Housing Market

Component readings used for calculating Housing Market Index readings also rose in October. Builder sentiment for current market conditions gained five points for a reading of 75. The index reading for builder perception of market conditions in the next six months also rose five points to an October reading of 78.

Builder sentiment for home buyer traffic in new home developments rose one point to 48. Buyer traffic readings seldom exceed a Home Builder Index reading of 50.

NAHB Chairman Granger Mc Donald said builders were recovering from the initial shock of damage caused by hurricanes, but this was prior to numerous wildfires adding to demand for contractors and home builders.

National Disasters Add to Ongoing Materials and Labor Shortages

Factors contributing to stronger builder sentiment included an industry concentration of building homes for purchase instead of multifamily rental projects. Single-family homes have been in short supply in recent years and building more homes is the only remedy for a market skewed in favor of sellers and rapidly rising home prices fueled by high buyer demand and few choices available to buyers.

Recent hurricane damage is likely to raise materials prices and worsen labor shortages; Widespread damage caused by wildfires in California is expected to increase demand for contractors and skilled laborers as they work to repair and rebuild homes and buildings ruined in storms and fires.

Regional Readings Mixed

Three-month rolling averages of builder sentiment for regions tracked by NAHB were mixed. In the Northeast, builder sentiment rose one point to 50. The South gained two points for a reading of 68. The reading for builder sentiment in the South was unchanged at 63; the reading for the West was also unchanged at 77.

Winter weather and challenges caused by higher demand for services against rising materials costs and ongoing labor shortages can be expected to challenge builders, but the need for new housing caused by multiple national disasters will likely create many new jobs for builders.

Last week’s economic reports included Case-Shiller’s Home Price Indices, readings on new and pending home sales and Freddie Mac ‘s weekly mortgage rates report. Weekly jobless claims and reports on inflation and core inflation were also released.

Case–Shiller Home Prices Rise in July; New and Pending Home Sales Lower in August

According to Case-Shiller July Index reports, national home prices rose at a rate of 5.8

90 percent on a seasonally-adjusted annual basis as compared to June’s reading of 5.80 percent. The top three cities in the 20-City Home Price Index were Seattle, Washington, Portland, Oregon and Las Vegas, Nevada.

Home prices are responding to high demand for homes and limited inventories of homes for sale. Although this trend has persisted in the last few years, lower readings for sales of new homes and pending home sales were lower in August. Analysts said this could indicate that home prices are topping out due to affordability and few homes for sale.

New home sales fell to 560,000 on a seasonally-adjusted annual basis in August as compared to July’s reading of 580,000 sales. While real estate pros and economists look to pending home sales as an indicator for future closings and mortgage originations, August’s reading slipped lower into negative territory with a reading of – 2.60 percent. July’s reading for pending home sales was – 0.80 percent.

Mortgage Rates Stay Flat, New Jobless Claims Rise

Freddie Mac reported no change in average fixed mortgage rates. 30-year fixed rate mortgages had an average rate of 3.83 percent and 15-year fixed rate mortgage rates held steady at an average of 3.13 percent. The average rate for a 5/1 adjustable rate mortgage rose by three basis points to 3.20 percent. Discount points averaged 0.60 percent for 30-year fixed rate mortgages and 0.50 percent for 15-year fixed rate and 5/1 adjustable rate mortgages.

First-time jobless claims rose by 12,000 to 272,000 claims. Analysts expected 270,000 new jobless claims; 260,000 new claims were filed the prior week.

Inflation rose by 0.10 percent in August, which matched expectations and was lower than July’s growth rate of 0.30 percent. Core inflation, which excludes volatile food and energy sectors, was unchanged at 0.10 percent and fell short of expectations of 0.20 percent growth in August.

Consumer sentiment fell to an index reading of 95.10 percent and met analysts’ expectations based on August’s reading of 95.30

What‘s Ahead

Next week’s scheduled economic reports include readings on construction spending and labor-sector reports from ADP Payrolls, Non-Farm payrolls and the national unemployment rate for September. Weekly readings on mortgage rates and new jobless claims will also be released. 

Case-Shiller reported higher sales of new homes for July; the national reading for new home sales increased by 0.10 percent to a seasonally-adjusted annual rate of 5.90 percent. The 20-City Home Price Index rose by 0.20 percent to 5.80 percent on a seasonally adjusted annual basis.

Seattle Washington held the top spot in the 20-City Index with a growth of 13.50 percent year-over-year. Seattle home prices are growing faster than home prices in Portland Oregon, which reported a year-over-home price growth rate of 7,60 percent. Dallas, Texas lost its third-place standing in the 20-City Index to Las Vegas, Nevada, which reported 7.40 year-over-year growth in home prices. Dallas, Texas and Detroit, Michigan tied for fourth position with 7.30 percent home price growth.

David M. Blitzer, managing director and chair of the S&P Case Shiller Home Price Index Committee, said that the Pacific Northwest largely drove July home prices,12 of 20 cities surveyed reported higher home prices in July. Home prices rose to their highest level since May 2009 but were selling for less than half of what new homes sold for in 2009.

Home Prices Rise, Falling Sales Suggest Prices May Have Peaked

High demand for a limited number of available homes continued to cause home prices to rise, but home sales fell in July. Three of four regions reported lower sales with the Midwestern region sales volume unchanged. Low inventories of homes for sale have increased competition among homebuyers; this creates bidding wars that cause artificially high home prices in high-demand markets.

In related news, The Commerce Department reported that new home sales fell by 3.40 percent in August. The inventory of homes on the market rose from a 5.70month supply to a 6.10month supply of homes for sale. Real estate pros consider a six-month supply of homes for sale a good balance between homes on the market and active home buyers. Increasing inventories of homes for sale suggests that home prices could be peaking as home buyers face strict mortgage rules and affordability concerns.  

Hurricanes Harvey and Irma impacted 14 percent of building permits issued in 2016. While building permits issued may increase, ongoing concerns over labor shortages and building materials costs could become more pronounced as rebuilding in the hurricane zones progresses.