Economist's Outlook

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s second update discusses housing starts.

• Total housing starts rose slightly to 914,000 in May, slightly behind expectations, but 28.6% higher than the same point in 2012.  The most recent peak for total starts was 1.005 million back in March of this year.   The bulk of the increase came from the multifamily sector.
• Single family housing starts are closely watched because they reflect both builder confidence and potential supply, but more importantly they have a strong impact on job creation.  Furthermore, home construction and sales drive consumption of goods and thus jobs in related industries.
• Single family housing starts inched up 0.3% from April to May and were up 16.3% over the year.
• Permits for construction of single family units increased 1.3% from April to May, but were up 24.6% from May of 2012.  While the year-over-year growth trend is strong, it appears to have hit a plateau and may converge at a new baseline level under the long-term trend.  Still there is much room for starts to catch up and to contribute to growth and job creation.
• New home construction is strong relative to recent history at 622,000 units in May, but remains well below the 1.06 million annual average from 1980 through 2001.
• While multifamily construction is on the rise, construction of single family homes remains tepid.  These low levels are insufficient to ameliorate the inventory shortage in the current market.  Low levels of construction will limit supplies and fuel modest price growth, but it will also limit the employment recovery.

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the consumer price index.

• No inflation to speak of in May, with the Consumer Price Index (CPI) rising by only 0.1 percent from last month. CPI is now higher by 1.4 percent from a year ago.
• But renters’ rent continues to strengthen with a 2.8 percent gain from one year ago.  Separate private sector data on rents has pointed to even faster increases of late, which may hint that government rent data will further rise in upcoming months. The fuzzy figure on “owners’ equivalent rent”, which tries to gauge what the homeowners would pay to rent out their homes, rose by 2.1 percent. Given falling apartment vacancy rates and a shortage of homes, rents will likely rise further over the next 12 months.
• Home prices are not part of CPI. It is considered an asset, like stock prices, and is not part of consumer price inflation. (Tell that to all the homebuyers now in the market).
• 2013 inflation will be tame – maybe 2 percent at most by December. So next year’s cost of living adjustment on social security checks and the like will be about 2 percent. However, rising rents and owner equivalent rent means CPI inflation will kick higher in 2014. If active money printing continues, then 5 percent inflation is a distinct possibility by 2015. Those with COLA will be protected, but those without such clauses will fall behind in standard of living.
• One guaranteed way to partly protect against inflation is to lock in those 30 year fixed rate mortgage payments. It is because of this that we’re amazed when hearing about the monthly mortgage payments of our grandparents.
• Interesting that the mention of a currency, be it the British Pound, French Franc, or the Russian Ruble, in the great literature of the 19th century retained its value throughout the story-line even over several generations. Even the mention of giving 75 Drachmas (Greek currency) by Julius Caesar to Roman citizens greatly awed the public. This is not true anymore. All currencies seem to measurably lose purchasing power over a short time. Today, Drachmas would be essentially worthless should Greece get out of the Euro.

The recovery in commercial REALTOR® markets notched a noticeable gain during the first quarter 2013, as sales and leasing activity advanced.  Based on the results of the May Commercial Real Estate Market Survey, commercial practitioners reported a solid start to the year.  REALTORS® rated the direction of commercial business opportunities 4.0 percent higher from the fourth quarter 2012, in the wake of a 6.0 percent rise from the third quarter of last year.

On the fundamentals side, leasing activity rose 5.0 percent over the previous quarter, pointing to a steadily rising demand.  On the supply side, new construction was virtually flat, with a 0.5 percent advance from the fourth quarter.  Vacancies declined for all property types, except multifamily, which increased 60 basis points to 7.9 percent in the first quarter.  Competition from residential property rentals is adding pressure on availability rates in the multifamily space.  Office vacancies declined 60 basis points, to 17.6 percent, while industrial rates declined 310 basis points, in addition to the 240 basis point drop in the prior quarter.  Retail rates decreased 10 basis points, to 16.0 percent.

As vacancies continue to decline, landlords find fewer reasons to provide rent concessions.  The market strengthening was further illustrated by rising rental rates in the first quarter.  For the first time since the inception of this series in the fourth quarter 2008, rental rates turned positive, gaining 1.0 percent in the first quarter.  In terms of space requirements, tenant demand remained strongest in the 5,000 square feet and below.  The first quarter witnessed growth in demand for spaces in the under 2,500 square feet range, with 42 percent of REALTOR® clients opting for such space.  Lease terms remained steady, with 36-month and 60-month leases capturing the bulk of the market.

In line with broader market trends, investors have clearly signaled a strong interest for secondary and tertiary markets, following higher yields in stable markets.  Investment sales rose 3.0 percent from the fourth quarter, and 5.0 percent year-over-year. Nationally, 64 percent of REALTORS® reported completing a sales transaction during the quarter. Prices gained 0.3 percent compared with a year ago.  Cap rates rose on average from 9.0 percent to 9.2 percent across all property types.

The average transaction price moved from $1.2 million to $1.1 million in the first quarter. Commercial practitioners continued to find financing as the top obstacle in closing deals, followed closely by price disagreements between buyers and sellers.  Inventory remains a concern for about one in five practitioners.

For the full report along with respondent comments, please visit http://www.realtor.org/reports/commercial-real-estate-market-survey.

• Foot traffic and future home sales have a strong correlation.  SentriLock, LLC. provides NAR Research with monthly data on the number of showings.
• Foot traffic in the area covered by the Tiftarea Board of REALTORS® (Tifton, GA) rose 22% over the 12-month period ending in May of 2013.
• This increase in year-over-year traffic was the 5th consecutive.
• Rising home prices and record mortgage rates have combined to boost buyer confidence and foot traffic.

• Sales growth was largest among homes in above-median-priced categories in April, and more than 10% of homes sold had a sales price over $500,000.
• In spite of the price variation by region, when summed to the regional level the median sales price for all regions of the US except the West falls into the $100,000 to $250,000 price range.  The West is slightly outside of this range and the Northeast is near the edge.
• The median price is the point at which the middle-priced home sold.  By definition, half of homes in an area sold at a higher price and half of homes sold at a lower price than the median.
• Sales were up from a year ago in the median-price category and all higher price tiers in all regions.  Sales were only lower in the lowest price category in the West, South, and Northeast—most likely a result of limited inventory in this price range.
• Notably, in most regions, sales growth was highest in the higher price tiers.  In the Northeast, sales growth was strongest in the $1 million plus category while in the Midwest and West sales growth was strongest in the $750,000 to $1 million price tier.  Sales in the South showed the most strength in the $500,000 to $750,000 category and were more than 30 percent higher than a  year ago in all above-median price tiers which partly explains the strong price growth in the median in that region.
• Sales in the lowest price tier began to show less growth and even decline in some areas in 2012.  Unsurprisingly, this was the same period when we saw the biggest tapering off in reports of distressed sales in our survey of practitioners.
• Strength in the upper price tiers has brought the share of homes-priced greater than $500,000 among those sold to over 10 percent in April.  As inventory is more plentiful in these price tiers, construction seems limited, and distressed sales are anticipated to continue to drop, expect the share of higher priced homes among those sold to remain above the 10 percent level for the duration of the summer selling season, and possibly into the off-season.

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the latest producer price index and an outlook for inflation.

• After two straight months of measurable declines in producer prices, companies were paying more to buy stuff in May. Producer prices advanced 0.5 percent in May and are now up 1.8 percent from one year ago.
• The prices at the very early stage of production (of crude goods rather than of finished goods) were rising at a much faster rate of 7.7 percent from one year ago, though this measure tends to be a bit volatile due to the swings in energy prices.
• The latest rise is not anything for consumers to be alarmed about. First, producers do not always pass on all of the costs to the consumer. Second, there are many items in consumer prices that are primarily a service rather than a good, such as a visit to a barber or dentist, which are rarely impacted by rising producer prices.
• Consumer price inflation, therefore, for all of 2013 should be about 2 percent. The next cost-of-living-adjustment to social security checks will therefore match this increase.
• However, expect higher consumer price inflation in a few years. The massive monetary stimulus of the recent past years will steadily trickle into the prices. Consumer price inflation of 4 to 5 percent is a distinct possibility by 2015. With higher inflation, expect measurably higher mortgage rates.
• America is fortunate to have one extraordinary privilege that no other country has. The U.S. dollar is for all intents and purposes the global reserve currency, which thereby permits no automatic inflation due to printing a lot of money. Iranian citizens, for example, prefer holding on to the dollar (via the black market) rather than keeping Iranian currency. If somehow in future years we see the rise of the Chinese economy and people’s belief that Chinese currency will strengthen over time, then some of the U.S. dollar luster may fade.  The printing of money will then no longer provide a free lunch and could lead to  greater inflationary pressure. Just to illustrate an extreme opposite end of this, where there is no trust in a country’s currency, Venezuela for example has a 35 percent inflation rate today from printing too much money.

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the latest unemployment insurance claims.

• Fewer initial claims for unemployment insurance were filed in the week ending June 8. Claims dropped to 334,000, a decrease of 12,000 from the previous week’s unrevised level. Initial claims filed are now back to the “normal” or pre-recession level of about 350,000.

• Notwithstanding the positive trend on unemployment insurance, job growth needs to accelerate to make a bigger dent on ensuring employment for recent college and high school graduates. The percentage of the adults employed in relation to population has been stuck at about 56 percent since 2009, down from 63 percent prior to the 2008-09 Great Recession.

• What this means for REALTORS®:  Fewer job losses and more job gains will provide support to increased home sales. However, much faster job growth is required to raise the employment ratio.

• Foot traffic can give a strong indication of future home sales.  SentriLock, LLC. provides NAR Research with monthly data on the number of showings.
• Foot traffic in the area covered by the Somerset-Lake Cumberland Board of REALTORS® (Somerset, KY) surged in April of 2013 before easing in May.
• The Somerset area has low traffic volume which makes it susceptible to volatile statistics, but the traffic trend has been strong this spring.
• Traffic last summer was very strong and low mortgage rates and steady job growth should help to sustain the strength through the summer, but traffic may be down from last July.

• The net worth of households and non-profits has recovered completely from the recession and reached a new peak of over $70 trillion in the first quarter of 2013 according to data from the Federal Reserve Flow of Funds.
• During the recession, the net worth of households and non-profits—the sum total of tangible assets such as real estate and financial assets such as savings and equities minus liabilities such as mortgages and other debt—took a beating, declining by more than $15 trillion from the first quarter of 2007 to the first quarter of 2009..
• While a reduction of debt has led to some increase in net worth, the recovery of home and stock prices has had a much bigger effect.  Household real estate accounts for $18 of the $83 trillion in household assets and owner’s equity in household real estate is $9 trillion of the $70 trillion in net worth.
• This data marks the 14th consecutive quarter of year over year growth in net worth and the 3rd consecutive quarter of nearly 10 percent gain from a year earlier.
• Households and non-profits are grouped together because current data collection by the Fed is not at a level of detail that would make separation of the two groups possible.

• Employment growth has been positive in all but 24 or of the 164 markets tracked by NAR Research over the 4-quarter period ending in March. This trend indicates that 85% of markets experienced an improvement in employment, which is important for the confidence of potential homebuyers.
• The strongest gains were concentrated in markets across Texas, but there have also been gains across the central south and the mountain states. A notable number of markets that experienced a decline in employment over this period were concentrated in the Northeast.
• Additional information on local market trends is available in the Local Market Reports for the 1st quarter.

• Foot traffic can provide great insight into the direction of future home sales.  SentriLock, LLC. provides NAR Research with monthly data on the number of showings.
• Foot traffic in the area covered by the Memphis Area Association of REALTORS® was 8% stronger in May compared to the same time a year earlier.  However, this year-over-year comparison was stronger, 18%, in April.
• Foot remains robust in the area and record mortgage rates combined with steady employment growth should help to maintain interest in housing demand.

Economic background

Economic activity maintained grew at a steady pace during the first quarter of the year, as consumers and businesses focused on the year ahead.  Gross domestic product rose 2.4 percent in the first quarter, as consumers opened up their wallets at the fastest pace since the fourth quarter 2010.  Consumer spending increased 3.4 percent in the first quarter, lifted by a 9.1 rise in auto purchases, coupled with an equal advance in sales of recreational goods and vehicles.

With aging vehicles and with manufacturers rolling out technologically advanced and more fuel efficient new models, consumers are finding new cars attractive.  Sales of cars in April totaled 651,644 units, a 3.1 percent increase year-over-year. Sales of light-duty trucks, which include SUVs, advanced 14.7 percent, benefiting from the soaring popularity of car-based cross-over vehicles, which recorded the strongest yearly gain in April, at 16.5 percent. Pick-up trucks also recorded solid sales growth, with the Ford F-Series leading the sales charts, followed by the Chevrolet Silverado.

Consumers also increased their expenditures of services—including health care, transportation, food services and lodging—by 3.1 percent, the strongest gain since the second quarter of 2005. In a sign of a broader improvement in sentiment, spending on financial services and insurance rose 7.6 percent in the first quarter, a pace not seen since the fourth quarter of 2004.

Employment figures also point to a steady pace of growth.  Payroll jobs advanced by 644,000 during the first quarter, with gains distributed fairly evenly across industries.  On a yearly basis, professional and business services, education and health and construction recorded noticeable growth.  The unemployment rate declined from 7.6 percent to 7.5 percent in March.

Businesses have also increased investments in equipment and jobs.  Business spending gained 2.1 percent in the first quarter of the year, focused on capital, equipment and software.  With international trade remaining favorable, and adding the increased domestic oil production, which led to diminishing need to import it, the balance of trade narrowed in the first quarter from $43.6 billion to $38.8 billion.

Government spending continued its decline, shrinking 5.0 percent in the first quarter, driven by budget cuts at federal, state and local levels.  At the federal level, both defense and nondefense cuts added to a 8.7 percent decrease in spending.  State and local governments slashed spending by 2.4 percent. Though negative to the economy over the short term, lowering the federal budget deficit will likely help long-term economic prospects.

The outlook for the remainder of 2013 is for GDP to grow at a 2.0 percent annual rate. Payroll employment is expected to rise 1.5 percent, as the unemployment rate remains around 7.5 percent.

Commercial Real Estate

Following on the solid 24 percent yearly gains in 2012, commercial investments notched a strong first quarter.  Sales of major properties totaled $72.8 billion in the first quarter, a 35 percent rise from a year ago, according to Real Capital Analytics.  Portfolio transactions made up a large portion of the volume, especially due to the sale of Archstone apartment properties to Equity Residential and Avalon Bay.  Individual property sales comprised $40 billion, a 7.8 percent gain from the same quarter last year.

Prices for commercial properties were up slightly in the first quarter. Cap rates inched up slightly, to an average 7.5 percent nationally across all property types, mostly due to a redirect in investments towards secondary and tertiary markets.

The rise of secondary and tertiary markets which began during 2012 has intensified during the first quarter of this year.  Faced with lower inventories of top properties in major metropolitan areas, investors have been searching for the higher yields of performing properties in smaller markets.  During the first quarter, in terms of nominal volume, New York and Washington, DC metro areas dominated the landscape, with close to $20 billion in combined sales.

However, on a year-over-year basis, the first quarter recorded 16 individual markets with triple digit gains in sales, most of them secondary markets. Jacksonville posted the strongest sales gains, up 625.2 percent, boosted by apartment and office sales.  Sales in the Virginia and Maryland suburbs of DC also jumped 295.3 percent and 199.1 percent, respectively.  The surge in sales were driven by large office and apartment property (Archstone portfolio sale) transactions in both markets.  Other markets with noticeable investment surges were East Bay, Westchester, Kansas City, San Antonio, St. Louis, and Long Island.

Source: Real Capital Analytics

The bifurcation in capital availability along property values continued in 2012 and the first part of 2013.  As data from Real Capital Analytics indicates, for deals valued at $2.5 million and above, CMBS issuers and government agencies remained dominant players in secondary and tertiary markets, followed by national banks, insurance companies and regional banks.  Meanwhile, based on data from the 2013 REALTORS® Commercial Real Estate Lending Survey, for transactions below the $2.0 million mark, private investors, local and regional banks continued to serve as the main conduits for capital liquidity.

For the Commercial Real Estate Outlook report, visit http://www.realtor.org/reports/commercial-real-estate-market-outlook.

The share of distressed properties on the market continued to decline in April. Approximately 18 percent of REALTORS® who responded to the April REALTORS® Confidence Index Survey and who reported a sale sold a distressed property, substantially down from levels a few years ago.

REALTORS® continued to report strong demand for REOs from investors who reportedly win against first-time homebuyers. About 37 percent of reported sales made to investors were distressed properties, compared to about 17 percent in the case of first-time homebuyers.

• Foot traffic provides a strong indication of future home sales.  SentriLock, LLC. provides NAR Research with monthly data on the number of showings.
• Foot traffic surged 20% over the 12-month period ending in May in the area covered by the Charleston Trident Association of REALTORS®.  May was the 2nd consecutive month of a 20%+ year-over-year foot traffic.
• Record low mortgage rates and steady price gains have pulled fence sitters back into the market.

• Housing equity rose nearly 30%, or nearly $2 trillion, over the past year as prices rose, home purchases rebounded, and mortgages outstanding continued to decline according to first quarter data from the Federal Reserve’s Flow of Funds.
• Mortgage debt outstanding fell by $200 billion while the market value of household real estate surged 11 percent, topping $18 trillion.
• The rise in the value of household real estate was anticipated as a result of increasing home prices as discussed here. In spite of the rise in house prices, the total value of household real estate remains roughly 20 percent below the peak.
• The housing market has rebounded in spite of falling mortgage debt in large part because of all-cash or high cash purchases. Jed Smith discusses the latest results from the Realtors® Confidence Index here, which show that 32 percent of recent transactions in April were all-cash purchases. This trend has been quite consistent over the last few years in spite of low mortgage rates.
• In total, home owners now have equity equal to 49 percent of the total value of household real estate compared to as little as 37 percent in the first quarter of 2009.

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the latest monthly employment report.

• While payrolls grew in May, the growth was moderate – not anything to be overly exuberant about. Private payrolls rose by 178,000 and total payrolls were up by 175,000 due to a 3,000 job decline in the government workforce, predominantly at the Federal Government level. This is roughly in line with the average growth of 180,000 jobs over the last 3 years.
• After stronger growth earlier in the year, jobs in goods-producing industries have softened. Jobs in service providing industries have increased, but not enough to completely offset the slow down in employment in goods-producing industries.
• At 135.6 million, overall payrolls remain noticeably below the 138 million jobs seen at the peak in January 2008. At this month’s rate of progress, we are only 13 months away from a return to that previous peak. Of course, to see the same unemployment rate we will need to add more jobs because the labor force has grown by 1.7 million since January 2008.
• While the unemployment rate ticked up to 7.6 percent from 7.5 percent, the change is not statistically significant, and a closer look at the data shows that trends are mixed. In the right direction, the number of employed persons grew, the number of job losers and those completing temporary jobs shrank, while job leavers and reentrants to the labor force grew, and the total number of workers unemployed for more than 5 weeks shrank. But one might be concerned about the fact that the number employed part time for economic reasons fell only slightly, the number of workers unemployed for 27 weeks or more was roughly unchanged, and the unemployment rates for teenagers and African Americans both remain in the double-digits, 24.5 and 13.5 percent respectively, and both increased in May.
• Hours were unchanged in May and earnings rose 2 percent from a year ago.
• Mixed news in the labor market has a mixed implication for the housing market. Weaker employment data might cause the Fed to work to keep mortgage rates low for a longer period in the short-run, but mortgage rates are beginning to climb in anticipation of the Fed’s eventually tapering. Strong employment and income growth will eventually lead to more qualified buyers as household formation resumes a more normal trajectory of growth in the long-run.

At the national level, housing affordability is down due to higher mortgage rates and even higher home prices. What is affordability like in your market?

• Housing affordability is down for the month of April in the U.S. as prices reached their highest point since August of 2008, and their highest April since that same year. Mortgage rates ticked up another notch as they have done each month since their December 2012 bottom, adding more downward pressure on affordability.
• While mortgage rates are still lower than a year ago and incomes are higher, home prices increased again keeping affordability down.
• By region, affordability is down from one month ago in all regions. From one year ago, affordability is down in all regions except the Northeast. The West had the biggest drop in affordability because it had the biggest price gain, at 17.5%.
• In all regions, the median income continues to rise from a year ago and mortgage rates are also down, allowing affordability to remain historically favorable.
• Check out the full data release here.
• The Housing Affordability Index calculation assumes a 20 percent down payment and a 25 percent qualifying ratio (principle and interest payment to income). See further details on the methodology and assumptions behind the calculation here.

As college graduates are thinking about what lies in store for them economically this equation may include whether or not they can achieve the American dream of homeownership. Here we show data that indicates that graduates with a Bachelor’s degree or higher are more likely to become homeowners compared to those with only a high school degree, primarily because they generally earn more and face a lower likelihood of being unemployed.

• The homeownership rate for those with a Bachelor’s degree or higher is 75 percent, compared to 65 percent for those with a high school degree or some college. The national rate is about 66 percent.
• The median earnings of a Bachelor’s degree holder ($48,309) is about twice that of a high school graduate ($26,699).
• The unemployment rate of a Bachelor’s degree or higher holder is less than 4 percent, about half than that of a high school graduate (7.4%) or about a third of a person with less than a high school degree (11.4%) (May 2013 data).
• What this means to REALTORS®: College education boosts the potential for homeownership, with the homeownership rate of those with a Bachelor’s degree or higher about 10 percentage points above those with only a high school degree/some college.

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses unemployment insurance claims.

• Initial claims for unemployment insurance filed in the week ending June 1 dropped to 346,000, a decrease of 11,000 claims from the previous week’s upwardly revised level. This brings the May average, as well as the year-to-date average, to the pre-recession level of about 350,000 claims. A lower level of initial claims for unemployment insurance means fewer layoffs in existing jobs and greater job security.

• In a related report released yesterday, ADP (which is a payroll processing company) reported an increase of 135,000 payroll jobs in May, which is better than April’s 113,000 jobs.
• The May unemployment figure will be released tomorrow. Although initial claims for unemployment insurance data is not used in the computation of the official figures, the historical data shows that claims data generally tracks with the unemployment rate. Similarly, the official jobs generated data and ADP payroll data also generally move in the same direction.

• Based on the above data and GDP growth, which still remains sluggish, the official job creation to be reported on Friday by the Bureau of Labor Statistics looks to be 100,000 to 150,000. Such a job gain is a bit below normal considering population growth and the stream of college graduates entering the labor force.

• Approximately 32 percent of REALTORS® reporting on their last sale in April had a cash sale (30 percent in March). Investors and international buyers typically pay cash.
• About 10 percent of REALTORS® reporting a sale to a first-time homebuyer also reported cash sales, while over 70 percent of reported last sales to investors and international buyers were for cash.

Source: REALTORS® Confidence Index Survey