These three indicators came out in the second half of March and together tell an interesting story about the housing market. The first indicator, monthly housing stats, comes from the New Residential Construction series put out by the Bureau of the Census and the Department of Housing and Urban Development. This index measures three specific indicators of home construction – building permits (or the number of privately-owned housing units authorized by governments), housing starts (the number of homes and apartments on which construction began) and housing completions (the number of housing units that were completed during the month).
The second indicator is released monthly by the National Association of Realtors and is based on transaction closings from Multiple Listing Services. This is a long series and reflects the number of existing homes (not new construction) sold during the month. Finally, the FHFA price index – which tracks prices outside of large cities where housing costs tend to be lower – was released by the Federal Housing Finance Agency. This index tracks federally guaranteed mortgages so does not reflect mortgage transactions greater than $625,000 in value in high cost urban areas and $417,000 in most other areas.
According to these three reports, the housing market in the first part of 2013 grew at a fairly robust rate. Building permits in February were at a seasonally adjusted annual rate of 946,000, 4.6 percent above the revised January rate of 904,000 and is 33.8 percent above the February 2012 estimate of 707,000, while housing starts in February were at a seasonally adjusted annual rate of 917,000, 27.7 percent above the February 2012 rate of 718,000, and housing completions in February were at a seasonally adjusted annual rate of 711,000, 24.3 percent above the February 2012 rate of 572,000. At the same time the sale of existing homes were up 10.2 percent above February 2012’s figures at a seasonally adjusted annual rate of 4.98 million units. The National Association of Realtors reported that median prices also rose to $173,600 in February, up 11.6 percent from February 2012. Finally, the government’s index of housing prices U.S. house prices rose 0.6 percent on a seasonally adjusted basis from December to January, and 6.5 percent over the past year.
We believe that the market for home sales, construction and prices has finally turned and that housing will no longer be a drag on the economy. This is partly due to the extremely loose monetary policy being carried out by the Federal Reserve and the Administration, but more importantly, due to the natural tendency for home sales and prices to increase along with demographics. During the recession, population in America and the number of new households continued to increase, as did overall inflation. Housing prices tend to track the growth in population plus inflation, and in spite of continued government interventions into the housing market, the bubble of the mid-2000s was finally eliminated from the market. That said, we should continue to see home sales and construction moderate back to a 2 percent annual growth rate, with prices increasing in the 5 percent range. There is a risk that the unduly low interest rate policy being pursued by the Federal Reserve will lead to another housing bubble and we will be keeping an eye on prices to see if they continue to outpace the 5 percent level.
While this will be good for industries dependent on construction (lumber, metals, appliances, etc.) the recent uptick in housing costs will begin to impact overall inflation rates. We continue to be concerned that overall inflation will trend back over 4 and up to 5 percent as the economy strengthens, and if the Federal Reserve continues to push for a weaker dollar. Inflation can come about quickly and every business and industry association needs to keep a sharp eye on what is happening to their input costs over the next year.