Construction Industry Forecasts

The two key measures of the U.S. housing market recorded some improvement in the latest month. Both new home starts and existing home sales recorded gains in March versus February.

U.S. new housing starts in March registered a solid gain. They increased to 549,000 units seasonally adjusted and annualized from only 512,000 the month before, according to a joint press release from the Census Bureau and Department of Housing and Urban Development.

Furthermore, building permits were +11.2% month to month, indicating more starts in the pipeline. Permits usually lead groundbreakings by a month or two. March’s level of permits was 594,000 units. They did, however, remain below the level (685,000) in the same month last year. 

Year to date, the single-family housing market was -21% versus Q1 2010. But multiple-unit starts were +60% off a low base. Multiples are making a comeback due to better rental markets as college-age adults move out of their family homes. Often, it’s the high-tech-savvy younger demographic that is finding employment in the first wave of the job market improvement.

Resales also contributed to the better news. Existing home sales in the latest month, as reported by the National Association of Realtors (NAR), increased 3.7% month to month. This left them at 5.1 million units, seasonally adjusted and annualized, versus 4.92 million in February.

On a year-over-year basis, they were down 6.3%. That’s not an altogether fair comparison. The pattern of sales activity in late spring-early summer of last year was out of the ordinary due to a tax incentive for first-time homebuyers. Existing home sales touched bottom in July of 2010.

According to the NAR, affordability is now at its best since records began in 1970. Monthly mortgage principal and interest payments for a median-priced existing home are only 13% of gross household income. But credit ratings required to secure a mortgage have been tightened.

The inventory of unsold existing homes fell slightly in March versus February on a number-of-months basis, to 8.4 from 8.5. The number of actual unsold homes rose 1.5% but was more than offset by the gain in the monthly sales rate. Foreclosure rates remain inordinately high.

A number of housing measures are on the table in connection with both U.S. financial reform legislation and Washington’s plans to tackle the U.S. deficit ($1.4 trillion) and debt problems (a $14.3 trillion ceiling that may need upping to as much as $20 trillion by 2020). These range from tinkering with mortgage interest tax deductibility to a plan for Qualified Residential Mortgages.

QRMs would establish a several-tier system of mortgage rates based not so much on ability to pay as amount of down payment. They would require 20% down payments as opposed to the longstanding 5%. Housing industry representatives are opposed to rule changes that would reduce the number of prospective homeowners having access to funding at the best rates.

There are also proposals to speed up the process of short sales. These occur when a homeowner, facing a foreclosure, applies for approval to sell the family home before the creditors move in.

Such sales are usually conducted well below market value. However there are advantages to both the seller (who avoids the stigma of foreclosure) and the lender (who typically retrieves more money than when selling a foreclosed home.) Short sales have recently been representing about 13% of the total, according to NAR. They help to lower the record number of total foreclosures.

Residential real estate depends very much on the jobs outlook. On that score, the American labor market is exhibiting slow but steady improvement. One bellwether statistical indicator, initial jobless claims, has been around 400,000 or less for nine of the past eleven weeks.

A figure of half a million is usually taken to mean the number of people being newly released is the same as those being newly hired. Throughout the recession, that benchmark was often far exceeded. A drop-down to 400,000 points to a monthly gain in employment of about 100,000.

These are only rough rules of thumb. In the latest labor market report, the U.S. added 216,000 jobs in March. During the recession, there was an 8.4 million decline in the number of U.S. jobs. After hitting bottom in February 2010, the U.S. has gained back 1.5 million of those positions.

Ongoing improvement in the U.S. economy was one reason Canada’s leading indicator index (+0.8% month to month) was positive again for the sixth month in a row (and 21st time in the past 22 months) in March. The U.S. composite leading indicator, as calculated by the Conference Board, was one of the eight-out-of-ten sub-indices in Canada’s composite leading indicator to show ongoing improvement in the latest month. Stock market prices led the way.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.