These indicators came out in the second half of November and together tell the story about the housing market. The first set of data, monthly housing starts, 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 compiled by S&P and comprises and index of housing prices for existing single family homes in 20 major cities. 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 October grew at a fairly robust rate. Building permits in October were at a seasonally adjusted annual rate of 1.034 million, 6.2 percent above September’s rate of 974,000 and is 13.9 percent above October of last year. Due to the partial federal shutdown, Census does not have data on completions or housing starts and will not have these data until December; however, earlier figures suggest that the housing market is up over the prior year.
The other two statistics together report on prices. According to the Case-Shiller Index, housing prices in the largest urban areas continue to rise, up by 0.7 percent in September, and 13.29 percent over the course of the past 12 months. While this is very rapid growth, it does follow a sizable decrease in housing costs following the recession. The FHFA House Price Index, which measures the costs of homes outside of expensive urban centers also rose, up 2.0 percent in the third quarter – the ninth consecutive quarterly price increase and the first time since 2009 that the national house price level is higher than it was five years ago. Compared with last year, house prices are 8.4 percent higher showing that higher priced urban markets continue to outperform the country overall as the population becomes more concentrated.
We believe that the market for home sales, construction and prices will continue to grow slowly and 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, which has kept mortgage rates at historically low levels, but more importantly, due to the natural tendency for home sales and prices to increase along with demographics. This will be good for industries dependent on construction (lumber, metals, appliances, etc.) the recent uptick in housing costs has not yet been seen in the overall inflation rates since wage growth has continued to be quite moderate. 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.