US HOUSING MARKET MONTHLY

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1 US HOUSING MARKET MONTHLY th Oct. Editor: Ed Stansfield New build sales finally making some headway Overview: The drop in mortgage rates towards the end of September has given mortgage applications a boost, as did the introduction of new disclosure requirements for mortgages as buyers acted early to avoid anticipated delays. A steady recovery in housing starts is feeding through into stronger new home sales. (See Chart.) But the supply of existing homes is still very constrained, and that will put upwards pressure on prices and weigh on total home sales. Economic Backdrop: A weak jobs report in September suggests the Fed will now delay raising interest rates until early next year. (Page.) Valuations & Affordability: Mortgage rates have dropped below % after the Fed held firm in September, and credit conditions continue to ease. (Page.) Activity: The divergence between new and existing home sales has narrowed, as a lack of inventory has restricted existing home sales. (Page.) Supply: The distortion caused by a tax-break for multi-family starts in NY looks to have worked itself through, with building permits up in September. (Page.) Prices: House prices are coming under upwards pressure from tight supply conditions. Consistent with that, price expectations remain elevated. (Page.) Regional/State Trends: Only nine of the cities measured by Case-Shiller recorded a price rise in July, with Chicago seeing the largest decline. (Page.) The Home-Buying Timeline: There has been an increase in the share of consumers planning on buying a home in the next six months. (Page.) Matthew Pointon Property Economist London Office: + () Housing Starts & New Home Sales (s Annualised).... Housing Starts (LHS) New Home Sales (RHS) US Housing Market Monthly

2 Economic Backdrop The third estimate of second quarter GDP growth brought another upwards revision, from.% to.% annualised. (See Chart.) That is welcome news after poor weather led to very weak first quarter growth of.%. But given the huge widening in the trade deficit in August, to $.bn, from $.bn in July, net external trade will subtract about.% point from third-quarter GDP growth, which we estimate was.%. The latest ISM non-manufacturing index also points to a slower third quarter. (See Chart.) But the drop back in the index to a threemonth low of. in September, from., still leaves it at a level that has historically been consistent with GDP growth of.%. Even allowing for the weaker ISM manufacturing survey, a weighted average of the two indices points to GDP growth of between.% and.% annualized. Accordingly, the ISM surveys suggest that the domestic outlook is still fairly solid. The September jobs report, however, was more of a disappointment. Payroll employment increased by a much smaller than expected,. (See Chart.) And stripping out public sector employment growth shows a dramatic slowdown in average private payrolls - from, in the first seven months of this year to, in the past two months. There is also no sign of a pick-up in average hourly earnings growth, which has now remained around % for over five years. (See Chart.) Given the slowdown in the jobs market in September, we think that the Fed will delay raising rates until early. - - Chart : Real GDP (%q/q Annualised) Chart : ISM Manufacturing & Non-Manufacturing Indices ISM Non-Manufacturing ISM Manufacturing Chart : Change in Non-Farm Payroll Employment (s) Change in Payroll Employment Three Month Average Chart : Average Hourly Earnings and Fed Funds Target Rate Fed Funds Target Rate (%, LHS) Average Hourly Earnings (%y/y, RHS) Source Thomson Datastream US Housing Market Monthly

3 Valuations & Affordability The Fed s decision to keep interest rates on hold in September led to a dip in -year Treasury yields and a corresponding fall in mortgage rates. Indeed, the -year rate dropped below % in the final week of September. (See Chart.) If the Fed does now push back the first rate rise to, we would not rule out some further decline in mortgage rates. Low mortgage interest rates, combined with the sharp drop in unemployment seen over the past couple of years, has led to a steady decline in the share of delinquent mortgages and those in the process of foreclosure. (See Chart.) Indeed, the foreclosure start rate has fallen to.%, in line with its level before the financial crisis. The fall in the share of mortgages with payment difficulties has encouraged banks to loosen their lending criteria gradually, leading to a rise in the share of mortgage applications that are being approved and a decline in the average FICO score for those that are successful (See Chart.) That should allow more buyers, particularly first-time buyers, access to homeownership. That said, with average hourly earnings growth stuck at % for over five years now, affordability is not quite as favourable as it used to be according to the NAR Affordability Index. In turn, that deterioration has been accompanied by a drop in the share of households who say now is a good time to buy. (See Chart.) But the deterioration in affordability needs to be put in perspective at. in August, homes are still more affordable than at any time from to the end of. Chart : Treasury Yields and Mortgage Interest Rates (%) Yr Treasury Yield (LHS) -Yr Fixed Mortgage Rate (RHS) Chart : Mortgage Delinquency and F closure Start Rate (%) Foreclosure Start Rate (%, LHS) Delinquency Rate (%, RHS) Chart : Average FICO Score and Share of Home Purchase Applications Approved FICO Scores for Successful Applicants (LHS) Share of Home Purchase Applications Approved (%, RHS) Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Chart : NAR Mortgage Affordability Index and Share Saying Now is a Good Time to Buy Good Time to Buy (% respondents, LHS) NAR Affordability (Index, RHS) Worse time to buy/ Affordability declining Jun- Jun- Jun- Jun- Jun- Jun- Sources Thomson Datastream, NAR, Ellie Mae, Fannie Mae..... US Housing Market Monthly

4 Activity Mortgage applications for house purchase increased by.% m/m in September. (See Chart : Mortgage Applications (Index) Chart.) That rise was helped by a surge in the final week of the month, which will partly have reflected applications being rushed through to avoid the TRID disclosure requirements that came into effect on the rd October. But applications still appear to be growing even if that final week is excluded comparing the first three weeks of September For Refinancing (LHS) For Home Purchase (RHS) with the first three weeks of August they were up by.%. Chart : New & Existing Home Sales (Millions Annualised) However, a lack of inventory will continue to act as a drag on home sales particularly existing home sales. Indeed, after making a very strong start to the year, existing home sales fell back in August. (See Chart.) Set against that, with housing starts making steady headway, new home sales finally seem to be on a rising trend..... New Home Sales (LHS) Existing Home Sales (RHS)..... The lack of stock appears to have hit realtors confidence in the sales outlook for singlefamily homes over the next six months. (See Chart.) Nevertheless, at in August the index remains above the level recorded in late. Meanwhile, the Fannie Mae House Purchase Sentiment Indicator picked up in September, as the share of households thinking now is a good time to buy or sell recovered from a recent drop. The rise in consumer sentiment towards the housing market may be linked to early evidence that the easing in credit conditions is helping first-time buyers back into the market. According to the NAR survey, FTBs made up % of sales in August, up from % the previous month. (See Chart.) But that is still low by historical standards, which implies there is plenty of scope for more buyers to enter the market. Chart : NAR Single-Family Outlook Confidence Index and Fannie Mae House Purchase Sentiment Indicator NAR Confidence (LHS) HPSI (RHS) Chart : First-Time Buyer Share of Total Home Sales (%) Historical norm Sources Thomson Datastream, MBA, NAR US Housing Market Monthly

5 Supply Market conditions are still tight. The share of homes for sale or rent but vacant has been on a steady downwards trend for the past five years. (See Chart.) Indeed, in the second quarter of this year the homeowner vacancy reached a -year low of.%, while at.% the rental vacancy rate has not been this low since the mid-s. Admittedly, the dip in existing sales in August meant that the months supply of homes for sale ticked up to., from a -year low of. in July. (See Chart.) But that is still low on a historical basis. The months supply of homes is close to where it was during the housing boom of the mid-s, and substantially below the average over the past years of.. The low levels of inventory primarily reflect a lack of existing homes for sale. By contrast, the new-build sector looks to be in relatively good health. Although housing starts dropped back in July and August, that primarily reflected the expiry of a tax-break in June for multi-family developments in New York. Indeed, the rise in building permits in August indicate that the volatility caused by the tax-break has already worked itself through, and starts are set to resume their upwards trend in September. (See Chart.) Chart : Homeowner and Rental Vacancy Rate (%) Homeowner Vacancy Rate (LHS) Rental Vacancy Rate (RHS) Chart : Months Supply of Unsold Homes Chart : Housing Starts and Building Permits (s, Annualised) Building Permits (Advanced m) Housing Starts So while the inventory of existing homes has Chart : Existing & New Homes for Sale (Millions) remained more or less constant since, that rise in homebuilding has helped the inventory of new homes to recover from, in... Existing Homes For Sale (LHS) New Homes For Sale (RHS).. August, to, in August. (See.. Chart.) And looking ahead, with homebuilder confidence elevated, housing starts and the... new home inventory should see further gains... Source Thomson Datastream, NAHB US Housing Market Monthly

6 Prices The CoreLogic measure of house prices recorded a substantial.% m/m (seasonally adjusted) increase in August, the biggest gain since March. (See Chart.) But given the propensity for the first estimate to be revised down July was also originally estimated at.%, before being revised down to.% - we wouldn t be surprised if this initial estimate is knocked back in due course Chart : CoreLogic House Prices (Seasonally Adjusted, % m/m) Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul That said, it is clear that house price growth has picked up over the past couple of months. Indeed, the annual rate on the CoreLogic measure is now at.%, the highest reading since June. (See Chart.) There are also signs that the Case-Shiller measure is finally picking up. Prices increased by.% m/m in July, and that has pushed the annual rate up to.% - a -month high. Meanwhile, the FHFA measure of the price of homes bought with mortgages backed by Fannie Mae or Freddie Mac reported annual growth of.% in July. House price pressure is increasing due to the low inventory of homes for sale. Indeed, if anything, growth is slower than might be expected given that the months supply of homes is close to a -year low. (See Chart.) House prices will also be supported by elevated house price expectations. Despite the slowdown in house price inflation during the first half of the year, there was no decline in expectations for house price growth over the next months. (See Chart.) That would suggest potential buyers will be willing to up their bids when looking for a property, in the belief that their home is set to increase in value. - Chart : Alternative Measures of House Prices (% y/y) CoreLogic Case-Shiller National FHFA Chart : Months Supply of Homes and House Prices Months' Supply of Homes (Inverted, Adv. m, LHS) CoreLogic House Prices (%y/y, RHS) Inventory down, prices up Chart : Realtors & Consumers Expected Change in House Prices Over Next m (%) - - Realtors' Expectations Consumers' Expectations Jun- Feb- Oct- Jun- Feb- Oct- Jun- Feb- Sources Thomson Datastream, CoreLogic, FHFA, Fannie Mae, NAR US Housing Market Monthly

7 Regional/State Trends With house prices on the national Case-Shiller measure more or less flat from March to June, it is not surprising that some cities have seen month-on-month falls. Indeed, on the -city measure, only nine cities recorded a rise in prices during July. (See Chart.) That follows a period from October to March this year when all cities saw consecutive gains the longest such period since the series began in. Looking at individual city performance, Chicago continues to prop up the bottom of the table, with a drop of.% m/m in July. (See Chart.) Concerns around an increase in city property taxes are still weighing on prices there. Prices dipped in both San Francisco and L.A. although this doesn t appear to represent a California-wide slowdown, as San Diego saw the largest gain of.%. As mentioned above, national homeowner vacancy rates have been on a downward trend in recent years, and are now just below the average from to. But that national figure hides a wide variation across states. (See Chart.) In principal, the relatively low vacancy rates in Florida and D.C. suggest prices may be under more pressure there than elsewhere. But the fact values in Washington D.C. and Miami have weakened over the past couple of months may be due to house prices in both states also being in the top most overvalued when compared to incomes. Low vacancy rates in D.C. have spurred building activity in the district, with building permits per, people significantly above average. (See Chart.) Conversely, the still large numbers of homeowners with underwater mortgages in Nevada are dissuading builders from breaking ground in the silver state. Chart : Number of Cities in Case-Shiller -City Index Experiencing Month-on-Month House Price Gains Chart : Case-Shiller House Prices by City (% m/m, July, Seasonally Adjusted) Chart : Vacancy Rates Relative to - Average, Q (% points). Rate below long-run average Rate above long-run average Chart : Building Permits Per People, Deviation From - Average, Q States furthest above/least below average level States furthest below average level Sources Thomson Datastream, Capital Economics US Housing Market Monthly

8 The Home-buying Timeline & Data Summary THE HOME-BUYING TIMELINE Typical Timeline Data (s.a.) Published by Previous Data Latest Data Month Strengthening (+)/ Weakening (-) Advanced indicators months Consumers' plan to buy home in months (index) Conference Board.. Sep (+) to closing Homebuilders' expected sales in months (index) NAHB Sep (-) Begin search - weeks to closing Traffic of prospective buyers (index) NAHB Sep (+) Mortgage application - weeks to closing For home purchase (%m/m) MBA -.% +.% Sep (+) Contract signing - weeks to closing Pending home sales (%m/m) NAR +.% -.% Aug (-) Homebuilder sales (index) NAHB Sep (+) New home sales (%m/m) Census Bureau +.% +.% Aug (+) Contract closing weeks Existing home sales (%m/m) NAR +.% -.% Aug (-) to closing FHFA house prices (%m/m) FHFA +.% +.% Jul (+) Register transaction week after closing Case-Shiller national house prices (%m/m) Case-Shiller.%.% Jul (+) DATA SUMMARY Monthly Indicators (s.a.) %m/m(%y/y) May June July August September Prices Case-Shiller National +.%(+.%) +.%(+.%) +.%(+.%) - - CoreLogic Inc. Distressed +.%(+.%) +.%(+.%) +.%(+.%) +.%(+.%) - FHFA +.%(+.%) +.%(+.%) +.%(+.%) - - Sales Total Home Sales +.%(+.%) +.%(+.%) +.%(+.%) -.%(+.%) - New +.%(+.%) -.%(+.%) +.%(+.%) +.%(+.%) - Existing +.%(+.%) +.%(+.%) +.%(+.%) -.%(+.%) - Pending Sales +.%(+.%) -.%(+.%) +.%(.%) -.%(+.%) - NAHB Homebuilders' Activity (index) Supply Total Months' Supply of All Homes New.... Existing Housing Starts -.%(+.%) +.%(+.%) -.%(+.%) -.%(+.%) - Residential Construction Spending +.%(+.%) +.%(+.%) +.%(+.%) +.%(+.%) - Mortgage Data Total Mortgage Applications -.%(+.%) -.%(+.%) -.%(+.%) +.%(+.%) +.%(+.%) For Purchase +.%(+.%) +.%(+.%) -.%(+.%) -.%(+.%) +.%(+.%) For Refinancing -.%(+.%) -.%(-.%) +.%(+.%) +.%(+.%) +.%(+.%) Mortgage Rate ( year fixed, %)..... Quarterly Indicators (s.a.) Q Q Q Q Q Mortgage Delinquency Rate (%)..... Mortgage Foreclosure Inventory Rate (%)..... Seasonally adjusted by Capital Economics. Number of months it would take to clear supply at current rates of sale. US Housing Market Monthly

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