Why Housing Data Is Worth Watching
The sector's potential for improvement could make a difference for GDP growth, says Morningstar's Bob Johnson.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here with Bob Johnson, he is our director of economic analysis. We're going to get an update on the housing market.
Bob, thanks for joining me.
Bob Johnson: It's great to be here today.
Glaser: So, we talk about housing every now and then. It seems like it's relatively small part of GDP, I think around 3%. Why is it worth paying attention to what's happening in housing?
Johnson: It absolutely is. And it's one of the sectors that can still improve. We've talked a little bit about how we think the automobile market has stalled out, the aerospace market has stalled out. But there's still some potential in the housing market in that it's in the mid-3s in terms of percentage to GDP. But on average, it's been as high as 5% on average, and it's been the highest numbers around 7% of GDP. So, that's one of the few categories that obviously has some room to continue to grow. So, that's the real positive on the number.
The other positive on residential investment is that it's a number that even though it isn't very big, it's a number that moves a lot. If the sector grows 10% a year, and I said it's 3% of GDP, just for round numbers, that's 0.3%. Frankly, that's about what it's averaged most of this recovery, that 0.3%. Well, that's a big number relative to GDP growth that we've been talking of 2.1%. And so, those swings in residential investment actually make a big difference.
Glaser: Let's look at the data then, first with existing homes. Why does this matter to the economy? Isn't it just a private transaction?
Johnson: Yeah. When we first started in this, we really didn't pay much attention to existing homes because it literally is a transaction like transferring a stock or whatever. You're not building anything. But the commissions on those homes do count as an investment. And it's 6% to 8% of the home price for commissions, it is a big number. And so, it's not as big as building a new home from scratch, but it's certainly a big number. And it's part of the GDP calculation.
And we got news this week on existing home sales. They happen to be down month to month. But I'll tell you, with any housing data I'm very reluctant looking at month-to-month numbers because they are so volatile and weather-dependent, I like to look at the year-over-year average data. And there, existing homes are more like 1%, 2% growth, so not very much there, and I don't see a lot of room for improvement there.
Inventories in that category are down about 8% year over year. And if you've got no stock of goods to sell, it's going to be hard to boost those numbers a lot. We've actually gotten a little bit efficient. Transactions have happened a little faster. So, we actually have moved up sales a little despite those shrinking inventories. But I don't think that can go on for a lot longer. And obviously, what we've got, there's a lot of baby boomers and those slightly older are remaining in their homes in retirement. As the demographics begin to show up with more 31-year-olds again, you've got this where nobody is moving out of their homes and you've got new demand for homes and you're creating this squeeze and that's been an issue.
Glaser: If the existing home sale inventories aren't growing, are homebuilders stepping into that void? Are we seeing big increases in new home construction?
Johnson: Absolutely. There the inventories are--and again, we got a report on new home sales this week--and inventories there are up about 10% year over year and lo and behold, guess what, new home sales are actually up about 11%. So, whether the inventories driving sales or the other way around, I'm going to stay out of that debate. But nevertheless, where we've got high inventories, we've also had some pretty darn good growth rates. That's a very important part of GDP. But unfortunately, there's about 10 times as many existing home transactions per year as there are new home sales. So, again, it's not as a big a difference as one might hope.
Glaser: Looking at building permits, anything that sticks out there?
Johnson: Yeah. Now, we got the building permits last year and we always like to triangulate around those, around the new home sales and existing home sales data. On the permits data, on the single-family side, we're up about 6.3% year over year, which is quite a bit lower than the 11% I had talked about earlier.
Why is that? Well, the new home sales report only includes sales of tract homes, the big projects, if you will. It doesn't include if you build, if you contract with a builder to build a home or a builder builds a couple on spec on a few lots that he has. That doesn't count in the new home sales, but it counts in the single-family permits data. And clearly, that's an area that's not growing quite as fast, but still at 7% it beats the heck out of existing homes still.
Glaser: And there are some signs in multifamily that that could be slowing?
Johnson: Multifamily has been having some issues for a time. It had a great run. The demographics really favored apartments. And for a while we had some real shortages, some big price increases, and I think the builders really stepped in where they could and built those numbers up a little bit. And now, I think, at the high end, there's some oversupply there, and clearly, the permits on the multifamily are about flat year over year now. So, that's a category that's been a big adder to the economy that will no longer be contributing nearly as much.
Glaser: What's happening with pricing?
Johnson: We got some data on pricing from FHFA again today. Again, we don't worry too much about the month-to-month data, but we are up 6% again year over year which we've been doing for some time. The problem with that 6% price increase, for a while we're, kind of, we're cheerleaders and we love that number because it got everybody's equity up and it let people get out from underwater mortgages, it brought the financial system back. But now, if we keep growing 6%, 7% in terms of real estate prices every year, that's going to destroy affordability and put another roadblock in front of increasing housing. So, I don't obviously want to see those collapse, but I'd certainly rather see 4% or 5% home price growth, something that looks more like income growth than 6%, which clearly every time we go up another 6%, it means it's less affordable because the incomes are only going up 4%.
Glaser: Final piece of data here is on home improvement. Are people who are staying in their homes investing in them?
Johnson: That's been one of our big thesis and our big hopes. And frankly, some of the data seems to support that. I mean, we've had good news out of most of the building material store stocks and certainly, that's been good news. But if you look at the official government data and in terms of improvements, it's only up about 2.5% year over year in the first quarter, so not growing as fast as any of the major new home sales categories.
So, that's a little surprising. I mean, if people are kind of stuck in their home because they can't find something else, you think they would be remodeling a little bit more. Now, we did have a big correction in the data about a year, and I'm wondering if that's still filtering through the system a little bit. They were having some measurement issues at the government with this category. But I'm still surprised that it's not doing any better.
Glaser: Bob, thanks for the updates today.
Johnson: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.