A 36-floor high-rise condominium sits under construction in Miami in July, when U.S. home construction jumped 15.7 percent.
For the U.S. labor market, 2014 so far has been the strongest year of the recovery. For the housing market, the picture is a bit murkier.
An unusually harsh winter kept many homebuilders from breaking ground in the first quarter and high prices may have dissuaded would-be buyers – especially young, educated Americans – from purchasing existing homes, though that sector has rebounded better than new construction since the recession.
The Census Bureau reported Tuesday that new home building surged 15.7 percent in July from its June slump that was the lowest level since February. And since July of last year, home construction is up 21.7 percent. Gains were stronger in multifamily units like apartment buildings, however, which employ fewer people per unit and add less to economic growth than single-family homes. Building permits also rose 8.1 percent in June, a sign construction could continue to pick up.
Housing demand, which has shown signs of strengthening in fits and starts, could show up as a lingering concern once again in the Federal Open Market Committee minutes from the latest two-day policy meeting, which it will release on Wednesday.
"The gains we are seeing in overall construction activity will have less of a positive impact on spending, production and employment than in the past, an issue that the Federal Reserve is watching extremely closely," said Diane Swonk, chief economist at Mesirow Financial in a blog post Tuesday.
Citing slow housing demand and sales in the first half of the year that ran below the 2013 levels, Fannie Mae even downgraded its outlook for housing’s contribution to the U.S. gross domestic product Monday, though it expects overall growth to reach almost 3 percent by year’s end.
“In terms of any sense of urgency to go out and make the purchase of a house and borrow a couple hundred thousand dollars, people are more conservative about that generally,” says Doug Duncan, Fannie Mae’s chief economist. “I wouldn’t expect housing to ramp up in any significant way in the second half of the year.”
One notable drag on demand could be younger adults’ reticence to buy homes and opt to rent instead. A separate report from Fannie Mae Monday argues that demographic and social shifts, such as historically high levels of student debt, don’t entirely explain the low homeownership of young adults, especially those considered “prime” first-time buying candidates, or those who are “very likely to own their homes,” have higher incomes, are in their early 30s, are college educated and have children.
“They should be demographically motivated by the fact that they’re married, they have young kids and they’re upper income. You’d expect that maybe they’d be financially motivated to own,” says Patrick Simmons, director of Strategic Planning and Business Strategy at Fannie Mae, and author of the report. “I think they might serve as almost like a canary in a coal mine in terms of telling you there’s something going on with homeownership attainment recently beyond just longer-term demographic shifts.”
Between 2006 – when credit was easy during the housing market peak – and 2012, homeownership rates for those prime fist-time buying candidates fell by 8.6 percentage points, the same decline all 30- to 32-year-olds experienced. But their 2012 rate was also 7 percentage points lower than it was in 2000, before the easing of loan qualifications. Uncertainty stemming from the 2007-2009 downturn about employment and incomes, according to the report, has had a “a detrimental effect on homeownership attainment.”
“You don’t have this organic home buying demand from owner-occupants, particularly among the younger age groups, that could carry us from a situation where a lot of the market activity was being generated by investors to one where owner occupants are taking the leadership in terms of demand growth,” Simmons says.
The housing market recovery is more reliant now on job gains – a “more sustainable driver of housing demand” – than the “rebound effect” of investors and other homebuyers buy up cheap property, according to a July report from Trulia. In other words, in areas where the rebound effect wanes and jobs grow, such as Miami and Atlanta, rent and home prices start to reach their long-term normal levels.
According to the most recent Labor Department figures, businesses have added more than 200,000 jobs for six months straight – a clip of growth unseen since 1997. Duncan says unless the U.S. economy experienced 300,000-plus job gains a month for the next nine months, 2015 won’t be a “breakout year” for housing either. Furthermore, incomes have yet to show the kind of growth Fed policymakers are hoping for.
A separate report from Trulia released Monday showed that metro areas that had the largest year-over-year property price increases have had the lowest building activity so far in 2014. These markets, including Fort Lauderdale, Florida, and Detroit, had higher vacancy rates, due in large part to the construction boom before the crisis. Builders generally are disinclined to start new construction where there are already a large number of vacant homes.
Other recent data suggest that the housing market could accelerate. Confidence among homebuilders of new single-family homes rose to the highest level since January, according to a survey Monday from the National Association of Homebuilders.
The National Association of Realtors will release data Thursday on the sales of previous owned homes in July. Last month the group reported that existing home sales rose to the highest level since October.
Stephen Stanley, chief economist at Pierpont Securities, cautions against reading too far into monthly housing data, especially new construction, since it can be volatile – but this year it’s been even more so than usual. Pointing to deteriorated affordability and slightly higher mortgage rates, he calls housing demand this year “a bit of a disappointment.”
“Demand is not quite where you’d hope at this point and as a result on the longer term, we’re still on an uptrend but it has not been as steep as we would like,” he says.
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