Synergy Thermal Foils

Part 2: Higher Costs and Public Policy

STF will be releasing a series of articles analyzing the U.S. housing market called “The State of US Housing”. The importance of the real estate sector on the U.S. economy cannot be overstated. More than half of the private wealth in the U.S. is composed of real estate assets, with $25 trillion in residential and $15 trillion in commercial. Even modest changes in the market can have massive ramifications in the U.S and globally as the world experienced following the bubble burst in 2009. So each month we will dive into various factors that are driving the current housing market.

Last month’s issue of The State of U.S. Housing focused on the effects of low supply and high demand. A robust economy has provided many Americans the opportunity to purchase a home, however with low construction rates and a high demand many are experiencing difficulties in purchasing a home.

This month will focus on the constraints that are limiting supply growth in the housing market, more specifically into construction costs and the impact of housing policies.
Housing starts rose 1.9% in March to a seasonally adjusted annual rate of 1.319 million units according to the Commerce Department. Despite the rebound in homebuilding last month, activity appears to be slowing. Single-family homebuilding, which accounts for the largest share of the housing market, fell 3.7% to a rate of 867,000 units in March.

New residential construction has remained at historically low levels following the 2008-2009 bubble burst. On a population-adjusted basis, housing starts averaged the equivalent of 2.5 million units per year from 1960 through 2005. From 2006 through February 2018, starts have averaged the current equivalent of just 1.1 million units per year, where 1.3 million units per year is required to maintain a balance in the population growth.

One of the biggest constraints facing new construction is the large increase in construction costs over the past 10 years. Annual inflation rates in the U.S. has averaged 2.2% over the past 25 years, according to the Bureau of Labor Statistics, close to the Federal Reserve’s goal of 2%. However, construction cost inflation has nearly doubled the pace of the annual, reaching an average of 4% per year, with costs of goods already reaching 4% increase during the first 4 months of 2018. The graph below indicates the change in costs for goods in residential construction based on the Producer Price Index (PPI) released by the Bureau of Labor Statistics.

Not only are builders facing higher costs but recent policies enacted by the current administration has started to drive building costs even higher. Tariffs placed on Canadian lumber and other imported products are pushing up prices and hurting housing affordability.

The need for entry level homes is at an all-time high with the large influx in demand for homes coming from the millennial generation. However, increases in costs have dwindled a builder’s desire for completing entry level homes. Instead most builders are focusing on mid-range and higher homes due to larger margins.

The next major limitation on new housing construction comes from public policy on housing such as land-use zoning and affordable housing policies. State and local governments limit land development based on zoning policies, this in turn makes it more difficult for developers to find suitable lots to build on.

Additionally, “Not in my backyard” groups (NIMBY) have started to have major influence on new land development through community outreach and action. Neighborhoods in Seattle don’t want apartments for homeless seniors; in Los Angeles, they don’t want more high rises; in San Jose, CA they don’t want tiny homes and the list goes on and on. All these are types of housing that could help alleviate some immediate housing issues, yet NIMBY groups oppose them at all costs. Worried that these new housing forms will not only hurt their home value but burden public services such as schools, roads and transportation, NIMBY groups continue to have an enormous impact on the development of housing.

• Part 1: Too many Buyers and not enough Homes
• Part 3: Home Prices and Rent Growth

Builder confidence for the market on newly-built single-family homes rose two points to a level of 70 in May according to the National Association of Home Builders/ Wells Fargo Housing Market Index (HMI).

This is the fourth time this year that the confidence levels have reached 70 or higher on the HMI index. Builders remain confident in new single-family homes by continued growing demand due to the inventory shortage many are seeing within the housing market.

While concerns over lack of land to build on and a shortage of skilled workers, a new issue has come to play in this month’s builder’s confidence: the increase in lumber prices. The increase in lumber prices are driving up costs making it more difficult for builders to produce competitively price houses for first time home buyers.

Derived from a monthly survey, the NAHB/ Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months. Scores for each component are used to calculate a seasonally adjusted index where any number over 50 indicates that more builder view conditions as good than poor.

Part 1: Too many Buyers and not enough Homes

Over the next few months, STF will be releasing a series of articles analyzing the U.S. housing market called “The State of US Housing”. The importance of the real estate sector on the U.S. economy cannot be overstated. More than half of the private wealth in the U.S. is composed of real estate assets, with $25 trillion in residential assets and $15 trillion in commercial assets. Even modest changes in the market can have massive ramifications in the U.S. and globally, as the world experienced following the bubble burst in 2009. So each month we will dive into various factors that are driving the current housing market.

This month’s focus will be on one of the biggest factors impacting today’s market: too many buyers and not enough homes.

As the tail end of the millennial generation is now entering adulthood the “American Dream” of homeownership seems to be a very problematic dream to achieve. Weighed down by the largest student debt ever seen, with 42.3 million borrowers owing a total of $1.3 billion in Federal student debt (does not include private student financing), many millennials have put off venturing into homeownership. With below average paying jobs, skyrocketing rents (especially in metropolitan areas) and the heavy burden of student debt, it has been impossible for many to save up to purchase a home up to this point. However, an expanding economy has spurred job and salary growth that has, in turn, lead to a push for homeownership.

Existing Home Sales, Month’s Supply: Previous 5 years

What many people are discovering is that finding a home (and getting it) is now more difficult than financing the home itself. A severe shortage of affordable entry-level homes has made it impossible for many buyers. February 2018 recorded an inventory level at 3.4 months, barring any additional homes going on sale the market only has enough homes for 3.4 months of sales based on current market conditions. This is one of the lowest inventory supplies on record. According to the National Association of Realtors (NAR), a healthy housing market has a 6-month supply.  The number of starter homes is down 14.2% in the first quarter from a year ago, according to Trulia.

While the sale of existing homes has been tight, there has been little done to alleviate the pressure with new construction. Builders are grappling with construction worker shortages, soaring raw material costs and limited land availability and cumbersome regulations. Single-family housing starts were up 2.9% in February over January, a small jump but nowhere near enough to cover the current demand.

Despite more than doubling off the bottom at the depths of the financial crisis (581,000 single-family housing starts in December 2009 to 1,236,000 in February 2018), the rate of annual housing starts remains low on a historical basis. On a population-adjusted basis, housing starts averaged the equivalent of 2.5 million units per year from 1960 through 2005. From 2006 through February 2018, starts have averaged the current equivalent of just 1.1 million units per year.

The rate of growth in housing starts has been declining linearly since peaking at 28% in 2012, growing just 3% in 2017. Housing starts are expected to increase by 0 to 5% in 2018. The overall trend remains weak, however, as total starts rose just 1.98% over the past twelve months, the slowest rate of growth since 2011.

U.S. Housing Starts (Previous 10 years)

• Part 2: Higher Costs and Public Policy
• Part 3: Home Prices and Rent Growth

March marked the 90th consecutive month of job growth, by far the largest streak on record. While March only added 103,000 jobs, it has maintained the unemployment rate at 4.1%.

The slight slowdown in March wasn’t a surprise. February’s job growth was probably inflated by a surge in hiring in construction and the retail sector that reflected unseasonably warm weather in much of the country. Both sectors slumped in March as winter storms blew through the eastern United States.

Image: Political Wire

Non-farm payroll has increased yet again, surprising economists who predicted only a moderate increase in the jobs report for February. A hot labor market has shown no sign of cooling as the U.S. has added 313,000 jobs in February, the most since July 2016.

The portion of Americans over 16 working or looking for jobs increased from 62.7% to 63%, which has kept the unemployment rate unchanged at 4.1%, a 17-year low.

The unseasonably warm weather has allowed the construction segment to add 61,000 jobs, the most notable job gains. Followed closely by retail (50,000 positions), professional and business services (50,000 positions), and manufactures (31,000 positions).

US Non-Farm Payrolls

Consumers and business powered the economy to an estimated 2.6% growth in GDP during the fourth quarter of 2017. While this fell short of some economists original forecasts of 3% growth, overall during 2017 the economy grew 2.3%, compared to 2016 which only saw a 1.6% growth. This is the longest continued expansion of GDP on record.

Consumer spending accelerated to 3.8% annual pace of growth, the fastest it’s been in almost two years. Business also increased spending on equipment by 11.4% and investment in new housing jumped 11.6%.

The economy continues to hum along,” according to Ryan Sweet, an economist at Moody’s Analytics. “This is far from doom and gloom. Businesses are investing aggressively and consumers continue to spend at a very strong pace. We got a bit spoiled by 3 percent-plus growth in the last couple of quarters, but that streak was eventually going to come to an end.”

Recently passed tax cuts for individuals and business are expected to give the economy another major boost in 2018. The Atlanta Federal Reserve is already projecting a very robust first quarter of 2018, stating the U.S. economy is on track to grow at a 5.4% annualized rate.

Image courtesy of Global Business Outlook

The beginning of 2018 has proved to be off to a good start in the U.S. job market. After a slight lull in December, nonfarm payroll increased by 200,000 in January surpassing original forecasts according to the Labor Department. The unemployment rate held at 4.1%, matching the lowest since 2000.

Breaking down January data, construction reported by the biggest gain by sector with 36,000; manufacturing also showed a gain of 15,000 and durable goods-related industries added 18,000. The focus on construction and manufacturing indicates a resurgence in factory activity and rebound in housing.

As the economy moves towards full employment, more companies are finding it harder to hire qualified candidates. In order to attract qualified workers companies are now increasing wages at a rate unseen since 2009. January experienced a 2.9% increase in wages, a sign that the booming economy is finally starting to reach American’s pocketbooks. Separate data released by the Bureau of Labor showed that private-sector wages and salaries rose 2.8% in the fourth quarter of 2017, compared to a year earlier.

Even claims for state unemployment benefits decreased 9,000 to a seasonally adjusted rate of 221,000. Last week marked the 153rd straight week that claims remained below the 300,000 threshold, which is associated with a strong labor market. That is the longest stretch since 1970 when the labor market was much smaller.

Image courtesy of Hubspot

Sales for the FDMC 300 group grew 5.4% in 2017 over the previous year to $52.209 billion. A year ago, the sales for the group of companies grew 5% in 2016 over the previous year to $48.786 billion.

This group of the 300 largest North American cabinets, millwork, furniture, and fixture manufactures recorded a sixth consecutive year of sales expansion, after the recession which sale declines from 2007-2011.

For more information:  FDMC 300

Image courtesy of Wood Working Network

U.S. furniture factory orders grew 8% in October 2017 over the same period in 2016. According to the monthly report of residential furniture manufacturers and distributors, shipments increased 8% over October 2016. Receivable levels increased 1% over October 2016, very much in line with shipments.

Inventories were up 5% over October 2016. October levels seemed to get back in line with current business conditions.

Source: Shipperoo

U.S. kitchen and bath cabinetry sales in November 2017 rose 1.8% from November 2016, according to the Kitchen Cabinet Manufacturers Association’s (KCMA). Year-to-date cabinetry sales increased 2.8% over the same period in 2016. Semi-custom sales were up 3.7% in November and were 3.5% higher through the first 11 months compared to 2016. Custom cabinetry sales improved 2.2% from the same month last year. Stock sales inched upward by 0.1% in November and year-to-date sales increased from 2016 by 3%.

A kitchen decorated by STF

“There’s no place like home.” A quote from the classic movie, The Wizard of Oz, has become the mantra for many Americans who are pursuing the American Dream of homeownership. Reaping the benefits of the growing economy; healthy job market and income growth has fueled demand for houses, including more millennial first-time buyers. Existing-home sales surged for the third straight month in November and reached their strongest pace in almost 11 years. According to the National Association of Realtors, existing homes sales were up 5.6% in November over October, a seasonally adjusted annual rate of 5.81 million. The fastest pace since July 2007, new single-family house sales increased 17.5% in November over October to a seasonally adjusted annual rate of 733,000. This is a 26.6% increase over the same time last year.

“The greater home sales will stoke the fires for stronger economic growth next year as consumers spend more to furnish their new homes with new appliances and furniture and all the decorations and trimmings,” said Chris Rupkey, chief economist MUFG in New York. Even though the housing market has experienced robust growth at fast paces there are continuing constraints that will affect the housing market going into 2018. Total housing inventory at the end of November decreased 7.2% and has fallen year-over-year for 30 consecutive months. Current inventory levels are at a 3.4 month supply. Low inventory has elevated home prices and has sidelined some first-time buyers who cannot find suitable lower end market homes. Due to low inventory, the median home price has increased 5.8% from a year ago, the 69th consecutive month of year-on-year price gains.

Additionally, for new homes being built, a consistent shortage of skilled labor and lots has tightened many builders ability to add new homes to the market. Builders are pushing for more housing starts, with a 3.3 percent increase in housing starts in November over October. However, the supply is unable to keep up with current demand.

The National Association of Realtors says it anticipates a slightly negative impact on the housing market from the overhaul of the U.S. tax code. The cap for property and state and local income tax is now set at 10,000, the prospect for a bigger tax bill may discourage some buyers. Moody's Analytics chief economist Mark Zandi has warned that the tax revamp would weigh on house prices, with the Northeast corridor, South Florida, big Midwestern cities, and the West Coast suffering the biggest price declines.

Sales of new U.S. single-family homes unexpectedly rose in October to a 10 year high. In October, sales were at a seasonally adjusted annual rate of 685,000. This is a 6.2% increase over September 2017 and an 18.7% increase over October 2016. The sale of new homes sales consists of eleven percent of overall home sales.

Mild weather helped to boost new home sales last month. Sales soared 30.2% in the Northeast to their highest level since October 2007. They rose 1.3% in the South also to a 10-year high. Sales jumped 17.9% in the Midwest and climbed 6.4% in the West.

Existing home sales also increased in October to their strongest pace since earlier this summer, a 2% increase over September. But supply shortages have continued to lead to fewer closings on an annual basis for the second straight month.