Housing Economics - 09/19/2007 (Plain Text Version)By David F. Seiders, NAHB Chief Economist
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E-mail Our Editor Housing Starts Lowest for 12 YearsTotal housing starts declined 2.6 percent in August 2007 to a 12-year low of 1.331 million, seasonally adjusted annual rate. Building permits dropped nearly 6 percent from July to a 1.307 million unit pace in August. Both single-family starts and permits fell significantly over the month.
Read additional information and download data (Excel) for Housing Starts & Permits. Related NAHB Press Releases: • Builder Confidence Continues Downward In September (09/18) Fed Rate Cut is Good News For Home BuyersDecisive action made by the Federal Reserve to ease its monetary policies is good news for the economy and prospective home buyers seeking a piece of the American dream, according to the National Association of Home Builders (NAHB). "By cutting the federal funds and discount rate each by a half a percentage point, the Fed has sent a strong signal to financial markets and American consumers that it intends to ensure that the economy keeps moving ahead and the housing market regains its strength," said NAHB President Brian Catalde, a home builder from El Segundo, Calif. "In an economy that continues to grow, create jobs and increase household income, the Federal Reserve's move to lower borrowing costs is just one more reason to consider buying a home in the current economic climate", Catalde said. "In today's buyer's market, there is an abundance of new and existing homes on the market, creating a wider variety of choice for home shoppers", said Catalde. "As a result, builders are offering a range of concessions, from discounted financing packages to value-added incentives." "The Federal Reserve's actions will hopefully bolster consumer confidence while the current housing price correction helps restore affordability. And interest rates on conventional, conforming loans, which have remained largely unaffected by the shakeout in the subprime market, are hovering near historic lows at just above 6 percent," said Catalde. "The Fed's rate cuts will help the economy to gain strength, said Catalde, and also help the housing market begin to recover next year, which bodes well for future house price appreciation." "All the market fundamentals show that now is a good time to buy a home," he said. "Fence-sitters waiting to time the market trough are likely to be wrong, while those who buy now can expect to reap the gains of home price appreciation in the coming years." Oversupply of Rentals Weighs on Multifamily Housing ActivityFeeling the fallout from the ongoing correction to the 2003 to 2005 housing boom, the near-term outlook for multifamily activity is “rather weak,” according to the new Multifamily Forecast from NAHB HousingEconomics. While condominiums — which rose to an abnormally high share of the multifamily market at the height of the boom — are being hit the hardest, market-rate rentals also face tougher going as the supply of available units is bloated by for-sale properties that, at least until conditions improve, are being put up for rent. “After a decade of unusual stability in the production of multifamily housing, multifamily housing starts are poised to fall sharply in 2007,” according to the NAHB report. “Over the last decade, multifamily housing starts have not fallen below 329,000 starts. This year and next year, multifamily starts are likely to be close to 1995’s level of 277,000 starts.” On a seasonally adjusted annual basis, multifamily production averaged 292,000 units during the first half of 2007, and it is expected to slow somewhat further during the balance of the year. An uptick in rental starts later this year or early next year won’t be enough to offset a decline in starts of multifamily units for sale. A Condo Glut With the homeownership rate slipping from its 69.2% peak in the second and fourth quarters of 2004 to 68.4% in this year’s second quarter as the result of the overall housing downturn and problems in the subprime mortgage market, the number of prospective renters is now on the rise. However, the supply of rentals has been increasing at an even faster pace and vacancy rates have been rising because of a recent movement back to building market-rate rental units, conversions back from condos to rental apartments and an increase in single-family rentals, the economists report. From an abnormally high 45% share of multifamily starts in 2006, condominiums are now headed back to their traditional range of 20% to 25% and were already down to a 39% share during the first quarter of this year. Even though it has been clear for some time that home buyer demand has weakened, the economists add, multifamily condo projects require a relatively long lead time. And even as condo production has declined, condo starts still exceed completions, “suggesting that a large number of units will be coming on the for-sale market during the coming year — adding to the supply glut and encouraging more conversions to the rental market.” High Rental Vacancy Rates The rental vacancy rate among structures with five or more units has been high in recent years, reaching 12% in 2004 but dropping to 9.5% during the fourth quarter of 2005. “However, more recently it has moved back up, partly due to increased supply from conversions of condos to rental units. In addition, some would-be sellers have decided to rent their units while they wait for a bounce back in the market to produce a price they are willing to accept,” the study says. As of the second quarter of this year, the five or more rental vacancy rate stood at 10.1%. The unprecedented overall rental vacancy rates in recent years partly reflect increases in the number of vacant single-family homes for rent. Single-family rentals account for more than 30% of all rental housing, and in the fourth quarter of 2005, the vacancy rate for these properties actually exceeded the multifamily rental vacancy rate for the first time ever. “The current high vacancy rate for single-family rentals is most likely due to excess supply from individuals who originally purchased a house with hopes of quickly selling it for a profit and now find they must either sell at a loss or rent the property until the housing market rebounds,” according to the report. “Many of these novice landlords may be exacerbating the excess supply problem by asking for too high a rent. Rather than ask a reasonable market rate, this group often asks for a rental rate that covers mortgage payment, insurance and taxes, an amount which may be above the market clearing rent. Presumably, the discipline of the market will eventually sort this out." Recasting Condos as Rentals Despite high vacancy rates, rents have been rising: “In 2006, rents rose faster than overall inflation and probably will continue to do so in future years as well.” Along with oversupply problems, this has resulted in some condo projects being recast as apartment projects, but the strategy is not risk-free. Condo units tend to be larger and more upscale than most apartments and “even if converted into luxury apartments, a limited market, it may be difficult to extract sufficient rents to pay for the cost of the project. At best, the project may have to be sold at a discount to attract a buyer, leaving the project’s backers with below-normal returns or even losses.”
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Download All the Housing Market Statistics (PDF) Housing Market Statistics offers 40 different sets of data, downloadable either as Excel or PDF files (updated weekly). Access to this key housing data is available only to HousingEconomics.com subscribers. Full Sample = Available for HousingEconomics.com subscribers Home Fire Sprinklers Found Far Costlier Than Advocates ClaimThe installation of residential fire sprinklers may bring down the cost of home owner insurance premiums, but not enough to pay for the sprinklers themselves, according to a study released this month by NAHB Housing Economics. Further, home builders surveyed for the study report fire sprinkler installation costs are about twice as high as the costs touted by the manufacturers and installers of residential sprinkler systems, strengthening NAHB’s position that residential fire sprinkler mandates have a negative effect on housing affordability. The study debunks attempts by residential fire sprinkler manufacturers and their advocates to downplay the added cost of installing the devices by pointing to the insurance savings realized. “The issues would be somewhat simplified if we could show that monetary savings existed to offset, or almost offset the added upfront costs of installing fire sprinklers,” said economist Lanlan Xu in “Fire Sprinklers and Home Owner Insurance.” “Builders in that case would be able to install sprinkler systems in most new homes and market the sprinklers effectively to prospective buyers as an added safety feature that pays for itself,” the study pointed out. “From the insurer’s point of view, sprinklers may generate savings, but also additional costs….if sprinklers discharge accidentally and cause unnecessary water damage,” the study said. “Most insurers do offer meaningful discounts for residential sprinkler systems,” but not high enough in any state to offset the added upfront cost buyers pay for sprinklers. In fact, the study showed, “Using the average insurance payment as a crude proxy for the basic premium, the most an average new home buyer in a particular state can expect to save on home owner insurance appears to be about $95 a year.” Insurance companies usually cap the discounts for safety devices like deadbolt locks, burglar alarms and smoke detectors, in addition to fire sprinklers, and the cap is usually 20%. “This means that, given a large enough number of other safety features, the marginal impact of a sprinkler system on the insurance payment could be very small or zero.” The advocacy group Home Fire Sprinkler Coalition says that residential fire sprinklers add about 1% to 1.5% to the cost of a home. For the $246,500 median price of a new home in 2006, the sprinklers would result in a $2,465 to $3,698 price increase. However, a nationwide survey conducted last year by the NAHB Research Center and completed by 102 builders who built 5,527 homes with fire sprinklers in 2006 showed that the median cost of installing fire sprinklers was about $5,573. The median size of the surveyed homes was 2,271 square feet, the study said. “The extra costs the NAHB Research Center survey was careful to include are the costs of increased permit, tap and inspection fees, as well as any costs of redesigning the home to accommodate the sprinklers. It’s important to include these items, as costs are not limited strictly to the material and labor used in installing the sprinkler system itself,” the study pointed out. And when fees from financing, the broker commission and profit margins are added, average costs to the home owner are probably closer to $6,677, the study said. Using Freddie Mac’s 30-year fixed-rate mortgage rate of 6.70% in July 2007, that translates into a $522 increase in an annual mortgage payment, the study found. “Even under the lowest of the above cost estimates ($2,465), the annual mortgage payment would increase by $193, roughly double the upper bound on the average insurance savings,” the study concluded. For sprinklers to not affect affordability, the cost of financing them over the life of the mortgage should at least be equal to the insurance savings achieved. In the example above, that would mean that the fire sprinklers could cost the home owner no more than $1,200, the study calculated. “If achieved, it would allow the market to provide sprinkler systems in most new homes without adversely affecting affordability. Local governments could make a contribution toward achieving this by not increasing permit, tap or other fees on homes with sprinkler systems,” the study said. Read the Full Report [return to top] Download Building Permits & Employment Data by Metro AreasBuilding Permits and Employment data by State and Metropolitan Statistical Area (MSA), are available for download (Excel tables). Also available for HousingEconomics.com subscribers:
Calendar: Data Releases September-October 2007Mark your calendar for all of the housing industry key data and primary indicators for September-October 2007. Print here the schedule of release dates for economic indicators. (PDF) 2007 release date calendar (Excel) When Time is Critical..."NAHB's HousingEconomics.com is an important destination for housing and construction industry statistics and trends. With a wide variety of information easily accessible in a single location, it's ideal for searches when time is critical.” Sylvia Kellogg Marketing Information & Analytical Manager USG Corporation Chicago Whether you advise, consult or work specifically on improving your own company’s profitability, you can rely on the premier data source for the U.S. housing industry, HousingEconomics.com. State and Metro Forecasts are some of the favorite materials our subscribers look for. Including Starts Forecast, Excel tables of Total, Single-Family and Multifamily Housing Starts by Regions, States, and the Top 100 Metropolitan areas. The NAHB Economics Group has provided research and analytical solutions to member companies, professional economists and the media since 1970. This kind of editorial excellence and in-depth analysis can only be found at www.HousingEconomics.com.
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