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US Housing, Winter's Worst or Fundamentally Something Else?

Posted by Joseph Trevisani on Feb 19, 2014 11:50:00 AM

Construction of new homes plummeted in January, the latest in a string of housing statistics whose origins indicate that the slowdown in the housing sector may be caused by more than the harsh winter weather.

Housing starts fell 16 percent in January to an annual rate of 880,000, the lowest level since September, according to the Commerce Department. The 168,000 decline from December's upwardly revised 1.048 million starts was the biggest one month drop since February 2011.

Post-recession new construction peaked at 1.101 million last November, which was the highest annual rate since February 2008. The January rate represents a 20 percent decline. The all-time high was 2.273 million new units in January 2006.

Building permits, an indicator of future construction, dropped 5.4 percent to an annual pace of 937,000 in January down from December's revised 991,000 rate. The high in permits came last October at 1.039 million annually; the decline to January is 9.8 percent.

Other standard measures of the housing sector, home prices, home sales and builder confidence have all taken sharp negative turns and in each case the reversal began before winter storms blanketed much of the continental United States.

The Case-Shiller composite-20 city month to month price change peaked at 1.82 percent in April 2013. In November, the last month released, it was 0.88 percent, a drop of more than half.

Existing home sales peaked last July and August at 5.39 million annualized. In December they were 4.87 million, a 9.6 percent decline.  Purchases of new homes topped out at 463,000 annually last October, in December they were 414,000, a 10.6 percent drop.

The pending home sales index, a leading indicator for existing home sales, reached 111.3 last May. In December it was 92.4, a 17.0 percent decline. 

And finally the NAHB Market Index (National Association of Home Builders) a measure of confidence in the home construction industry was at 58 last August and 56 in January, in February it sank to 46, the biggest drop in the history of the survey which began in 1985.

The index divides at 50 between majority positive and negative sentiment. The index has not been below 50 since May.

The NAHB index of prospective home buyers has tumbled from 46 last September to 31 in February. 

Builder sentiment was weaker in all sections of the country in February. In the West, which was largely untouched by the severe winter, builder sentiment dropped from 71 in January, which had been the post-recession high, to 57 in February for the largest monthly drop on record.

While many analysts have cited the frigid temperatures and incessant snow in two-thirds of the country for the fall in housing sector statistics, the more telling fact is that the declines began in 2013 long before the winter set in.

Housing starts peaked in November, to January they are down 20 percent. Building permits topped in October by January they were off 9.8 percent.

Home prices and sales peaked earlier in 2013 but the pattern is the same.

The Case-Shiller monthly 20 city price index lost 51.6 percent from April to November. Existing home sales, the largest category of home purchases, fell 9.6 percent from August to December; new home sales are down 10.6 percent October to December and the pending home sales index is off 17.4 percent  from May to December.

A combination of strong home prices increases and rising mortgage rates combined with  largely stagnant compensation are likely responsible for the cooling of the housing market. 

The Case-Shiller 20 city yearly composite of home prices was 13.71 percent higher on the year in December, the biggest annual rise in almost seven years. A 30-year fixed rate mortgage was 4.43 percent in January up from last May’s average of 3.54 percent.

Average hourly earnings in January were just 1.9 percent higher on the year and personal income in November was 2.3 percent more, (December’s annual rate of -0.8 percent was skewed a large 7.9 percent increase the previous December). 

The gain in household income by either measure is barely above the annual inflation rate of 1.5 percent in December. These are not the type of wage gains that can stand up to an almost 14 percent annual increase in home prices.

While warmer spring weather will permit some revival in home construction and home sales the fundamental drag from prices, wages and interest rates does not seem ready to change with the season.


Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts:   Bloomberg







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