The resale and new home market continues to improve nationwide. The National Association of Realtors reported that previously-owned homes sold at an annual pace of 4.92 million, 9% higher than this time last year. Home prices were up 12.3%, taking the median to $173,600. That marked the biggest percentage gain since January 2005. And foreclosed home sales made up only 23% of January sales, compared to 35% of sales a year ago. It looks as if the national market has finally passed bottom. The improvement is being driven by tight housing and real estate inventories, increased demand from buyers, and a drop in sales of distressed properties. Which all are good signs for ultimately the economy as job creation, such as construction and materials begin to improve.
But for us in Texas, the real estate market turned two years ago, and is very strong compared to the rest of the country. Almost all Texas metros are experiencing shortages of real estate in some channel. Mostly residential, but office, commercial, and retail have all seen the market improve and the need for new product. We are constantly asked why the finance side can’t react to this opportunity, and the answer is that 18 months ago, it would have been considered crazy to start any new real estate due to the economy.
Building permits through the roof
Building permits, traditionally an indicator of future construction – reached their highest point in four years at the end of last year (2012). Three weeks ago, the US Census Bureau reported that building permits nationally had risen 23.6% in January 2013, to a seasonally adjusted annual rate of 890,000, from the January 2012 rate of 720,000. This continued improvement is what the economy needs.
However good the rebound has been, construction continues at historically very low levels, as evidenced by this chart looking back to 1968, from calculatedriskblog.com. Average housing starts over the period 1990-2011 were almost 1.4 million, and at the top of the market in 2006, 1.9 million. 2012 construction starts were 43% below this long-term average. Let’s put this in perspective, aside from the years of 2009-2011, construction starts in 2012 were at their lowest level since 1959, when the Census began reporting housing starts.
Construction activity focused on apartments. In 2012, 31% of new home starts were in multi-unit buildings, as opposed to single family homes. That move toward rentals drove multifamily to its highest share of the construction market in the last twenty years. Traditionally multi-unit buildings/apartments have accounted for just 20% of new home starts, on average. Strong rental demand, as well as overbuilding in some sprawling single-family neighborhoods during the boom, has pushed developers to focus more on multi-unit construction. Here in Texas, Austin and Houston saw a large amount of focus in multifamily the last two years. San Antonio and DFW have not been as aggressive, but still have plenty of new multifamily construction.
Texas has weathered the recession without much damage to values. A total of 6,718 building permits for single-family homes were issued in January 2013. In the 12 months ending in January 2013, a total of 76,937 permits were issued, 22 percent more than in the previous year. There were 3,992 multi-family building permits issued in January 2013. During the 12 months ending in January 2013, a total of 53,295 permits were issued, 54 percent more than in the previous year.
The smaller cities of San Antonio and Austin saw slower growth than Dallas or Houston, but both still posted double-digit percentage increases. San Antonio issued 46 more single-family home permits this January than it did the same month last year – a 12% gain. For Austin, those numbers were a little higher – 91 and 15%, respectively. The Dallas-Fort Worth Metro growth rate of 24% over last January for single-family permits exceeded the statewide rate by a couple of points. In sheer volume, that means 306 more permits, for a total of 1562 projects that got started in Dallas this January. In Houston, the numbers are through the roof. Houston outpaced every other metro in Texas at a rate almost double the state average. All in all, 43% more single-family home permits were issued this January than January 2012 for The Bayou City. That’s nearly 800 more permits.
Even with all this activity, we have not had the traditional construction rebound in new construction jobs. Despite the 28% increase in construction starts between 2011 and 2012, nationally residential construction jobs actually fell 1.2% between December 2011 and December 2012 (though there was a slight uptick at the very end of 2012). Construction jobs are down 23% since December 2008, when construction starts were running at close to the 2012 level. And construction employment is down 45% from its peak in April 2006, at the height of the construction boom.
In Texas, Houston and Dallas led the nation in the most new construction jobs in December 2012. The Houston metropolitan area added the most jobs nationally — 17,600 jobs or a 10 percent increase from a year earlier. The Dallas area was second, adding 8,300 jobs or 8 percent. Across Texas, the construction industry added 35,600 jobs last month for a gain of 6 percent. Compared to the national job creation, by December 2011, Texas employers replaced all 427,600 jobs shed during the recession as the Texas economy rebounded more quickly than the US as a whole, and continues to add jobs. Nationally, through November 2012 only 52 percent of recession-hit jobs have been recovered.
So yes, Texas has recovered and continues to create the jobs, but the rest of the country is lagging way behind.
Stocks are at a five year high, with solid earnings, another sign that the economy is stronger. This is far outside this analyst’s expertise, but last week we saw the Dow Jones industrial average move to a record high. On Tuesday, the Dow set an intraday all-time high at 14,286.37, which many say is a sign of the economy healing. And in the world of politics, partisans on both sides are quick to point to the Dow as generic confirmation that their policies are working.
Auto sales are strong
Auto sales are one of the 11 key indicators used to calculate GDP. The recovering US auto industry should continue to improve, as they hit their stride this last year with new vehicle offerings, increased pickup-truck demand, and a stable economy that helped push sales above 15 million. Pickup truck sales are expected to outpace the broader US auto market this year, helped along by a recovering housing market. Why is this good news? Small business are among the largest purchasers of pickup trucks, and an investment in capital goods shows confidence in their local economy. Secondly, auto manufacturer’s focus on trucks, where traditionally profit margins are larger compared to cars. Pickup trucks made up about 11 percent of the US market last year, well below the historical average of 17 percent.
Manufacturing activity accelerated to its fastest pace in nearly two years
Manufacturing in the United States is reviving, slowly and at a pace that will cause slow employment growth in 2013. However, it does appear that small- and mid-sized manufacturers are expecting increased revenues and profits. The Institute for Supply Management Manufacturing Index is an index based on surveys of more than 300 manufacturing firms. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. By monitoring the ISM Manufacturing Index, investors are able to better understand national economic conditions. When this index is increasing, investors can assume that the stock market will increase because of higher corporate capacity and profits showing the improvement of an economy. The opposite can be thought of the bond markets, which may decrease as the ISM Manufacturing Index increases because of sensitivity to potential inflation.
Net worth is almost back to prerecession numbers
The total net worth of US households and non-profits is nearly back to 2007 levels, according to flow of funds data released by the Federal Reserve. The rebounding housing market and booming stock market helped household net worth climb $1.17 trillion over the fourth quarter of 2012. The increase brought total net worth for households and non-profits up 9 percent from the end of 2011 to nearly $66.1 trillion. That’s the highest it’s been since the end of 2007, when the net worth for those categories totaled $66.12 trillion.
The improved value of financial assets owned by US households grew by $784.4 billion in the fourth quarter 2012 and by nearly $3.8 trillion overall of 2012. The improving national housing market helped considerably. The value of real estate owned by households grew by about $450 billion in the fourth quarter and by $1.4 trillion over the year. Americans’ household equity – the portion of their home values that they own, rather than their mortgage lender – rose to 46.6 percent at the end of 2012, up sharply from 40.5 percent at the end of 2011.
Indicators of a languishing economy
Interest rates, already near zero, will not go down. Consumer spending and business investment have not changed that much. Keeping middle class income taxes and the alternative minimum tax from rising is also a no-change step; same goes for the one-year reprieve for unemployment insurance. None of the measures legislated at the year-end ‘fiscal cliff’deal will increase total private spending, which would have been useful right now. Given that drag, the economy will limp along at best.
Other than Texas, where are the jobs?
Texas has created close to 50% of all new jobs the last couple of years, and only seven states are at prerecession numbers. We haven’t seen the employment picture get better.
Barring a new recession — now unlikely — the Fed’s new 6.5% unemployment rate target will be approached the hard way: Not with new jobs, but mainly because workers desert the labor force, take retirement, or just drop out. Last Friday’s unemployment numbers were improved, not because of new jobs, but because workers quit looking and applying for unemployment. The number of Americans designated as “not in the labor force” in February was 89,304,000, a record high, up from 89,008,000 in January, according to the Department of Labor. This means that the number of Americans not in the labor force increased 296,000 between January and February. The Bureau of Labor Statistics (BLS) labels people who are unemployed and no longer looking for work as “not in the labor force,” including people who have retired on schedule, taken early retirement, or simply given up looking for work. The increase marks the second month in a row, after rising in January from 88.8 million in December. Those not in the labor force had declined in December from 88.9 million in November. Of course, some of those in the “not in the labor force” are not of working age. It is estimated that in 2011, 80 million of that number are 65 and older or less than 18. Still, over 8 million folks that could be in the labor force is too many.
Congress and the White House were unable to reach a deal on budget sequestration. As a result, we face $85.3 billion in federal budget cuts in 2013, with the number rising steadily each subsequent year to a total of approximately $1.2 trillion over ten years.
What’s the economic impact going to be? In the short term, it appears to be pretty severe. Most analysts think we could see almost a full percentage point cut off growth in the second and third quarters of GDP. The most visible initial impact will be civilian layoffs in the military and furloughs at defense contractors. Other impacts will be a bit harder to see. A nearly 10 percent cut in Section 8 housing assistance vouchers, for example, won’t directly lead to layoffs. But the hardship inflicted on low-income families will mean reduced sales for the businesses they patronize with downstream consequences. All told, the Bipartisan Policy Center thinks full implementation could lead to a million fewer jobs next year.
In Texas, budget sequestration is estimated to cost the state $16.039 billion in Gross State Product. That is 1.23 % of the state’s total GDP for 2012.
• 159,473 jobs will be lost in Texas
• 98,979 of the jobs will be because of defense spending
• 60,494 if the jobs will be because of cuts in non defense spending
• Texas stands to lose $67.8 million in education funding, putting about 930 teacher and aide jobs at risk
• Head Start services would be slashed for 4,800 children
• About 52,000 Department of Defense employees will be furloughed
This is basically a picture of a slowly improving economy that is showing modest growth. All of this uncertainty and lack of confidence has caused slower inflation, subdued job growth and a weakening GDP the last two years.
So which is it? Is the economy mproving or not improving? First, count your blessings if you live in Texas. Even with the drag of the national economy, Texans continue to see improvement in job growth, real estate growth, state and regional GDP growth and hopefully, personal income growth.
We hope to influence what is happening nationally. The good news is regionally we have seen the local and regional housing market have “a positive feedback loop”. Basically, when consumers see and think home prices are rising, they think they will continue to do so. They also think credit conditions will improve and this in turn increases home purchases. Home prices regionally have picked up on the back of four key things – low inventory, high affordability, reduced shadow inventory, and a positive feedback loop. The region’s recovery has been more about restarting from a plateau, rather than from a bottom, which helps.
ven with the volatility in economic indexes, and the inability of the Federal Government to reach a fiscal compromise, the US and regional Texas consumer are showing that they believe that long term the economy is improving.