Word for the day: US Housing data

Housing is one of the most important sectors in the US economy. Residential investment building new homes, remodeling houses, and the fees associated with selling them accounts for around 5% of GDP. More than 2.5 million people are employed in the housing sector in the US, or around 1.7% of the labor force. Thus the health of the housing sector strongly influences the health of the economy as a whole. Moreover, houses are the major financial asset that most people own; 65% of Americans own their own home while only 52% own any stocks, and even at that, holdings of stocks are overwhelmingly concentrated in a relatively small number of wealthy people. Thus changes in house prices greatly affect the emotions of consumers: rising house prices make people feel richer and thereby encourage them to spend (the wealth effect), while falling house prices can make people feel poor (or even actually become poorer, if the value of their house falls below what they paid for it). Because it is such a large part of the economy and so important to consumer sentiment, housing activity usually leads the business cycle. It is therefore is a key indicator to watch to judge where the economy is headed. Several factors can affect the housing market, such as consumer confidence, mortgage rates, the availability of mortgages and of course economic growth. For example, with strong economic growth and rising incomes, people can afford to spend more on houses; therefore demand for property rises. Below are some of the most closely watched indicators that economists and analysts use to measure activity in the housing market in US. Building permits Builders planning to construct new homes most of the time have to file for a permit before they start construction. Building permits therefore lead housing starts by one to three months (As the graph shows, the one-month lead is pretty close). By tracking the issuance of permits, one can get an idea of future construction activity. The US Commerce Departments Census Bureau releases data on building permits monthly. Because the housing sector tends to lead the rest of the economy and permits tends to lead housing, the series on permits is one of the ten components of The Conference Boards index of leading indicators.

Housing starts Housing starts show the number of new houses or apartment buildings that builders start building each month. The Census Bureau releases the data monthly along with the building permits. A drop-off in home construction is a sign that the broader economy is likely to slow. On the other hand, a rebound in housing starts often sets the stage for a pickup in overall housing activity. Home Sales There are three series on home sales: new home sales, existing home sales and pending home sales. New home sales: Data on the sale of new homes is issued every month by the Census Bureau. The report includes price statistics as well as the number of homes sold. The houses can be at any stage of construction, from not yet started to under construction to finished. The series is quite volatile and subject to revision back several months, so that several months of data are usually needed to establish a change in trend. Sales are registered on the signing of a contract or acceptance of a deposit. If the contract is subsequently cancelled, the figure is not revised (unlike existing home sales below). As a result the figure overstates sales when the market is bad and people are cancelling more homes than usual. The data includes the supply of completed new single-family homes being offered for sale, which can also be expressed in relation to the pace of annual sales the inventory/sales ratio. Changes in this ratio often lead an opposite move in housing starts as builders adjust the pace of building in response to rising or falling inventories. Existing Home Sales: The existing home sales report is released monthly by the US National Association of Realtors (NAR) and measures monthly sales of previously owned single family homes. It also reports the average and median prices of the homes sold, plus the inventory of unsold homes (expressed in terms of months supply). The report covers in detail the whole US nation and separates them by region (West, South, Midwest and Northeast). In contrast to new home sales, existing homes are considered sold when the contract closes, which can be one to three months after a contract is signed. Thus existing home sales lag shifts in housing demand by a few months. There are far more existing homes sold than new homes: some 5.5mn annually vs 420,00 recently (see graph). Although the sale of existing homes has only a small impact on GDP, unlike the construction of new homes, it may be an indicator of the demand for household goods as people often buy a new refrigerator or other goods when moving into a new house. The sale of an existing home also can provide a windfall to the seller, who may choose to spend the money. The house price data can indicate how changes in the housing market are affecting household wealth. NAR uses the price data to calculate an affordability index for home purchase, which takes into account incomes, house prices and mortgage rates. At 100, it indicates that the household with the median income can afford to purchase the median-priced home. Above 100 indicates greater affordability.

Pending Home Sales: The pending home sales is also released by the US National Association of Realtors (NAR). The release shows the number of existing home sales in which a contract is signed but the sale has not yet been settled. As noted above, existing home sales are reported as of the closing of the transaction, which takes place anywhere from one to three months after the contract is signed. Over 80% of all pending home sales settle within two months. Unlike the sales data, which are reported in terms of units sold, pending home sales are reported as an index (2001 = 100). Contract activity was relatively strong in 2001. MBA mortgage applications The Mortgage Bankers Association (MBA) releases every week its mortgage applications report, which shows the number of people applying for a mortgage or to refinance an existing mortgage. The MBA estimates that the survey captures more than 75% of all mortgage applications. Since most people take out a mortgage to buy a house, mortgage applications are a leading indicator of the housing market, although the data can be affected by changes in the industry or in loan standards. In theory, the data should also be a leading indicator of consumer spending. This index is quite volatile (see graph) and has less impact on the market than other housing indicators. NAHB housing market index The National Association Home Builders (NAHB) is an industry group for the housing construction industry. It compiles the NAHB housing market index (HMI), a monthly survey to assess the current market for new single-family home sales along with builder expectations of future trends. NAHB surveys its 140,000 plus members to rate current market conditions and sales expectations for the next six months as good, fair or poor. The result is presented as a diffusion index ranging between 0 and 100. A reading above 50 indicates that the market conditions and expectations are improving. The NAHB index is a useful leading index of housing activity, especially as it is released relatively early in the month and revisions are usually not very large.

S&P/Case-Shiller home price indices The S&P/Case-Shiller home price indices are a leading tool to measure the change in the price of single-family homes throughout the US. There are three composite indices: A national home price index, which is a composite of single-family home price indices for the nine US Census divisions; a 10-city composite index, which measures the change in value of residential real estate in 10 metropolitan areas; and a 20-city composite index, which measures the change in value of residential real estate in 20 metropolitan areas. Individual indices are available for all twenty metro areas as well. The 10- and 20-city indices are compiled monthly, while the national index is compiled quarterly. The S&P/CS indices are calculated from data on repeat sales of single-family homes (that is, homes that have been sold at least twice before). FHFA US house price index The Federal Housing Finance Agency (FHFA) house price index (HPI) is also a weighted, repeatsales index for single-family homes, similar to the S&P/CS indices. Because of differences between the two methodologies, its not possible to say which one is better than the other. The FHFA HPI has the advantage of broader geographic coverage: it is available on a monthly basis for the nine census divisions and the US as a whole, while a comprehensive report covering all 50 states and all of the countrys metropolitan statistical areas is published quarterly, whereas the S&P/CS indices do not have data from 13 states. On the other hand, the FHFA index is confined to homes financed with conforming mortgages, which are those that both meet the underwriting guidelines of the US government-owned mortgage lending institutions Fannie Mae or Freddie Mac and do not exceed the conforming loan limit of $417,000. The S&P/CS indices include houses in all price ranges. Moreover, they are valueweighted, meaning that price trends for more expensive homes have a greater influence on the indices, while the FHFA weights price trends equally for all properties. There are also differences in the sources for price data as well as some other differences in how they are computed. Hence the two series can and do differ. As the graph shows, the S&P/Case Shiller index, with its wider range of prices and narrower geographic base concentrated in major cities, tends to be more volatile than the FHFA index. Note: the FHFA used to be called the Office of Federal Housing Enterprise Oversight (OFHEO) and the index was similarly known back then.

US Housing-related indicator schedule in Aug 2013 Date Indicator For Time 15-Aug NAHB Housing Market Index Aug 17:00 16-Aug Housing Starts Jul 15:30 16-Aug Building Permits Jul 15:30 21-Aug Existing Home Sales Jul 17:00 22-Aug FHFA House Price Index Jun 16:00 23-Aug New Home Sales Jul 17:00 27-Aug S&P/Case Shiller indices Jun 16:00 28-Aug Pending Home Sales Jul 17:00 Note: the order of the releases can and does vary each month

As you can see, the NAHB index is the most up-to-date indicator for the sector, while the two price indices usually lag the rest of the housing data by one month.

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