U.S. house price rises continue to accelerate
February 12, 2018
The S&P/Case-Shiller seasonally-adjusted national home price index rose by 6.21% during the year to November 2017 (3.91% inflation-adjusted), its strongest y-o-y growth since June 2014. This was supported by Federal Housing Finance Agency’s seasonally-adjusted purchase-only U.S. house price index, which rose by 6.54% y-o-y in November 2017 (4.24% inflation-adjusted), a slight increase from y-o-y rises of 6.44% in November 2016 and 6% in November 2015.
All 20 major U.S. cities experienced relatively strong house price hikes, according to Standard and Poor’s, with Seattle posting the highest increase of 12.71% during the year to November 2017, followed by Las Vegas (10.6%), San Francisco (9.04%), San Diego (7.45%), Los Angeles (7.02%), Tampa (7.02%), and Dallas (7.02%). Strong house price rises were also registered in Detroit (6.98%), Denver (6.94%), Portland (6.94%), Boston (6.26%), Charlotte (5.76%), New York (5.71%), Phoenix (5.54%), Minneapolis (5.41%), Atlanta (5.14%), Cleveland (4.13%), and Miami (4.06%).
Washington and Chicago saw the lowest growth in inflation-adjusted house prices at 3.28% and 3.59%, respectively.
The Mountain region had the highest house price increases of 8.9% y-o-y in November 2017, followed by the Pacific region (8.6%), South Atlantic (6.9%), East North Central (6.3%), West North Central (5.9%), and West South Central region (5.8%), according to the FHFA.
The average sales price of new homes sold in the U.S. rose by about 4.3% y-o-y in December 2017, to US$398,900, according to the U.S. Census Bureau. On the other hand, the median sales price of new homes sold increased by a more modest 2.6% to US$335,400 over the same period.
For existing homes, the median price was up 5.8% to US$246,800 in December 2017 from a year earlier, according to the National Association of Realtors (NAR). December’s price increase marks the 70th consecutive month of year-over-year gains.
Demand continues to rise. Sales of new single-family houses rose by 8.4% to 608,000 units in 2017 from the previous year, according to the U.S. Census Bureau. Likewise, existing home sales were up by 1.1% to 5.51 million units in 2017, the highest level since 2006, according to NAR.
U.S. homebuilder sentiment surged to 74 in December 2017, up from 69 a year earlier and the highest level in more than 18 years, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). A reading of 50 is the midpoint between positive and negative sentiment.
Construction activity remains robust. In 2017, new housing starts rose by 2.4% y-o-y to 1,202,100 units, while completions were up 8.7% to 1,152,300 units, according to the U.S. Census Bureau. Building permits authorized for new housing units rose by 4.7% y-o-y to 1,263,400 units in 2017.
“With low unemployment rates, favorable demographics and a tight supply of existing home inventory, we can expect continued upward movement of the single-family construction sector next year,” said NAHB Chief Economist Robert Dietz.
The U.S. housing market is expected to remain buoyant. NAR projects about 5% increase in the national median existing-home price this year. In addition, new home sales are forecast to increase to 700,000 units this year and existing home sales to rise to 5.7 million units.
The U.S. economy grew by 2.3% in 2017, an acceleration from a 1.5% growth in 2016 but still short of the government’s target growth of 3%, according to US Department of Commerce. The economic growth was mainly fuelled by strong consumer spending, which is supported by rising household wealth, the stock market rally, higher house prices, tax cuts, and wage growth. The International Monetary Fund (IMF) recently raised its growth forecast for the world’s largest economy from 2.3% to 2.7%, after President Donald Trump signed a landmark tax law (known as the Tax Cuts and Jobs Act or TCJA) considered to be the largest overhaul of the U.S. tax code in over 30 years.
The new tax law includes a massive reduction in the corporate tax rate from 35% to 21%, in an effort to boost economic growth and stimulate business investment. However, the new law also includes provisions such as reduction of the mortgage interest deduction cap, increasing standard deduction, and the restriction of state and local tax deductions that may hurt the housing market.
The story of the U.S. housing boom and bust
All 20 main U.S. cities experienced spectacular house price rises during the boom (1996-Q1 2006). Los Angeles registered the biggest house price rise of 265.5%, followed by San Diego (247.7%), San Francisco (226.6%), and Miami (213.1%).
Then in Q2 2006, house prices started to fall.
The S&P/Case-Shiller composite-20 home price index plunged 33.8% from Q2 2006 to Q4 2011. Phoenix registered the biggest drop (-55.2%) among the twenty largest metro areas, followed by Miami (-50.5%), Detroit (-42.8%), San Francisco (-41%), Los Angeles (-40.7%), and San Diego (-39.7%).
Starting the second half of 2012, the U.S. housing market started to recover, led by Phoenix. All the 20 largest cities in the U.S., except New York, saw house price rises in 2012 from a year earlier.
In 2013, the S&P/Case-Shiller composite-20 home price index soared 13.5% from a year earlier, with Las Vegas house prices surging by 25.5%, followed by San Francisco (22.6%) and Los Angeles (20.3%).
House prices continue to rise in the following years, albeit at a much slower pace. The S&P/Case-Shiller composite-20 home price index rose by 4.4% in 2014, by 5.5% in 2015, and by 5.4% in 2016.
HOUSE PRICE CHANGE (%)
|US Cities||Housing boom (Jan 1996 – Mar 2006)||Housing crash, global crisis (Apr 2006 – Dec 2011)||Housing recovery (Jan 2012 – Dec 2014)||2015 (y-o-y)||2016 (y-o-y)||Nov 2017 (y-o-y)|
Housing inventory is very tight; construction far below the peak
Residential construction activity continues to rise, but still far below peak levels.
- Housing starts: 1,202,100 units, up 2.4% from a year earlier
- Housing completions: 1,152,300 units, up 8.7% from a year earlier
- Housing permits: 1,263,400 units, up 4.7% from a year earlier
From 1990 to 2007, housing completions averaged 1.5 million units per year, peaking at almost 2,000,000 completions in 2006, but crashed to 584,900 units in 2011. Residential construction started to recover in 2012, and by 2016 was back at 1,059,700 units. However, this is still far below the peak of 2005/6.
Inventory remains tight. The total number of existing homes available for sale fell by 10.3% y-o-y to 1.48 million units in December 2017, according to NAR. Existing homes inventory has fallen year-over-year for 31 consecutive months. On the other hand, the seasonally-adjusted inventory of new houses for sale at the end of December 2017 was 295,000 – equivalent to about 5.7 months of supply, slightly up from 5.6 months of supply a year earlier, according to the U.S. Census Bureau.
“The lack of supply over the past year has been eye-opening and is why even with strong job creation pushing wages higher, home price gains – at 5.8% nationally in 2017 – doubled the pace of income growth and were even swifter in several markets,” said NAR’s Chief Economist Lawrence Yun.
Home sales continue to rise
Existing home sales stood at 5.51 million units in 2017, up 1.1% from a year earlier and the highest level since 2006, according to the National Association of Realtors (NAR).
- In the Northeast, existing home sales were almost unchanged in 2017 from a year earlier, at 740,000 units.
- In the South, existing home sales increased by 1.8% to 2.26 million units in 2017 from a year earlier.
- In the Midwest, existing home sales were almost unchanged in 2017 from a year earlier, at 1.3 million units.
- In the West, existing home sales rose by 2.5% y-o-y to 1.22 million units in 2017.
Likewise, new homes sold rose by 8.4% to 608,000 units in 2017 from the previous year, according to the US Census Bureau - the highest number of new housing units sold since 2007.
First-time homebuyers accounted for about 34% of total sales in 2017, according to NAR. In addition, all-cash sales were 21% of all transactions in 2017, down from 23% in 2016. Individual investors, who account for many cash sales, purchased 15% of homes in 2017, up slightly from 14% in 2016.
Residential properties typically stayed on the market for 40 days in December 2017, down from 52 days in December 2016 and 58 days in December 2015.
Foreclosures continue to fall
The delinquency rate on single-family residential mortgages fell to 3.62% in Q3 2017, down from 4.36% a year earlier and the lowest rate since Q4 2007, according to the U.S. Fed.
Foreclosure filings, which include default notices, scheduled auctions, and bank repossessions, were reported on 676,535 properties in 2017, down by 27% from a year earlier and down by 76% from a peak of nearly 2.9 million properties in 2010, according to ATTOM Data Solutions. In fact, it was the lowest level since 2005.
The foreclosure rate was 0.51% of all housing units in the U.S. in 2017, down from 0.7% in 2016 and from the peak of 2.23% in 2010. New Jersey had the highest foreclosure rate in the country in 2017, at 1.61% of all housing units with a foreclosure filing, followed by Delaware (1.13%) and Maryland (0.95%).
“Thanks to a housing boom driven primarily by a scarcity of supply, which has helped to limit home purchases to the most highly qualified – and low-risk – borrowers, the U.S. housing market has the luxury of playing a version of foreclosure limbo in which it searches for how low foreclosures can go,” said Daren Blomquist of ATTOM Data Solutions.
Foreclosure starts (at 383,701 units) and foreclosure auctions (at 318,165 units) were both at their all-time low in 2017.
Lenders repossessed 291,579 properties in 2017, down 23% from a year earlier and the lowest level in 11 years.
Mortgage interest rates remain low, despite key rate hikes
The Fed Funds target rate was raised to 0.25%-0.50% in December 2015 and further to 0.50%-0.75% in December 2016, after being held at 0%-0.25% for seven years. In December 2017, the Fed raised the target range for the Fed funds rate again to 1.25% - 1.5%, following two rate hikes (in March and June) last year.
Despite this, mortgage interest rates remain low.
- The average interest rate for 30-year fixed rate mortgages (FRMs) was 3.95% in December 2017, down from 4.2% a year earlier.
- The average rate for 15-year FRMs was 3.39% in December 2017, slightly down from 3.43% in December 2016.
- The average rate for 5-year adjustable rate mortgages (ARMs) rose to 3.39% in December 2017 from 3.23% a year earlier.
Mortgage debt outstanding rose by 3.7% y-o-y to US$14.75 trillion in Q3 2017 from a year earlier, thanks to low interest rates, according to the U.S. Federal Reserve System. One- to four-family residences accounted for almost 71.5% of the total amount of mortgage loans outstanding in Q3 2017.
The size of the mortgage market was equivalent to more than 76% of GDP in 2017, almost unchanged from the past two years, but still far lower than the 100.1% of GDP in 2009, according to the US Fed.
Rents continue to increase, but vacancies rising
Rising rents are another sign of the increasingly healthy U.S. economy. The median asking rent in the U.S. rose by 5% y-o-y to US$899 per month in 2017, according to the U.S. Census Bureau.
- In the Northeast, the median asking rent soared by 13.3% during 2017, to US$1,128 per month.
- In the West, the median asking rent rose strongly by 9.1% y-o-y to US$1,180 per month in 2017.
- In the South, the median asking rent rose by 6% y-o-y to US$885 per month in 2017.
- In the Midwest, the median asking rent fell slightly by 0.2% y-o-y to US$721 per month in 2017.
Median rents were more or less static from 2008 to 2014, according to the U.S. Census Bureau. However since 2015, rents have risen at least as fast as house prices.
The nationwide rental vacancy rate was 7.2% in 2017, up from 6.9% in 2016 but down from 7.1% in 2015, 7.6% in 2014, 8.3% in 2013, 8.7% in 2012, and 9.5% in 2011, according to the U.S. Census Bureau.
The West had the lowest rental vacancy rate of 5.3% in 2017, followed by the Northeast (5.5%), and the Midwest (7.9%). The South had the highest rental vacancy rate of 9% in 2017.
Homeownership rate increased slightly
After almost a decade of decline, homeownership has somewhat increased in 2017, despite the continued rise in property prices and tight credit standards. Homeownership in the U.S. stood at 63.9% of households in 2017, up slightly from 63.4% in the previous year but still below the peak level of 69% in 2004, according to the U.S. Census Bureau.
- In the Northeast, the homeownership rate was 60.5% in 2017, up slightly from 60.2% a year earlier but down from 65% in 2004.
- In the South, the homeownership rate stood at 65.6% in 2017, up from 65% in the previous year but down from its peak of 70.9% in 2004.
- In the Midwest, the homeownership rate was 68.4% in 2017, unchanged from a year earlier but still down from 73.8% in 2004.
- In the West, homeownership rate improved to 59.2% in 2017, from 58.5% a year earlier. But it was still below its peak of 64.2%.
Labor market is fundamentally strong
In January 2018, the nationwide unemployment rate remained at a 17-year low of 4.1%, according to the Bureau of Labor Statistics (BLS). The recent peak year for unemployment was 2010, with 9.6% unemployment.
About 200,000 more jobs were added in January 2018, higher than the 160,000 additional jobs in the previous month.
The U.S. jobs market continues to strengthen and many economists believe that it is already near full employment.
“The untapped reservoir of unemployed or underemployed skilled workers that existed in the aftermath of the recession has largely disappeared,” said Jim Baird of Plante Moran Financial Advisors. “Employers are finding it more difficult to find potential workers.”
The average hourly earnings increased by 2.9% to US$26.74 in January 2018 from a year earlier, up from a 2.7% rise in December 2017 and its fastest growth since June 2009. This was mainly due to the increases in the minimum wage in 18 U.S. states, as well as the effect of the tax cut.
Wage growth is expected to continue these coming months as Walmart is expected to raise entry-level wages for hourly employees at its U.S. stores.
The new tax law and the housing market
The effect of the new tax law to the housing market remains uncertain because of these three key policy changes:
- Mortgage interest deduction cap will decrease. The new law caps the deduction threshold, which helps homeowners lower their taxable income, on new homes at the first US$750,000 of a loan from the original US$1 million.
- Standard deduction will increase. The new law raises the standard deduction for all taxpayers to US$12,000 for single filers and to US$24,000 for joint filers. This implies that it may no longer be better for some households to itemize the mortgage interest deduction since it would be lower than their standard deduction.
- The state and local tax (SALT) deduction will be restricted. The new law caps the SALT deduction at US$10,000 of property value, individual income, and sales taxes. This will have the greatest impact on high-income households since about 93% of households earning US$200,000 to US$300,000 annually claim the SALT deduction, compared with only 39% of households earning US$50,000 to US$75,000.
“While more disposable income for buyers is positive for housing, the loss of tax benefits for owners could lead to fewer sales and impact prices negatively over time with the largest impact on markets with higher prices and incomes,” said Danielle Hale of Realtor.com.
In fact, some economists expressed concerns that the new tax law will only hurt the housing market. At one extreme, the National Association of Home Builders warned of a possible housing recession.
“You’re talking about potentially causing housing recessions in some of the biggest markets in the country, and those kinds of recessions tend to have spillovers,” said Jerry Howard of the National Association of Home Builders. “We’re worried about a national housing recession.”
This concern was supported by the National Association of Realtors: “Eliminating or nullifying the tax incentives for homeownership puts home values and middle-class homeowners at risk, and from a cursory examination this legislation appears to do just that,” said William Brown of NAR.
Modest economic growth, rising deficit
The U.S. economy grew by 2.3% in 2017, an acceleration from a 1.5% growth in 2016 but still short of the government’s target growth of 3%, according to U.S. Department of Commerce. The economic growth was mainly fuelled by strong consumer spending, which is supported by rising household wealth, stock market rally, higher house prices, tax cuts, and wage growth.
The International Monetary Fund (IMF) recently raised its growth forecast for the world’s largest economy from 2.3% to 2.7%, after President Donald Trump signed a landmark tax law (known as the Tax Cuts and Jobs Act or TCJA) in December 2017 that lowers both corporate tax rate and individual income tax rates, among other provisions. It was considered as the largest overhaul of the U.S. tax code in over 30 years.
“The backdrop at the start of 2018 is encouraging and supports an accelerated pace of U.S. GDP growth,” said Sam Bullard of Wells Fargo.
The federal government ran a deficit of about US$23 billion in December 2017 and annual deficits are now almost US$ 1 trillion. Spending rose by 3% to an all-time high of US$3.98 trillion in 2017, while revenues increased by a slower 1% to almost US$3.32 trillion.
As a result, the budget deficit widened to 3.5% of GDP in 2017, up from 3.2% in 2016 and 2.5% of GDP in 2015, according to the U.S. Treasury. Despite this, the deficit remains far lower than the deficit of 10.1% of GDP recorded in 2009.
Though the deficit is expected to increase further this year due to tax cuts – estimated to add US$1.4 trillion over 10 years to the country’s budget deficit.
National debt has topped US$20trillion and the U.S. Treasury estimates that the country needs to borrow US$441 billion in privately held debt this quarter, the largest sum since 2010.
In December 2017, the nationwide inflation rate stood at 2.1%, from 2.2% in November, 2% in October and 2.2% in September, according to the US Bureau of Labor Statistics. Overall, inflation was estimated at 2.1% last year, the highest level since 2012, according to the IMF.
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