Tuesday, April 29, 2014

Is The Recovery in Housing Losing Steam?

While many have been quick to blame a relatively severe winter for economic weakness in the first quarter, it would appear that weather had little to do with weaker growth in the US housing market. Mortgage purchase applications have been in a downward trend since last spring and through the week ending April 18,, 2014 they were down 18% year-over-year. Initially, declining mortgage purchase applications had little impact on home sales, which continued to rise through the spring and summer of 2013 as investors, purchasing with cash, continued to enter the market. However, on a seasonally-adjusted basis, existing single family home sales, which account for approximately 93% of the single family market, have declined in seven of the eight months through March of this year. Year-over-year, March sales were down 7.5% on a seasonally-adjusted basis.

New home sales only comprise about 7% of the market. However, because they are tabulated at contract signing while existing sales are calculated at closing, new home sales are considered a timelier indicator. After averaging an annualized 445,000 sales per month on an annualized, seasonally-adjusted basis, from January through June 2013, new homes sales have averaged 423,000 over the last nine months, a decline of about 5%. March sales plunged 14.5% to a seasonally-adjusted, annualized rate of 384,000, the worst month since July of last year and the third worst in the last 18 months.

After a relatively strong first quarter in 2013, annualized, seasonally-adjusted housing starts were significantly weaker from April through October, but spiked in November and December to the highest levels of the recovery. Despite the spike at year-end, the market averaged fewer starts over the last nine months of 2013 than it did from December 2012 through March 2013. Construction began on fewer homes during the first quarter of this year than during the first quarter of 2014, a fact some might attribute to the weather. However, that rings a bit hollow given that seasonally-adjusted starts in the first quarter were stronger than those in the second and third quarters of 2013. In short, outside the spike in November and December, monthly starts over the last year have been consistently below the previous recovery peak reached from December 2012 through March 2013. Was the spike in November and December of last year an aberration? That remains to be determined, yet it is clear is that the growth rate in starts has slowed significantly over the last year.

Despite weakening trends in sales and starts, home prices and mortgage rates have risen. Despite the fact that rates remain historically low, the combination of rising rates and rising prices has reduced the pool of potential buyers. The median price of an existing home in March was $198,500, 7.9% higher than in March 2013, according to the National Association of Realtors. Meanwhile, the US Census Bureau reports that the median price of a new home in March was $290,000, up 12.6% year-over-year. Assuming a 20% down payment, rising prices added an additional $2,906 and $6,490 to the down payment on the median priced existing and new home, respectively. Assuming the same 20% down payment, the combination of higher prices and rising rates increased the monthly payment on the median existing home by just over $110 and that of the median new home by just over $203. With the employment market recovering slowly and income gains modest, rising prices and higher rates have reduced affordability.

In short, there have been signs that the recovery in housing has been losing momentum since last spring. Sales of existing single family homes have been in decline since late last summer, mortgage purchase applications have suffered double-digit declines over the last year, and the growth rate in starts has moderated. The fact that the housing market appears to be decelerating is troubling due not only to its importance to the overall recovery, but also due to the fact that sales and starts remain far below long-term historical trends. The charts below show the median levels of new home sales and starts since the inception of their respective data sets. Simply put, despite significant improvement over the last few years, the housing market remains depressed.