Economist's Outlook

REALTORS® Confidence Index in December Reflects Tempered Market Expectations

Confidence about current market conditions was essentially unchanged from November to December [1]. The REALTORS® Confidence Index for single family sales registered at 59 (same as in November). The indexes for townhouses/duplexes was at 43 (42 in November) while the index for condominiums was at 37 (38 in November). An index of 50 marks “moderate” conditions. See the December REALTORS® Confidence Index Survey for more information.

Confidence about the next 6 months saw a slight improvement in December. The 6-month outlook index for single family rose to 66 (64 in November). The index for townhouses slightly rose to 48 (46 in November) while the index for condominiums registered at 44 (43 in November). REALTORS® expressed concern about a variety of factors that can impact the market such as the new regulations pertaining to the Ability to Pay Rule for Qualifying Mortgage, the reduction in FHA loan limits, uncertainty regarding flood insurance rates, and the state of the economy.

[1] An index of 50 delineates “moderate” conditions and indicates a balance of respondents having “weak” (index=0) and “strong” (index=100) expectations. The index is calculated as a weighted average using the share of respondents for each index as weights. The index is not adjusted for seasonality effects.

New Home Sales

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 in new home sales data.

  • New home sales fell for the second consecutive month.  Sales fell 7 percent in December following a 4 percent decline in November.  Though new home sales generally reflect the degree of new home construction – that is, if more homes are built then there will be more new home sales – the latest weakness is a part of weakening demand, which has become hampered by increasingly challenging affordability conditions.
  • Even with softer demand, new home prices continue to rise.  In December, a typical new home sold for $270,200, up 4.6 percent from one year prior.  New home prices partly reflect construction material costs, which are incorporated into the supply and demand dynamics.  The gap between new and existing home prices is sizable in the current environment, suggesting existing homes could be a better buy.
  • The inventory of newly built homes is essentially at a 50-year low.  More new home construction is needed.  Housing starts need to rise by at least 50 percent quickly to help relieve both new home inventory and existing home inventory.  The speed of sale is quick.  In the latest month, it took 3.2 months to sell a new home compared to over 12 months during the depths of the housing market crash.
  • Details on the data are as follows.  In December 414,000 new homes went under contract compared to 445,000 in November.   Because the data follows the standard reporting format (seasonally adjusted and annualized), the latest two-month softness is more than the usual slowdown that occurs at the end of the year.  There is no data for new home sales closings.  It is only contract signings that are reported.

House Price Indices

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 housing price indices data, including the FHFA index.

  • This week NAR released existing home sales and median home price information while the FHFA released their housing price index data.  Both data series showed continued gains in home prices with some deceleration suggesting that the pace of home price increase should fall back into a more normal range in the next few months.
  • Home sales edged up slightly in December finishing the month slightly below the year ago sales pace.  For the year, sales were up 9.1 percent.
  • In the same release, NAR showed year over year house price gains of 9.9 percent—a solidly above average increase, and only the second month in the last 13 for house price gains to register less than 10 percent.  For the calendar year, the median home price rose 11.5 percent over 2012.  At the same time, the FHFA reported a 7.6 percent home price rise for the year ending November 2013.
  • NAR reports the median price of all homes that have sold while FHFA reports the results of a weighted repeat-sales index.  Because home sales among higher priced properties have been growing more than among lower price tiers, the NAR median price has risen by more than the weighted repeat sales index—which computes price change based on repeat sales of the same property.
  • FHFA sources data primarily from Fannie and Freddie mortgages, transactions using prime conventional financing, and misses out on cash transactions as well as jumbo, subprime, and government backed transactions such as those using VA or FHA financing.
  • FHFA releases data at the Census division level and it confirms the trend seen in NAR measures.  The most robust gains from a year ago were in the West.  NAR reported price change of 15.8% in November and 16.0% in December.  According to FHFA year over year prices rose 15.4 percent in the Pacific division which includes Hawaii, Alaska, Washington, Oregon, and California and 10.7 percent in the Mountain division which includes Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona, and New Mexico.
  • Likewise, NAR data showed the smallest price gains from a year ago in the Northeast (5.7% for the year ending in November and 3.6% for the year ending in December), and FHFA showed a similar pattern.  Prices rose 4.2 percent in New England (Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut) and 3.2 percent in the Middle Atlantic states (New York, New Jersey, Pennsylvania) from one year ago.

Latest Housing Starts Data

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 housing starts data.

  • New home construction reached the 3rd highest level in the past 66 months. However, the latest annualized pace of 999,000 new units is insufficient to satisfy demand. Another 50 percent increase in housing starts is needed to help relieve the inventory shortage conditions.
  • The latest figure is a decline from the prior month, which was the best in over 5 years. But activity is still higher from a year ago. Both single-family and multifamily housing starts softened in December. Perhaps the deep freeze in a good portion of the country could have impacted builders, postponing the digging of the earth. Housing permits, which are just paper approval and which should not have been impacted by the weather, also weakened a bit.
  • It takes about 6 months to go from housing starts to housing completion and ready for sale for a single-family home. Big builders can do it quicker on spec homes. Owner-initiated construction takes more than twice as long to complete.
  • The inventory of newly constructed homes is essentially at a 50-year low. Much more construction is needed. Publicly-listed companies like KB Homes and Toll Brothers can tap Wall Street funds to get busy. However, small local builders have historically been the principal supplier of new homes in America. These local homebuilders rely on construction loans, which are very hard to get. Many local lenders have indicated the burdensome regulation arising from Dodd-Frank financial market regulations have hindered their ability to lend. Hence, large companies are getting bigger at the expense of smaller guys getting shut out. A case of unintended consequence of a government policy?
  • The insufficient new housing starts will mean a likely continuation of a housing shortage in 2014. Therefore, home prices and rents will rise in nearly all local markets in 2014.

Consumer Price Index

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.

  • Consumer prices (CPI) increased 0.3 percent in December, marking the largest 1-month increase since June 2013. On a year-over-year basis, however, prices rose 1.5 percent, well below the Federal Reserve’s 2 percent inflation target.
  • Data show that energy prices had a big impact on the headline figure for the month. Core inflation—a measure that excludes energy and food prices—was up by a much smaller 0.1 percent on the month. However, energy prices have risen less than other prices throughout the year and core inflation was 1.7 percent—slightly higher than headline inflation—for the year. While the Fed does not target this specific measure, the factors driving the Fed’s preferred measure of inflation are the same, suggesting that there is currently no major inflationary pressure pushing the Fed to tighten monetary policy. If this trend continues, expect a gradual taper followed by moderate increases in the Federal Funds interest rate.
  • One of the big non-energy components of the CPI, the shelter index, rose 0.2 percent for the month and 2.5 percent for the year. This has a big effect on the overall index because shelter is a little more than 30 percent of the index.
  • Rent of primary residences—actual market rents paid by individuals who do not own the home they live in (pictured below)—rose 2.9 percent for the year ending in December 2013. When rents are rising, it becomes more attractive to own a home. Because the bulk of home ownership costs for someone with a 30-year fixed rate mortgage are fixed, even if rents are initially cheaper, potential buyers can expect rent costs to catch up to ownership costs.
  • A few other sub-components of the shelter index show interesting trends. Housing at School, excluding board (pictured below) shows a gradual decline, but this is just a decline in the rate of increase. In fact, for the year ending December 2013, the price of housing at school was still rising at a 3.4 percent rate—faster than that for rent of primary residences. In contrast, Other Lodging Away from Home Including Hotels/Motels (pictured below) shows rough stability—a meager 0.6 percent gain for the year ending in December 2013. While the trend for hotel/motel pricing is more variable, it has seen smaller price gains than housing at school over the last 6 years with only a few exceptions.

Depleting Shadow Inventory

  • Rising mortgage rates will tame the enthusiasm of some homebuyers. But the lack of choice when choosing a home will also hinder buying.
  • Inventory levels are already very low. Newly constructed home inventory is essentially at a 50-year low. Existing home inventory is hovering at a 13-year low.
  • Increases from housing starts will bring more inventory to the market. But the current production of little over a million is not sufficient. Another quick ramp up of around 40 to 50 percent is needed to adequately supply the market.
  • Another source of potential inventory is from homes where mortgages have not been paid or the home is already in the foreclosure process though not yet cleanly released from all the paperwork. How is this so-called shadow inventory trending?
  • The table below shows the shadow inventory situation for all 50 states. It shows the current as well as peak distressed conditions. The data is also overlaid with home price trends to help gauge where shadow would be most useful. Naturally, fast price appreciating markets such as California and Nevada would like to have more inventory, but the shadows in these states have been greatly depleted. California’s shadow has been slashed by 71 percent while Nevada cut its future distressed homes by 59 percent.
  • At the other end, slow price appreciating states have no need for additional supply. Yet, states like New Jersey, New York, and Connecticut have barely dented their shadow and these distressed homes still loom over the market. These states have only reduced their shadow by around 10 percent from the peak condition. Take a look at your state’s condition after the jump.

Daily Economic Update: Mortgage Applications

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 mortgage applications data.

  • Seasonally adjusted applications to purchase homes surged 11.9% in the week ending January 10th compared to the prior week. However, this improvement reflects a technical adjustment in the prior week as well as a rush to submit applications in advance of a major regulatory change in the current week.
  • The Qualified Mortgage rule went into effect for all applications received on or after January 10th. The “QM” rule introduced stronger underwriting, fee and pricing protections for consumer, but those protections could also raise costs or limit credit access for some consumers.
  • The average rate for a 30-year fixed rate mortgage eased two basis points from the prior week to 4.51%.
  • New purchase applications for conventional and government financing rose, by 12.6% and 9.0%, respectively.
  • In a separate data report released this morning, the average FICO scores for conventional and FHA financed, purchase mortgages closed in December were 756 and 690, respectively. Though traditional, safe underwriting standards have been restored since the boom period and risky products like NINJA loans and low or no documentation loans eliminated, credit overlays remain significantly higher than the pre-boom period when average FICOs were 30 to 40 points lower for conventional and FHA mortgages. Several important reforms and regulatory changes remain that have kept conditions tight.
  • Mortgage applications shot upward this week, reversing some of December’s weakness. However, this improvement is likely due to a rush to submit applications in advance of new regulations. Thus, purchase applications in subsequent weeks could suffer as a result of demand having been pulled forward. The impact of the new regulations will largely be smoothed out in time as most originators are already compliant with the new underwriting standards and understanding of limitations and legal liabilities improves with time, but the market faces adjustments in the near term.

Distressed Sales at 14 Percent of Sales in Latest RCI Report

Distressed property sales remained at 14 percent of sales reported by REALTORS® in November 2013 [1]. This is substantially down from levels a few years ago when distressed property sales accounted for close to 30 percent of sales. This trend is in line with the broad decline in foreclosure inventory amid the recovery in home prices and government programs to assist financially strained homebuyers. Read more in the latest RCI report.

[1] NAR’s monthly REALTOR® Confidence Survey asks about the last sale for the month. This percent is computed by dividing the number of REALTORS® who reported that their last sale was a distressed sale by the number of REALTORS® who reported a sale for the reference month. To convert to percent, the ratio is multiplied by 100.

Latest Data on Retail Sales

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 data on retail sales.

  • Retail sales squeaked out a small gain in December, rising by only 0.2 percent from the prior month. Cold weather and more precipitation this past December compared to historical norms may have contributed to the sluggish sales. From one year ago, sales were up 4 percent.
  • The national retail vacancy rate will not move down if sales rise at this slow pace. Rent growth, hence, will be difficult. NAR projects a retail vacancy rate of 10.1 percent in 2014, with retail space rents rising by only 2 percent.
  • Recent softness in home sales is causing sales at furniture shops to decelerate. A similar slowdown is occurring at building and garden equipment stores.
  • Employment at retail stores meanwhile has been increasing quite nicely, with a net gain of 381,000 in the past 12 months. But that growth is in jeopardy if retail sales do not accelerate higher.
  • Because consumer spending comprises two-third of the economy, consumer spending growth (supported by job and income growth) is needed to further propel the economy.
  • Spending at jewelry stores, interestingly, is rising at a double-digit pace. The record high stock market is likely causing the high net worth households to visit Tiffany’s on 5th Avenue, which then subsequently forces other high income people to spend conspicuously in order to keep up with the Jones. Though present, the show-off consumption is not that bad in the U.S. given many years of being a high income country. Pretty much everyone has a high-definition TV and a smartphone.
  • Conspicuous spending is most visible today in Moscow. The newly rich need to show they are no longer pretending to get paid (and pretending to work) as occurred in former communist times. Though subway stations in Moscow contain artistic beauty, as if visiting a museum, the newly-rich refuses to take underground transport and are adamant to show off their latest German-made car even through they endure possibly the worst traffic jams in the world. Pedestrians beware: it is common for drivers to view the wide sidewalks as another lane.

The Latest on Employment Conditions

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 data on the unemployment rate.

  • The unemployment rate plunged in December to the lowest level in five years.  The latest 6.7 percent jobless rate is almost back to normal.  The mystery, however, is that very few jobs were created over the month.
  • The all-important payroll jobs grew by only 74,000 in December.  That is much less than the 200,000 or so that are needed each month to move the job market into a noticeably improved state.
  • The principal reason for the deep fall in the unemployment rate is due to nearly ½ million people leaving the labor force in the past three months.  When people are not looking for work, even though they are without a job, they are no longer officially classified as being unemployed.  The opposite side of the coin – the employment rate, measuring what proportion of the adult population has a job – remains stuck at recession levels.  Only 58.6 percent of adults have jobs compared to 63 percent prior to the Great Recession.   In this sense the job market has only been treading water over the past five years with no meaningful progress.
  • As to job creation over a longer period, from the low point in 2010 a total of 7.5 million net new jobs have been added to the economy.  Note that 8 million jobs were lost during the Great Recession, so we have not yet fully recovered all the jobs that were shed several years ago.  Moreover, every year there are fresh high-school and college graduates looking for jobs.
  • Improvements in the housing sector led to about 100,000 net new jobs over the past 12 months in residential construction and for general contractors.  In the more sluggish commercial real estate arena, only 20,000 jobs have been added.
  • In other sectors, rental leasing jobs have increased solidly by 46,000.  The low apartment vacancy rates naturally require more workers for property management.  Federal government jobs have fallen by 80,000.  Given that the defense spending has been taking the biggest blow over the past year, many military and defense related jobs may have been shed.    Finally, Hollywood is hemorrhaging as there are 23,000 fewer jobs (a big 6 percent plunge) in the motion pictures and sound recording industries.  Smiles at Oscars could be of the sad kind.
  • Despite the mixed news on employment, the direction is clearly for the better.  The net 2.2 million new jobs and the likely 2 million or so in the current year will provide support for home sales and increased leasing of commercial buildings.

The Latest on Housing Affordability

At the national level, housing affordability is up for the month due to a break in mortgage rates and home prices gains but affordability will be down for the year. What is affordability like in your market?

  • Housing affordability is up for the month of November as mortgage rates and the median price for a single family home in the US decreased slightly from October.  In spite of the decrease, the median single-family home price is up 9.4 % from last year keeping prices moving at a high year-over-year pace.
  • As a result of higher home prices and mortgage rates that are up 25.1%, nationally, affordability is down from 203 in November 2012 to 170.3 in November 2013.
  • Home prices are expected to slow down while inventory figures improve. Income levels are up and should help consumer confidence before rates begin to rise for the coming year.
  • By region, affordability is up from one month ago in all regions. The Midwest had the biggest gain in affordability at 3.4%.  From one year ago, affordability is down in all regions. The West saw the biggest decline in affordability as a result of having the largest price gain at 15.9 %.
  • Mortgage rates are expected to increase as the Fed reduces bond purchases and eventually begins to tighten monetary policy.  For a look at how the housing market might respond to a change in rates, I recommend this Stress Test by Chief Economist Lawrence Yun.
  • What does housing affordability look like in your market?  View 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.

Job Indicators: Off to a Good Start in 2014

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 in unemployment insurance claims data.

  • The job market appears to be sustaining the gains made in 2013 as the year starts. Fewer initial claims for unemployment insurance were filed in the week ending January 4 with filings recorded at 330,000, a decrease of 15,000 claims from the previous week.  The January number is also lower than the average number of claims filed in 2013. Fewer unemployment claims filed means fewer job losses.

  • Another positive job indicator is the net increase of 238,000 payroll jobs in December based on information provided by ADP, a payroll processing company. This data is not considered “official.” The official tally by the Department of Labor comes out tomorrow morning. Based on ADP, around 200,000 jobs are expected to be created. The economy needs about that much to speed up the decline in the unemployment rate.

Mortgage Purchase Applications

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 economic update discusses mortgage purchase applications.

  • Applications to purchase homes slipped 0.5% from last week on a seasonally adjusted basis, according to data released this morning by the Mortgage Bankers Association. The average rate for a 30-year fixed rate mortgage climbed nearly 40 basis points, from 4.1% to 4.53%, from the beginning of November through the first week in January. The steady climb has weighed on consumer sentiment and affordability.
  • In a bit of a surprise, conventional purchase mortgage applications ticked upward by 0.1% while applications for government financed loans fell 1.9%.
  • Yesterday the MBA announced that its index of mortgage credit availability improved by a modest 0.6% for the month. Credit availability has had a small improvement since its low in 2012 with more lenders offering lower down payment loans to highly qualified borrows, but credit access remains well below levels seen in 2007.
  • Mortgage applications fell in four of the last six weeks following the steady rise in mortgage rates. Rates are roughly at the same level as in August. Rates are likely to rise through the spring as the Federal Reserve tappers its purchases of mortgage backed securities and Treasuries. This action will press up on mortgage rates, eroding affordability in an environment of tight credit.

State and Metro Employment Conditions

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 in employment conditions.

  • The national economy continues to heal and move ahead.  A total of 7.5 million net new jobs have been added in the past 4 years following the disastrous 8 million net job cuts during the Great Recession.  In the past 12 months, 2.3 million net new jobs have been added, representing a growth rate of 1.7 percent for the country as a whole.
  • Some states and metro markets are doing much better than the national job growth rate while others are faring much worse.  North Dakota continues to shine due principally to massive new oil and gas production.  The southern states of Texas, Florida, and Georgia have robust job growth.   Alabama and D.C. (just the city proper and not the suburbs) are stalled with net zero job creation.  Alaska lost some jobs.  Puerto Rico is under tremendous stress with 4.3 percent fewer jobs, portending a possible government bankruptcy like one experienced in Detroit.
  • Among the metro markets, several small Florida markets are on fire (Sebastian-Vero Beach growing at +8.1%; Naples +7.9%; and Port St. Lucie +6.1%).  The energy cities of Odessa and Midland are also moving fast with a 5% growth rate.  Among the large cities, there are three standouts:  Tampa-St. Petersburg (+3.3%), Houston (+3.1%), and Nashville (+3.1%).
  • The table below shows the ranking of states and U.S. territories:

REALTORS® Expect Prices to Increase Modestly in Next 12 Months

REALTORS® generally expect modest price increases in the next 12 months with demand easing and more inventory coming into the market. The median expected price increase is 3.7 percent [1].

Some REALTORS® saw the forecasted slowdown as a welcome brake to the rapid home price growth amid the modest growth in consumer incomes and jobs. Local conditions vary, and conditions can change as the economy changes. See the November REALTORS® Confidence Index Survey report for more information.

[1] The median is the middle value. A median expected price change of 4 percent means that 50 percent of respondents expect prices to increase above 4 percent while the other 50 percent expect prices to increase (or decrease) at less than 4 percent.

Latest Construction Spending Data

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 construction spending data.

  • More construction occurred in November. Good news in terms of some anticipated increases of new housing in the upcoming months and in terms of job creation prospects for construction workers and general contractors. From one year ago, the value of completed construction rose by 6 percent. A huge 16 percent gain was observed in residential home and apartment construction while commercial construction barely budged.
  • Though construction activity has risen by about 15 percent from the low point three years ago, total construction jobs have increased by only 6 percent. That is, given the less than full recovery, more physical work is done by each of the current job holders.
  • Digging deeper into the data of different segments, one finds long-term declines in the construction of religious service buildings and amusement-recreation parks. America, perhaps, may be becoming less religious and more angry.
  • Taken for granted in rich countries, better construction in durable methods have saved many lives from natural disasters. It was not uncommon to witness a death of 100,000 or more in the aftermath of a hurricane or earthquake a century ago. For example, a few seconds of an earthquake in Tokyo in 1923 took 140,000 lives. Even today, death tolls are many magnitudes higher in poorer countries than in richer countries when a natural disaster strikes because of the differences in building codes. Some new office towers in San Francisco are being built with “sliding” floors so that it can be more earthquake resistant. Therefore, kudos to all the architects who are improving our lives.

Investors Continue To Be Active in the Residential Market

Investors remain active in the existing home sales residential market. About 19 percent of REALTOR® respondents reported a sale to an investor in November 2013. The share of investors has generally stayed at about this level since 2008. Cash sales account for about 70 percent of purchases made by investors, who are frequently mentioned as winning in bidding against first time buyers, who generally need to obtain a mortgage.

Existing-Home Sales Decline in November, but Strong Price Gains Continue

  • NAR released a summary of existing home sales data showing that overall existing home sales fell by 4.3 percent from October to November 2013, and are 1.2% percent lower than November 2012. This was the third straight month of declines; all regions observed a decrease in sales from October.
  • The national median existing-home price for all housing types was $196,300 in November, up 9.4 percent from November 2012. All regions showed growth in prices, but the Midwest and South regions are showing the most deceleration in price growth.
  • November’s inventory figures fell slightly from October, but are up 5.0% from a year ago. Months’ supply is up slightly in all regions, but the West is dealing with the most pressure on inventory.
  • Though sales were down again this month, there is still a projection of sales above 5 million, which would be the strongest sales figure since 2007.
  • See the full NAR Existing Home Sales press release here and data tables here.
  • Find a full graphical summary of the data here.

Prices Still Rising But at Subdued Pace

About 87 percent of REALTORS® who responded to NAR’s monthly survey reported constant or rising prices compared to prices a year ago for a typical transaction. However, prices are increasing at a more subdued pace. Approximately 12 percent of reported sales in November were of properties that sold at a net premium compared to the original listing price, compared to 20 percent in mid-2013. See the November REALTORS® Confidence Index Survey report at

REALTORS® Confidence Index in November Reflects Tempered Market Expectations

Confidence about current market conditions was essentially unchanged from October to November. The index for single family sales registered at 59 (58 in October) . The indexes for townhouses/duplexes was at 42 while the index for condominiums stayed at 38. An index of 50 marks “moderate” conditions [1]. See the November REALTORS® Confidence Index Survey at

However, REALTORS® appear to be more confident about the outlook for the next 6 months, but this appears to be tied to the seasonal upswing in the spring. The 6-month outlook index for single family rose to 64 (60 in October). The index for townhouses surged to 56 (45 in October ) and the index for condominiums increased to 43 (40 in October).

[1] An index of 50 delineates “moderate” conditions and indicates a balance of respondents having “weak”(index=0) and “strong” (index=100) expectations. The index is not adjusted for seasonality effects.