Economics Group. Special Commentary. June 01, 2015

Transcription

1 June 1, 215 Economics Group Special Commentary Mark Vitner, Senior Economist (74) Anika R. Khan, Senior Economist (74) Alex V. Moehring, Economic Analyst (74) Housing Chartbook: June 215 Housing Activity Ramps Up Demand for new and existing homes continues to ramp up heading into the peak spring selling season. New home sales through the first four months of this year are running 22.4 percent ahead of their year-earlier pace and homebuilders generally report strong demand across much of the country. Existing home sales, which reflect closings, have been more volatile this year, reflecting the effects of winter weather, tight inventories and delays in the closing process. Pending home sales, which are purchase contracts, have shown steady improvement. The most recent data show pending sales rising 3.4 percent in April and up 14. percent from their year ago level. The strength in pending home sales suggests existing home sales will rise solidly this spring, which we believe will set up 215 to be the best year for housing since the recession ended six years ago. One of the biggest hurdles for existing home sales has been a lack of available inventory. Inventories of existing homes have fallen.9 percent over the past year and remain at a relatively lean 5.3-months supply. Inventories are tight even though homes are selling much more quickly and sellers are receiving a higher proportion of their asking price. The continued lack of existing home inventory is due to a multitude of factors. For starters, the housing market is still healing. While prices have improved considerably, a large proportion of homeowners remain in a negative equity or near negative equity position. The lack of equity means a move does not make sense for many potential sellers. Moreover, many homeowners may be concerned that they will have difficulty qualifying for a new mortgage and are unwilling to part with their current mortgage, which may have been refinanced at a low mortgage rate. Credit criteria are more stringent than they were previously, particularly in regard to income documentation. The stricter guidelines come at a time when income has been growing very slowly and many workers are supplementing their income in ways that may be difficult to document. One of the biggest hurdles for existing home sales has been a lack of available inventory. Figure 1 Figure Pending vs. Existing Home Sales Index, Millions, 3-Month Moving Average Pending Home Sales: 11 (Left Axis) Existing Home Sales: 5.M (Right Axis) Multifamily Starts Multifamily Forecast Single-family Starts Single-family Forecast Housing Starts Millions of Units Forecast Source: U.S. Department of Commerce, NAR and Wells Fargo Securities, LLC This report is available on wellsfargo.com/economics and on Bloomberg WFRE.

2 Housing Chartbook: June 215 June 1, 215 Generational hurdles may also be holding some homes off the market. The lack of housing turnover may be about to change. A Large Number of Homes Remain Off the Market Another factor that may be restraining existing home inventories is the larger role that rental homes play in the housing market today. Investors bought a significant portion of available inventory earlier in the recovery and have converted many of these homes to rental units, effectively taking them off the for-sale market. With vacancy rates falling, rents increasing and interest rates remaining low, few investors are likely to put many of these homes up for sale. Generational hurdles may also be holding some homes off the market. The struggles that Millennials are facing establishing their careers and building a nest egg has received widespread attention. With a rising proportion of Millennials living at home with their parents, many homeowners are holding on to their current home rather than downsizing or relocating, as empty nesters traditionally have. The lack of inventory has likely contributed to some of the recent fevered bidding for homes, particularly in good school districts, where empty nesters are not making way for families with school-aged children. The National Association of Realtors (NAR) noted that roughly 4 percent of the homes sold in April were sold at or above their asking price, which was the highest share seen since NAR began tracking this in December 211. We suspect that housing turnover has slowed in a major way but it is difficult to calculate turnover in a way that takes into account all of the structural shifts that have taken place in recent years. We calculated existing home sales and existing home inventories as a share of the occupied housing stock and found that turnover not only remains well below its pre-recession levels but also below the levels that existed prior to housing boom. The slight uptrend in sales as a share of the occupied housing stock likely reflects the improvement in home equity. The lack of housing turnover may be about to change. Word is getting out that right now is a pretty good time to put your home on the market. The latest University of Michigan Survey of Consumer Sentiment asks a number of questions related to whether consumers feel now is a good time to buy a home and whether now is a good time for a homeowner to sell a home. Responses concerning the purchase decision tend to be influenced more by mortgage rates while responses dealing with whether it is a good time to sell are more influenced by changes in home prices. Both indices are moving in the right direction, with the bulk of the recent improvement coming in the proportion of households that feel now is a good time to sell a home. The one caveat in the University of Michigan s survey is that a relatively high proportion of households, 4 percent in May, said that now is a bad time to sell a home and another 6 percent said they were uncertain. Our forecast for home sales and new home construction continues to call for solid gains during the next few years. We feel that home sales and new home construction will be an upside surprise for the economy this year and expect home price appreciation to reaccelerate a bit from recent levels, as new supply continues to lag behind strengthening demand. Construction will continue to be restrained by a lack of developed lots and increased development costs. Figure 3 Figure 4 1 Young Adults Living in Parent's Household Percent of Total Population Aged 25 to 34 Years 25 to 34 Year Olds: to 7 Average 1 7% Housing Turnover Existing Home Sales & Inventory as a Share of Occupied Stock 7% 1 1 3% 3% 2% 2% Source: U.S. Department of Commerce, NAR and Wells Fargo Securities, LLC 1% Sales: 4.3% Inventory: % 2

3 National Housing Outlook Forecast Real GDP, percent change Nonfarm Employment, percent change Unemployment Rate Home Construction Total Housing Starts, in thousands ,13. 1,23. Single-Family Starts, in thousands Multifamily Starts, in thousands Home Sales New Home Sales, Single-Family, in thousands Total Existing Home Sales, in thousands 4,11. 4,34. 4,19. 4,26. 4,66. 5,9. 4,94. 5,15. 5,4. Existing Single-Family Home Sales, in thousands 3,66. 3,87. 3,78. 3,787. 4,128. 4,484. 4,344. 4,53. 4,75. Existing Condominium & Townhouse Sales, in thousands Home Prices Median New Home, $ Thousands Percent Change Median Existing Home, $ Thousands Percent Change FHFA (OFHEO) Home Price Index (Purch Only), Pct Chg Case-Shiller C-1 Home Price Index, Percent Change Interest Rates - Annual Averages Prime Rate Ten-Year Treasury Note Conventional 3-Year Fixed Rate, Commitment Rate One-Year ARM, Effective Rate, Commitment Rate Forecast as of: June 1, 215 Source: Federal Reserve Board, FHFA, MBA, NAR, S&P, U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC Housing Chartbook: June 215 June 1, 215 3

4 Housing Chartbook: June 215 June 1, 215 Mortgages 1,6 New Home Sales vs. 3-Year Mortgage Rate Thousands, SAAR, FHLMC Conventional Fixed Rate Mortgage 3% 5 Mortgage applications for purchase have ticked up recently. Purchase applications have increased 13.1 percent from a year ago. Strong mortgage applications support our outlook for a strong spring selling season this year. We expect purchase applications to improve further in 215. Mortgage rates should rise modestly, as the Fed begins to raise short-term interest rates, although not enough to choke off the housing recovery. Mortgage applications for refinancing have moderated. We do not expect to see another large increase in refinancing activity, as most of the homeowners that were in a position to refinance have already done so. Mortgage Applications for Purchase Seasonally Adjusted Index, 199= 5 1,4 1, 1, New Home Sales: 517, (Left Axis) 3-Year Fixed Mortg. Rate: 3. (Inverted Right Axis) Conventional Mortgage to 1-Year Treasury Spread Basis Points Mortgage Spread: 161 bps 7% 9% 1 11% Mort. Appl.: 8-Week Average: , 1, Weekly Figure: 21.5 Up From: Week Average Up 12.9% From Same Period Last Year Mortgage Applications for Refinancing 4-Week Moving Average, Seasonally Adjusted Weekly Figure: 1,538 Down from 1,61 on May-15 4-Week Average: 1,68 4-Week Average Up 19.3% from Same Period Last Year 12, 1, MBA Mortgage Credit Availability Index Index, Mar 212 = MCAI: , 8, , 6, 4, 4, 2, 2, Source: Mortgage Bankers Association, FHLMC, U.S. Department of Commerce and Wells Fargo Securities, LLC 4

5 Housing Chartbook: June 215 June 1, 215 Single-Family Construction Single-family housing starts came roaring back in April after a weak start to the year, rising to a 733 thousand unit annual rate. Year-to-date single-family starts are up 7.6 percent. Part of April s huge bounce back was likely a catch up from the winter slowdown. Starts in April are running above single-family permits, suggesting we may see some payback in coming months. Unusually wet weather in Texas may also take a toll on May starts. For the year, single-family starts should rise 12.7 percent. Most forward-looking indicators for new home construction remain positive. Builder sentiment remained in expansion territory for the 11th consecutive month Existing & New Single-Family Home Sales Both Series In Millions of Units, Seasonally Adjusted Annual Rate New Home Sales: Million (Left Axis) Existing Home Sales: 4.4 Million (Right Axis) Single-Family Housing Starts SAAR, In Millions, 3-Month Moving Average Single-Family Building Permits SAAR, In Millions, 3-Month Moving Average Single-Family Building Permits: 645K Single-Family Housing Starts: 654K Expected Single-Family Home Sales Percent, NAHB Housing Market Index Single-Family Housing Completions Seasonally Adjusted Annual Rate, In Millions Single-Family Housing Completions: 688K In the Next 6 Months: Source: U.S. Dept. of Commerce, National Association of Realtors, NAHB and Wells Fargo Securities, LLC

6 Housing Chartbook: June 215 June 1, 215 Multifamily Construction 5 Multifamily Housing Starts SAAR, In Thousands, 3-Month Moving Average 5 Multifamily starts also bounced back nicely in April, rising 2.2 percent from their March level. Looking through some of the volatility, multifamily family starts are only up a modest 1.5 percent on a year-to-date basis from 215. Multifamily permits continued to post solid gains, rising 1.1 percent in April, more than offsetting March s 5.5 percent decline. Multifamily permits have increased 6.4 percent from a year ago. The vacancy rate for apartments has held steady around 4.2 percent over the past year. We suspect that this is near the cycle low, although housing demand outpaced new supply in the first quarter Multifamily Starts: 42K 3-Month Moving Average: 339K Multifamily Building Permits SAAR, In Thousands, 3-Month Moving Average Private Multifamily Construction Spending Percent 3-Month Annual Rate: 27.2% Year-over-Year Percent Change: Multifamily Building Permits: 448K % Apartment Supply & Demand Percent, Thousands of Units % Apartment Effective Rent Growth Quarter-over-Quarter Percent Change % 75 % % 7% % -% Apartment Effective Rent Growth: -% -% % Apartment Net Completions: 29,26 Units (Right Axis) -5 Apartment Net Absorption: 37,16 Units (Right Axis) Apartment Vacancy Rate: 4.2% (Left Axis) 2% Source: U.S. Dept. of Commerce, REIS Inc. and Wells Fargo Securities, LLC 6

7 Housing Chartbook: June 215 June 1, 215 Buying Conditions Buying conditions remain relatively favorable by historic norms; however, mortgage credit standards remain tight. The NAR Housing Affordability Index has fallen over the past several years, however, as prices have rebounded faster than incomes have risen. Much of the focus is now on the rate hike by the Federal Reserve expected to occur this year. Previous tightening cycles have produced a variety of reactions. Typically, long-term rates quickly anticipate how far the Fed will raise rates. This go round, the Fed is making the case that they will go slower and keep rates lower for longer than they have in the past, which should be very good for the housing market. 1 9 Net Percent of Banks Tightening Standards Nontraditional Mortgages Nontraditional Mortgages: -5.7% Housing Affordability, NAR-Home Sales Base = Housing Affordability Index: Month Moving Average: U.S. Real Home Prices Index, Jan. =, Not Seasonally Adjusted U.S. Real Home Prices: Trough Trend * CoreLogic HPI Deflated with CPI Less Shelter Occupied Housing Units Year-over-Year Percent Change Owner Occupied: -. Renter Occupied: 4.3% S&P Case-Shiller Home Price Index P/E Ratio January 1987=1, Seasonally Adjusted S&P Case-Shiller P/E Ratio: 1.3 S&P Case-Shiller C-1 Home Price Index Divided by CPI Owners' Equivalent Rent 2. 3% 3% 2% 2% 1% 1% % -2% -1% -2% % % Source: CoreLogic, S&P, Federal Reserve, NAR, U.S. Dept. of Commerce and Wells Fargo Securities, LLC 7

8 Housing Chartbook: June 215 June 1, 215 New Home Sales 6 Inventory of New Homes for Sale New Homes for Sale at End of Month, In Thousands 6 New home sales jumped 6.8 percent in April, following a sizeable decline in March. New home sales have risen in four out of the past five months, despite harsh winter weather. Despite recent gains, new home sales remain well below their long-run norm. The unusually low level of inventories, particularly of completed homes, has been a major limiting factor. Inventories typically move with prices and the median price of a new home has moderated following double-digit gains in 212. The gap between the median price of a new home for sale relative to an existing home remains wide by historical standards. Developers are still contending with a shortage of ready-to-build lots in many key markets. 1,5 New Home Sales Seasonally Adjusted Annual Rate, In Thousands 1, New Homes for Sale: 25, Months' Supply of New Homes Seasonally Adjusted ,3 1, , 1, New Home Sales: 517, 3-Month Moving Average: 513, Months' Supply: New Home Sales New Homes Sold During Month, Index 2=, 3-MMA 2 18 $325 $3 Median New & Existing Home Sale Prices In Thousands, Single-Family Median New Sales Price: $297,3 Median Existing Sales Price: $221, $325 $ $275 $ $25 $ $225 $ $175 $225 $ $175 4 South: 73.6 Midwest: West: 57.5 Northeast: $ $15 Source: U.S. Department of Commerce, National Association of Realtors and Wells Fargo Securities, LLC 8

9 Housing Chartbook: June 215 June 1, 215 Existing Home Sales 7. Despite solid gains in pending home sales, existing home sales stumbled 3.3 percent in April to a 5.4 million unit pace. The drop in April was concentrated in single-family and follows two straight months of improvement. Low inventory levels are likely holding back existing home sales. The wave of refinancing in recent years provides homeowners with less incentive to list their property and many homeowners want to see prices move even higher before listing their property. Investor buyers have pulled back somewhat and tight credit conditions are also limiting sales. The proportion of all-cash sales held steady at 24 percent in April, and first-time buyers accounted for 3 percent of the market. Existing Single-Family Home Resales Seasonally Adjusted Annual Rate - In Millions U.S. Distressed Home Sales Percent of Total Sales Total Distressed: % First-Time Home Buyers Share of Existing Home Sales Share of Total Existing Home Sales: % % 27% Existing Home Sales: 4.4 Million Percent Change in Existing-Home Sales Year-over-Year Percent Change, By Price Range Single-Family Home Inventory Millions of Units New Homes: Existing Homes: 1.95M April 215 $-K $-25K $25-5K $5-75K $75-1M $1M Source: NAR, U.S. Department of Commerce, CoreLogic and Wells Fargo Securities, LLC 9

10 Housing Chartbook: June 215 June 1, 215 Home Prices Home price appreciation appears to be firming as of late. Most home price indices moderated during 214 but have firmed back up recently. Home prices are now rising at more than double the rate of wages and salaries, which is cutting into affordability and sales. Inventories of homes remain at historically low levels as supply chain issues restrained new construction. Lower inventories will continue to put upward pressure on prices. According to the S&P Case Shiller 2-City Index, prices grew roughly 5. percent in March with prices in San Francisco, Seattle, Dallas and Denver showing the strongest gains. 2 Home Prices Year-over-Year Percentage Change FHFA Purchase-Only Index, NSA Bars = Q/Q % Change Line = Yr/Yr % Change Purchase-Only Index: (Right Axis) Purchase-Only Index: 5. (Left Axis) S&P/Case-Shiller National Home Price Index, NSA Bars = Q/Q % Change Line = Yr/Yr % Change National Home Price Index: (Right Axis) National Home Price Index: 4.2% (Left Axis) % - -2% Median Sale Price: $221, -2 Median Sales Price 3-M Mov. Avg.: 8. FHFA (OFHEO) Purchase Only Index: 5.2% S&P Case-Shiller Composite 1: 4.7% -32% % Median Single-Family Existing Home Price Year-over-Year Percentage Change CoreLogic HPI: United States Year-over-Year Percent Change United States: 5.9% Median Price Change: Month Moving Average: 7.3% Median Sale Price: $221, Source: CoreLogic, NAR, S&P, FHFA, U.S. Department of Commerce and Wells Fargo Securities, LLC

11 Housing Chartbook: June 215 June 1, 215 Renovation and Remodeling According to the Joint Center for Housing Studies, markets where home values and household incomes are typically higher than the rest of the nation, such as in the Northeast and West, saw the largest gains in improvement spending in recent years. Overall spending on improvements, however, remains modest. Although growth in improvement spending has been somewhat lackluster, strengthening labor market conditions, rising household formations and stronger income growth should all boost remodeling activity. Many homeowners refinanced their home during the past few years and will likely remain in place for some time. Ageing homes and the increased appeal of urban living should also provide support. $1, $1, $9 $8 $7 $6 $5 $4 $3 $ Residential Investment Billions of Dollars Other: $8.4 B Brokers' Commissions: $134.9 B Improvements: $181.9 B New Building: $25.2 B $1, $1, $9 $8 $7 $6 $5 $4 $3 $ Residential Investment Year-over-Year Percent Change Improvements: 2.3% Res. Investment Ex. Improvements: NAHB Remodeling Market Index Index, Seasonally Adjusted Overall Index: Future Expectations: 55.4 Backlog of Remodeling Jobs: $ $ $ $ Share of Owner-Occupied Housing Year Structure Built $16 Leading Indicator of Remodeling Activity In Billions, 4-Q Moving Total, Harvard Joint Center for Housing Studies JCHS Forecast $ to to 9 1 $15 $ to 1989 $14 $14 $13 $ to % 1969 or earlier 41% $12 $12 $11 $11 $ $ Source: Joint Center for Housing Studies, U.S. Department of Commerce, NAHB and Wells Fargo Securities, LLC 11

12 Wells Fargo Securities, LLC 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) Anika R. Khan Senior Economist (74) Azhar Iqbal Econometrician (74) Tim Quinlan Economist (74) Eric Viloria, CFA Currency Strategist (212) Sarah House Economist (74) Michael A. Brown Economist (74) Michael T. Wolf Economist (74) Mackenzie Miller Economic Analyst (74) Erik Nelson Economic Analyst (74) Alex Moehring Economic Analyst (74) Donna LaFleur Executive Assistant (74) Cyndi Burris Senior Admin. 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 Advisors, 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 215 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 7. The FCA rules made under the Financial Services and Markets Act 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