL Chicago, IL-IN-WI Atlanta, GA Austin, TX San Francisco, CA Phoenix, AZ Washington, DC-VA-MD-WV Boston, MA-NH Houston, TX Tampa, FL September Multifamily Housing Starts: 339K Multifamily Building Permits: 444K Multifamily Housing Starts SAAR, In Thousands, 3-Month Moving Average 5+ Units: 324K (Left Axis) 2-4 Units: 15K (Right Axis) % Apartment Supply & Demand Percent, Thousands of Units 6. Apartment Effective Rent Growth Quarter-over-Quarter Percent Change 2. 8% % % % Quarter-over-Quarter: (Right Axis) -4. Year-over-Year: 3.3% (Left Axis) % -1.2% % Apartment Net Completions: 47,271 Units (Right Axis) Apartment Net Absorption: 31,254 Units (Right Axis) Apartment Vacancy Rate: 4. (Left Axis) 2% Source: U.S. Department of Commerce, Reis, Inc., and Wells Fargo Securities

7 Housing Chartbook: December 217 December 14, 217 Buying Conditions 9 Home Purchase Sentiment Index Index 9 The Fannie Mae Home Purchase Sentiment Index fell slightly in October but remains at a relatively high level. The index, which only dates back to 211, rose to an all-time high of 88.3 points just one month earlier. The net share of both those who believe now is a good time to buy and to sell decreased on the month, while income and employment measures remain steady. The general lack of supply of homes available for sale and diminished affordability remain the greatest detriments to increased sales. Wages are growing around 3 percent year to year, which, while solid, is still half the pace that home prices are rising. Consumers feel upbeat about their employment and income prospects, however, which will continue to support sales. 3 3 Consumer Confidence vs. Disposable Income Pct. Consumers That Expect Incomes to Increase Next 6 Months 6-Month Income Expectations 12-MMA: 2.1% (Left Axis) Income Yr/Yr % Chg. 12-MMA: 2. (Right Axis) Home Purchase Sentiment Index: Good Time to Buy vs. Good Time to Sell University of Michigan Consumer Sentiment Survey Good Time to Buy a House: 144. Good Time to Sell a House: % 18% % % % Homeownership vs. Housing Affordability Percentage, Index Homeownership Rate: 63.9% (Left Axis) % Home Prices vs. Wages and Salaries Year-over-Year Percentage Change Wage & Salaries (3-MMA): 2.8% S&P/Case-Shiller Composite-2: 6.2% National HPI: 6.2% % 7 Housing Affordability Index: (Right Axis) 19 68% % -18% 62% Source: University of Michigan, National Association of Realtors, The Conference Board, S&P, Fannie Mae, U.S. Dept. of Commerce and Wells Fargo Securities 7

8 Housing Chartbook: December 217 December 14, 217 New Home Sales New home sales surged 6.2 percent to a 685,-unit pace in October, reaching a new cycle high. Sales in the Midwest and Northeast saw the largest percentage gains. These two are the smallest regions for new home sales and are highly volatile, particularly in the fall and winter months. October s print was a bit of a surprise considering the low levels of inventory in the market. New home sales of units not yet started spiked 34 percent on the month and accounted for all of the increase, while completed homes inventory was unchanged, hinting at some seasonal distortions. The median price of a new home fell, as the proportion of new homes priced below $3, increased 5 percent. Homes above $75, rose 2 percent, pulling the average price higher. 2 1 Median New Home Sales Price Year-over-Year Percent Change, 3-Month Moving Average Median New Sales Price: $312,8 Year-over-Year Percent Change: % 8% 7% New Home Sales vs. Mortgage Rates Seasonally Adjusted Annual Rate, In Thousands Mortgage Rate: 3.9% (Left Axis) New Home Sales: 685K (Right Axis) 3% Months' Supply of New Homes Seasonally Adjusted Months' Supply: 4.9 1,75 1,5 1,25 1, New Home Sales New Homes Sold During Month, Index 22=, 3-MMA 18 $44 Average and Median New Home Sale Price In Thousands $ $4 $ $36 $36 $32 $ $28 $24 $2 $16 Average Sales Price: $4,2 $28 $24 $2 $ South: 9. Midwest: West: 66.7 Northeast: Median New Sales Price: $312,8 $ $12 Source: U.S. Department of Commerce, FHLMC and Wells Fargo Securities 8

9 Housing Chartbook: December 217 December 14, 217 Existing Home Sales 13 Pending vs. Existing Home Sales Index 21=, SAAR in Millions 7.5 Existing home sales rose 2. percent in October to a 5.48-million unit pace, down.9 percent over the year. Most of the drop is due to lack of inventory, with 1.4 percent fewer homes for sale than last year. Home turnover is not as quick as it used to be, as owners are staying in their homes longer. With fewer homes on the market, homes are selling quickly. The National Association of Realtors (NAR) reports that the typical home was on the market for 34 days in October, down from 41 days a year ago. Homes priced at or below the median are selling the fastest, while higher priced homes are moving less rapidly. The lack of for-sale inventory is discouraging some homeowners from putting their homes on the market out of fear their current home will sell before they find a new one Pending Home Sales Index: 16. (Left Axis) Existing Home Sales: 5.48 Million (Right Axis) Inventory of Existing Homes for Sale Existing Homes for Sale at End of Month, In Millions Total Inventory: 1.8M Existing Single Family Home Sales vs. Mortgage Rate Percent and SAAR In Millions Yr. Conventional Mortg. Rate: 3.9 (Left Axis) SF Existing Home Sales: 4.9 Million (Right Axis) % % Median Single-Family Existing Home Price Year-over-Year Percentage Change Median Price Change: 5. 6-Month Moving Average: 5.7% Median Sale Price: $248, Existing Home Sales Existing Homes Sold During Month, Index, 22= Northeast: 74. Midwest: 94.2 South: 11.9 West: % 8% % -8% Source: National Association of Realtors, FHLMC and Wells Fargo Securities 9

10 Housing Chartbook: December 217 December 14, 217 Home Prices The S&P CoreLogic Case-Shiller Home Price Index rose 6.2 percent year to year in October, the 16 th consecutive month in which annual gains accelerated. The improvement reflects stronger employment growth and continued low inventories in many of the fastest growing markets. While headline price gains are strong, only eight of the 2 metro areas tracked by Case-Shiller have recovered from prior peaks. No Midwestern city has reached its prior peak. In the Southeast, home prices have fully recovered in Charlotte and Atlanta but remain below prior peaks in Tampa and Miami. Prices are rebounding in many of the slow to recover markets in the Sunbelt. Las Vegas and Tampa are two notable standouts National HPI: Composite-2 City: 23.5 Composite-1 City: S&P CoreLogic CS Home Price Index Index, January 2= Home Prices Year-over-Year Percentage Change Seattle Las Vegas San Diego Portland Tampa Boston Denver Dallas San Francisco Detroit Charlotte Los Angeles Phoenix Cleveland Minneapolis Atlanta New York City Miami Chicago Washington, D.C. C-1 C-2 National HPI Denver Dallas Seattle Portland Boston San Francisco Charlotte Atlanta San Diego Los Angeles Cleveland Minneapolis Detroit New York City Washington, D.C. Chicago Tampa Miami Phoenix Las Vegas C-1 C-2 National HPI S&P CoreLogic Case-Shiller Home Prices Year-over-Year Percent Change, NSA % 7.3% 7.2% 7.2% 7.2% 7.1% % 6.2% 6.2% 6.1% % % 3.1% 5.7% 6.2% 6.2% 12.9% September 217 2% 8% 1 1 S&P CoreLogic Case-Shiller Home Prices Percent Change from Previous Peak, NSA September % % % -16.3% -18.8% -23.9% -28.9% % 19.9% 12.9% % 2.7% 5.9% 44.1% 42.1% S&P CoreLogic Case-Shiller Home Price Index Index, January 2= Denver: 22.1 National HPI: Dallas: Median Sale Price: $248,3 Median Sale Price, 3-M Mov Avg: 5.3% -2 FHFA Purchase Only Index: 6.3% S&P/Case-Shiller Composite-1: 5.7% Source: National Association of Realtors, U.S. Dept. of Commerce, S&P, FHFA and Wells Fargo Securities 1

11 Housing Chartbook: December 217 December 14, 217 Renovation and Remodeling Spending for residential improvements has decelerated for seven consecutive quarters on an annual basis, growing at just 1.3 percent in Q This is the slowest pace of remodeling growth since Q We expect residential improvements outlays to rebound in Q4-217 as homes damaged by the recent hurricanes are repaired. Residential improvements should also benefit from rising home values, which have provided homeowners with more equity to use to fund upgrades. Home improvement chains have generally reported stronger sales in recent months, with the late-summer storms and warmer-thanusual early- and mid-fall weather providing a boost. $1, $1, $9 $8 $7 $6 $5 $4 $3 $2 Residential Investment Billions of Dollars Other: $1.9 B Brokers' Commissions: $161.3 B Improvements: $229.1 B New Building: $325.8 B $1, $1, $9 $8 $7 $6 $5 $4 $3 $ Residential Improvements Year-over-Year Percent Change Improvements: 1.3% Res. Investment Ex. Improvements: 6.8% NAHB Remodeling Market Index Index, Seasonally Adjusted Overall Index: Future Expectations: 58.1 Backlog of Remodeling Jobs: $ $ $35 $ Leading Indicator of Remodeling Activity In Billions, 4-Q Moving Total, Harvard Joint Center for Housing Studies JCHS Forecast $ $ Building Material, Garden Equip & Supply Stores 3-Month Moving Average Year-over-Year Percent Change: 9.7% 3-Month Annual Rate: 13.7% $3 $3 1 1 $25 $ $2 $ $15 $ $ $ Source: Harvard Joint Center for Housing Studies, U.S. Dept. of Commerce, NAHB and Wells Fargo Securities 11

12 Wells Fargo Securities Economics Group Diane Schumaker-Krieg Global Head of Research, Economics & Strategy (74) (212) John E. Silvia, Ph.D. Chief Economist (74) Mark Vitner Senior Economist (74) Jay H. Bryson, Ph.D. Global Economist (74) Sam Bullard Senior Economist (74) Nick Bennenbroek Currency Strategist (212) Eugenio J. Alemán, Ph.D. Senior Economist (74) Azhar Iqbal Econometrician (74) Tim Quinlan Senior Economist (74) Eric Viloria, CFA Currency Strategist (212) Sarah House Economist (74) Michael A. Brown Economist (74) Jamie Feik Economist (74) Erik Nelson Currency Strategist (212) Michael Pugliese Economic Analyst (74) E. Harry Pershing Economic Analyst (74) Hank Carmichael Economic Analyst (74) Ariana Vaisey Economic Analyst (74) Abigail Kinnaman Economic Analyst (74) Shannon Seery Economic Analyst (74) Donna LaFleur Executive Assistant (74) Dawne Howes Administrative Assistant (74) Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Clearing Services, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. ("WFS") is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. ("WFBNA") is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WFS and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company 217 Wells Fargo Securities, LLC. Important Information for Non-U.S. Recipients For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For purposes of the U.K. Financial Conduct Authority s rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 27. The FCA rules made under the Financial Services and Markets Act 2 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE