Although employment and home price levels have returned to or exceeded normal levels of activity, new-home construction during the fourth quarter of 2016 remained tepid in many markets due to regulatory and supply-side constraints, according to the National Association of Home Builders/First American Leading Markets Index (LMI) released today.
The index’s nationwide score inched up to .99, meaning that based on current permit, price and employment data, the nationwide average is running at 99 percent of normal economic and housing activity. However, when breaking down the three major components of the index, single-family permits are running at just 52 percent of normal activity, while employment is at 98 percent and home prices are well above normal at 147 percent.
Part of the reason why home prices have jumped in many metro areas is directly related to the paucity of permits, creating an imbalance between supply and demand.
“Though rising, single-family permits continue to lag behind the other components of the LMI,” said NAHB Chief Economist Robert Dietz. “This is due to a number of factors, including regulatory hurdles and supply-side headwinds such as persistent shortages of lots and labor in many markets. As we address these challenges, we should see an additional increase in housing production.”
“While housing continues to gradually mend, regulatory constraints are preventing builders from meeting demand in many markets,” said NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, Texas. “We expect further improvement in the year ahead as we work with the new Trump administration and Congress to implement regulatory relief that help small businesses and the housing sector.”
A recent survey of NAHB members found that their top two concerns this year are the cost and availability of labor and developed lots.
Richard Van Osten, executive vice president of the Builders League of South Jersey, summed up the problem succinctly: “It’s been more difficult to find lots to build on.”
Despite these challenges, the housing market continues to make gradual gains. The LMI shows that markets in 174 of the approximately 340 metro areas nationwide returned to or exceeded their last normal levels of economic and housing activity in the fourth quarter of 2016. This represents a year-over-year net gain of 60 markets. Moreover, 86 percent of markets have shown an improvement year over year.
“More than 250 markets, or 75 percent of all metro areas nationwide, now stand at or above 90 percent on this quarter’s Leading Market Index,” said Kurt Pfotenhauer, vice chairman of First American Title Insurance Company, which co-sponsors the LMI report. “This shows that the overall housing market continues to improve at a moderate pace.”
Baton Rouge, La., continues to top the list of major metros on the LMI, with a score of 1.73 — or 73 percent better than its last normal market level. Other major metros leading the group include Austin, Texas; Honolulu; Provo, Utah; and San Jose, Calif. Rounding out the top 10 are Spokane, Wash.; Nashville, Tenn.; Charleston, S.C.; Los Angeles; and Salt Lake City.
Among smaller metros, Odessa, Texas, has an LMI score of 2.10, meaning that it is now at more than double its market strength prior to the recession. Also at the top of that list are Midland, Texas; Ithaca, N.Y.; Walla, Walla, Wash.; and Florence, Ala.
The LMI examines metro areas to identify those that are now approaching and exceeding their previous normal levels of economic and housing activity. Approximately 340 metro areas are scored by taking their average permit, price and employment levels for the past 12 months and dividing each by their annual average over the last period of normal growth. For permits and employment, both the 12-month average and the annual average during the last period of normal growth are also adjusted for the underlying population count. For single-family permits and home prices, 2000-2003 is used as the last normal period, and for employment, 2007 is the base comparison. The three components are then averaged to provide an overall score for each market; a national score is calculated based on national measures of the three metrics. An index value above one indicates that a market has advanced beyond its previous normal level of economic activity.
In calculating the LMI, NAHB utilizes employment data from the Bureau of Labor Statistics, house price appreciation data from Freddie Mac and single-family housing permits from the U.S. Census Bureau. In 2015, the Census Bureau revised the manner in which it obtains monthly counts of MSA single-family permits data. To maintain consistency within the LMI, NAHB excluded certain MSAs and improved comparability with previous years for the remaining areas. The LMI is published quarterly on the fourth working day of the month, unless that day falls on a Friday—in which case, it is released on the following Monday. For historical information and charts, please go to nahb.org/lmi.