December 2016 - Getting Serious About Diversity

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TH E M R EP O RT | 49 O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T ANALYTICS THE LATEST The Turning Point: Housing Permits Outpace Starts Rising housing permits point to growth and could help inventory-strapped markets. O n the surface, the latest news was not good for housing starts: a 9 percent over-the-month decline and a 12 percent drop over the year in September down to an annual rate of 1.05 million units. A closer examination of the data from the HUD/Census Bureau New Residential Construction Report for September, 2016, however, reveals that the outlook is not so gloomy. For starters, the declines in housing starts were driven by a substantial drop in multifamily starts; for single-family, housing starts jumped by 8 percent from August to September to an annual rate of 783,000. The numbers for building permits were also solid, with an annualized rate of 1.23 million—an increase of 6.3 percent from August and 8.5 percent from September 2015's estimate. Single- family permit authorizations rose by 0.4 percent from August to September, up to a rate of 736,000. The fact that overall permits (1.23 million) are outpacing hous - ing starts (1.05 million) indicates a significant turning point for the market, Chief Economist Jonathan Smoke said. "Today's data spawned some ominous headlines, but, if you look closer, this is actually a very encouraging report about new construction to come in the months ahead," Smoke said. "True, housing starts dropped— but we have to take that with a grain of salt because it came from such thin data. On the other hand, the permitting data released today blew by analysts' expectations. It also showed that this year's most troubling trend in new construction has clearly reversed: Permits are outpac - ing starts, which indicates that developers and builders are finally planning for more growth ahead. That's great news for both the economy and the consumer." Smoke continued, "A persistent lack of growth in new construc - tion has given us low vacancies in rentals and very low inventories of homes for sale. That has pro- duced above-average increases in rents and prices—but today's data is a good sign that we could be turning the page on this troubling scenario. Let's hope this trend persists." Trulia Chief Economist Ralph McLaughlin cautioned that the rate of increase for gains in single-fam - ily housing starts has slowed in five of the past six months, "which means homebuyers will see fewer new homes come on to the market in the next 6-12 months." Housing completions were a soft spot in the September new residential construction report, de - clining by 8.4 percent from August and by 5.8 percent from September 2015 down to an annual rate of 1.01 million. Single-family housing completions dropped by nearly 9 percent from August to September, down to a rate of 687,000. "While housing starts continue to inch up to their pre-recession average, they're only about 75 per - cent back to normal," McLaughlin said. "Housing completions, which represent tangible new supply for homebuyers, is even lower at 67 percent. Though homebuilders continue their slow and steady charge, there is much room for growth headed into 2017." Pre-Crash Peak Is Within Reach for Existing Sales Tight inventory is leading the existing home sales market to underperform. T he residential housing market is falling short of its potential due to in- creasingly tight inventory not keeping up with demand, but it is making strides, according to the First American Financial Corpora - tion Potential Home Sales Model for September 2016. According to First American, po- tential existing-home sales increased to a seasonally-adjusted annual rate of 5.8 million, which represented a 92.6 percent increase from the trough reached in December 2008 right after the housing crash. The potential existing-home sales rate of 5.8 million in September represented an increase of 6.5 percent compared to September 2015 (which calculates to approximately 352,000 in sales) but is still about 6 percent below its pre-recession peak of market potential, reached in July 2005 at the height of the housing bubble. The existing-home sales market is underperforming its potential by 6.5 percent, or approximately 375,000, according to First American. "Current mortgage rates hovering near historic lows combined with increases in wages remain the key drivers to growth in the housing market, as they continue to soften the impact of rising prices and offer consumers increased leverage and buoyed home-buying power," said Mark Fleming, Chief Economist at First American. "While this is contributing to greater consumer confidence in the housing market and providing a firm foundation for increased housing demand, tight inventory, particularly in the lower-priced segments, is keeping market activity from reaching its true potential." Continued tight inventory in the market (which declined to a 4.6-month supply in August) has put upward pressure on prices, which have increased by an average of 5.7 percent in the previous 12 months. The unemployment rate rose by 10 basis points up to 5.0 percent in September due to the number of people trying to re-enter the workforce, Fleming said. Wage growth over the past 12 months has helped, however. "Incomes continue to trend upward with the Census Bureau reporting that average hourly earnings have increased 2.6 percent in the past year, coinciding with a boost in consumer confidence," Fleming said. "Current mortgage rates hovering near historic lows combined with increases in wages remain the key drivers to growth in the housing market." — Mark Fleming, Chief Economist, First American

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