Is housing trending or spiraling?
Wednesday, April 26, 2017
Could this be the year the housing industry finally reaches escape velocity from the tenacious pattern of monthly yo-yoing of advances and retreats in buyer activity that has characterized the post-recession recovery?
Building upon a promising, if modest, beginning to the year, the industry ended the first quarter on a high note, posting substantial gains in the sale of both new and existing homes. Consumer confidence also increased in the same period, leading analysts to speculate that demand will continue in the months ahead.
Yet, despite strong buyer interest, the industry confronts a number of challenges that are thwarting its momentum, keeping it turning in circles rather than moving forward.
New homes sales grew for the third month in a row in March, up 5.8 percent over February — their highest level in eight months, and 15.6 percent higher than the same time last year. Sales of existing homes reached their highest level in 10 years, according to the National Association of Realtors, jumping 4.4 percent, after a 3.7 percent dip in February, nearly 6 percent higher than last March. Sales of existing single-family homes were up 4.3 percent for the month and 6.1 percent from a year ago.
At the same time, other indicators pointed to some slowing in the industry.
The Fannie Mae Home Purchase Sentiment Index (HPSI) decreased 3.8 percentage points in March to 84.5, after reaching its highest level ever in February. The net share of Americans who reported that now is a good time to buy fell 10 percentage points, said Fannie Mae. Survey participants expressed reduced confidence in employment stability and growth of household income, as well as concern about increasing mortgage rates and rising home prices.
That drop in homebuyer confidence may in part account for the slowdown in residential construction in March.
New residential construction (in number of units) dropped 6.8 percent from February, in which starts had only slightly recovered from a dip in January. Single-family starts were down 6.2 percent from the previous month, and requests for permits were up only slightly, at 1.1 percent. The analysts at Dodge Data & Analytics also reported a 3 percent month-over-month drop in single-family residential construction (in dollar value) in March.
The softening in activity was reflected in the National Association of Home Builder's Housing Market Index for April, which reported a 3-point drop from March. Builders reported slowing somewhat across all three of the index’s measures: current sales (down 3 points), anticipated activity for the next six months (down 3 points) and buyer traffic (down 1 point).
Nonetheless, NAHB Chairman Granger MacDonald said, "Builder confidence is on very firm ground, and builders are reporting strong interest among potential home buyers."
The question looming over the housing industry at the moment is whether pent-up demand and strong potential homebuyer interest are sufficient to propel sales and growth in the face of affordability challenges that are making home ownership more elusive.
Mortgage rates fell to their lowest level since December earlier this month, but were still nearly 0.5 percent higher than the same time last year and are expected to go higher later this year. In addition, home prices continue to rise as the supply of available homes decreases. The NAR states the median existing single-family home price in March was up 6.6 percent from a year ago, while the median sales price of a new home was up 1.17 percent, according to the U.S. Census Bureau.
Meanwhile, after adjusting for inflation, average real household income is up only 0.2 percent year-over-year, estimates Sentier Research, and surveys show many consumers anticipate a decline in household income growth in the coming year. That could put a damper on their eagerness to invest in a home purchase.
Quite likely, market activity will benefit this spring from buyers who are able to afford to purchase a home choosing to commit before mortgage rates and home prices go even higher, especially if latent sellers increase supply by deciding to take advantage of rising prices and competitive demand.
However, the industry needs a strategy for longer-term, sustainable growth, or it is likely to continue to experience the spiral of alternating ups and downs month-to-month and quarter-to-quarter rather than a more consistent upward trend.
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