Constructive Demand, Shaky Supply
Call it “good news Friday,” for a mid-September splash of brighter hues on the demand side of housing’s still-healing supply-and-demand equation. What’s good about it?
For starters, what’s negative is less so. Here’s CoreLogic’s latest look at the portion of the nation’s 50 million homes with mortgage loans that are “under water,” or in negative equity. Homes with negative equity stood at 3.6 million, or 7.1% of all homes with a mortgage; that’s a better-than 13% improvement from the prior quarter, and almost 20% better than a year ago. The headline here is that there are 900,000 fewer of those mortgage holders now than a year earlier who owe a bank more money than their home would fetch if it were sold today.
Here’s a stalactite-style chart from CoreLogic that shows the states with the biggest improvements, from negative toward positive, on the negative equity spectrum. Now, most of that good news occurred, and will keep occurring at least marginally and for the time being, because house prices have been and are rising. As positive value goes up, negative value shrinks. That’s a good thing, because as more people in more households get free of owing more than they can sell their homes, it will free them to do things like look for better jobs in other markets, releasing more for-sale inventory, and helping to ease price increases for some near-term or longer-term future would-be buyer.
Which brings us to a second dollop of positive tidings. Housing affordability is a two-sided coin, although we’ve become accustomed to looking at just one side of it– the price side of the coin. That’s because the other side, the amount people can pay based on what they earn, has been in deep-freeze mode for as long as anybody can remember. Well, after many many months of employment tallies that have showed payroll headcount growth, that deep-freeze may possibly be beginning to thaw. That would be “h-u-u-u-g-e” for housing demand if earnings power can pick up and sustain a bit of pep in its step. We’ll see.
But for the moment, gains on the income front are evident.
So, just as less negative is a positive on the mortgage-to-value measure, so is a shrinkage in amount of household pay that rents or mortgage payments siphon off from people’s wages each month.
Digital job-site Indeed’s new chief economist Jed Kolko is also a senior fellow at the Terner Center for Housing Innovation at the University of California, Berkeley, and he just published analysis on the latest batch of household earnings data from the Census’ American Community Survey. His piece, titled “Housing Highlights,” spotlights exactly such a shrinkage. Two key findings:
- The share of households spending 30% or more of their income on housing (“cost-burdened” households) fell to a post-bubble low of 33.6% in 2015, the fifth straight year that measure dropped. Rising incomes and falling mortgage rates in 2015 helped reduce housing cost burdens.
- Nationally, 49.1% of renters in 2015 were cost-burdened, the lowest level since 2008. Among homeowners with a mortgage, 29.9% were cost-burdened, dramatically down from the recent peak of 38.3% in 2010.
Now, as for the first bullet point, the 33.6% of housing cost-burdened households is a relatively minor improvement from a year-earlier level of 34.6%. Directionally, however, any improvement here is dramatic, especially as prices themselves have been spiraling upward. Payment capacity is not only keeping pace, but making gains on a significant level.
Kolko’s analysis unpacks one other important bright spot that one can easily miss if our data focus is only on rates, averages, and percentages. It’s the absolute number growth in owner-occupied single-family households. Look at this chart, and you’ll note that a net-gain of 500,000 additional homeownership households reflects the best year in homeownership growth since 2006.
Lost decade, be gone!
Finally, one more note of cheer comes from the latest print on new home mortgage application activity from the Mortgage Bankers Association’s Builder Applications Survey. The August 2016 level of 601,000 is a 5% sequential month to month increase, and is up 14% compared with the year-ago benchmark. It’s also the high watermark since the MBA introduced the measure in 2012.
Per HousingWire’s Brena Swanson, who quotes Lynn Fisher, MBA’s Vice President of Research and Economics:
“While our new home sales estimates have trailed the recent Census data, the increase in our series in August, which derives from a different source of data compared to the Census, provides some corroboration that single family building activity has remained strong even as the summer winds down,” explained Fisher.
“Our sense is that builders have been attempting to catch up with demand in the face of labor shortfalls and other limiting factors in various parts of the country,” she continued.
So, demand is building, from the ground up. Questions swirl around risks and uncertainty on supply constraints.
As a brutally hot summer’s end gives way to cooler days and evenings, the heat actually turns up a notch on builders’ delivery schedules. We should get a solid reading on just how acute labor capacity squeezes continue to be, particularly as homes on pace to settle by year-end move by the thousands into their finishing-trade phases.
It seems that, at least through the rough trade stages, builders have been able to stay on the rails with their construction cycle plans–perhaps taking a page out of the airlines book of re-setting delivery schedule timelines to build in more leeway from start to delivery.
An even bigger question–especially as demand really kicks in at the entry level price points–is dirt. Replacing and accessing developed and finished lots at a cost-base that matches up to surging demand in the lower price tag ranges is the area of greatest anxiety as the machines of housing production shift into the next gear up.