Two press releases that came out on
Monday may point to a new direction for the residential construction market and
perhaps for housing policy.
Home builders continue to have little optimism
about the new home market according to the National Association of Home
Builders/Wells Fargo Housing Market Index (HMI) for July. The index, floating near its bottom for since October 2008, did rise two points to 15 but this only partially recouped the three
point drop seen in June.
The NAHB HPI is a composite index of home builder sentiment about the new home
market. Builder members of the National
Association of Home Builders (NAHB) are asked for their perceptions of both current
single-family home sales and sales expectations for the next six months as
"good," "fair" or "poor" and asks them to rate traffic of prospective
buyers as "high to very high," "average" or "low to
very low." Scores are used to calculate three component indices and the
HPI, a seasonally adjusted index. Any number
over 50 for the HPI and each of the components indicates that more builders
view sales conditions as good than poor.
The component indices also rose slightly from their terrible June levels. The component gauging current sales
conditions rose two points to 15 while the one measuring expectations for traffic
over the next six months jumped seven points to 22. The component assessing prospective buyer
traffic was unchanged at 12. On a
regional basis, the Northeast declined two points to 15 but the Midwest was up
one point to 12 and the South and West each gained three points to 17 and 14
respectively.
According to Bob Nielsen, chairman of NAHB, "The improvement in builder
confidence in July is a positive sign that the outlook perhaps isn't quite as
bleak as was feared in June. While
builders continue to confront serious challenges with regard to competition
from foreclosed properties that are priced below replacement cost, inaccurate
appraisals of new homes, and a very restrictive lending environment for new
home construction, select markets are showing gradual improvement as consumers
begin to take advantage of very favorable buying conditions."
At the same time, the BuildFax
Remodeling Index (BFRI) which tracks building permits and construction starts indicated
that May had the highest level of remodeling activity since the Index was first
introduced in 2004.
The BFRI is derived from building and permitting information from 4,000
cities and counties throughout the country assembled by BuildFax, a division of
BUILDERadius. The BuildFax database
currently covers over 60 percent of the US commercial and residential building
stock.
The BFRI for May reveals that residential remodeling activity in May registered
growth in every region of the country and signifies the 19th
consecutive month of industry growth. According to BuildFax, the data demonstrate
that many Americans are remodeling their current homes rather than purchasing
new ones.
The May 2011 index was 124.3, the highest number ever. This was a 22 percent year-over-year increase. Each region increased month-over-month with
the Northeast up 9.8 points (12%), the South up 7.3 points (7%), the Midwest up
16.3 points (18%), and the West up 8.7 points (7%). Even though the Midwest was
up month-over-month, it continues to lag the other regions (as it has for the
past three months) in year-over-year performance, down 10.6 points (11%)
year-over-year. All other regions were up year-over-year, with the Northeast up
7.2 points (9%), the South up 9.5 points (10%), and the West up 20.7 points (21%).
Joe Emison, Vice President of Research and Development at BuildFax said of
the index, "Even with the continued struggles in the economy, the
remodeling industry has been a bright spot, as consumers look to make upgrades
to their current homes, rather than purchasing a new residence. Based on the
trends from the first months of this year, we expect to continue seeing strong
gains from coast to coast."
So how does this have any bearing on housing
policy? Housing starts continue to lag -
the Census Bureau reports they were up 3.5 percent in June from May figures but
were down almost an identical amount from June 2010. Builders are simply not going to build until
the current inventories of new and existing homes return to more normal levels
and the shadow inventory does not loom so ominously over the market.
If the emphasis were shifted from new
construction to rehabilitating and improving existing housing stock it could
provide a real jump start to the ailing construction industry. Remodeling dilapidated houses lacks the sex
appeal of building yet another subdivision or condo complex as well as the
economies of scale; but it also lacks the infrastructure costs, conservation
headaches, and permitting delays. Returning
some of the million plus "off market" vacant property to service as well as
improving the stock of REO to useable/salable condition might, while creating
construction jobs, also speed up the timeframe for reducing the inventory and returning
the market to normal activity.
Adam Quinones, MND's Managing Editor, notes
that the Department of Housing and Urban Development has already announced initiatives
to rebuild the distressed housing stock.
"With so many foreclosed properties sitting empty on the market we
can expect remodeling and rehabbing to be a leading indicator of a bottom in
the housing market. We already know there
is a dearth of affordable rental housing available to low income renters. From
that perspective, FHA should open its 203(k) program to investors if they want
to accomplish their affordable housing goals."
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