NAHB Has a New Way to Measure Housing Recovery

News

The National Association of Home
Builders (NAHB) is introducing the latest in a series of indices it has
employed to measure housing within a broader context of the economy.  The first in our memory was the Improving
Markets Index (IMI), introduced early in the recession and using 2007 as a benchmark
to determine the post-downturn recovery of hundreds of cities and towns.  This index was retired sometime in 2012 or
2013 and replaced by the Leading Markets Index (LMI) which switched the focus
to the progress of communities in regaining their own (pre-recession) levels of
activity.  Both used three data sets for
the assessment; Bureau
of Labor Statistics employment data, Freddie Mac information on home prices,
and U.S. Census counts of single-family housing permits.  Now the LMI has been shelved (not sure
exactly when, as we retired our coverage of it quite some time ago) and this
week NAHB unveiled its replacement, the Home Building Geography Index
(HBGI). 

The HBGI uses U.S. Census Bureau
counts of county-level building permit data, both single and multifamily, to segment
the United States housing market.  According
to the first Eye-on-Housing blog post about the index written by Litic Murali, subsequent
posts will have “several, mutually exclusive categories into which the 3,221
counties are methodically delineated.”

The first cut, for the first quarter
of this year, is a region-based delineation of the counties, with each region
differentiated from each other by population density.  This resulted in seven regions, Large
Metro – Core County
, highly urbanized areas; Large Metro – Suburban
County
, inner and outer suburbs of larger metropolitan areas; Large
Metro – Outlying County
, exurbs of larger metropolitan areas; Smaller
Metro – Core County
, urbanized areas and inner suburbs of small
metropolitan areas; Smaller Metro – Outlying County, outer suburbs of
small metropolitan areas; Micro county, small towns; and Non
Metro/Micro County
, rural areas.

The initial analysis focuses on the
trends in single- and multifamily construction as they occurred in the “exurbs”
(categorized as Large Metro – Outlying County above.)  Most serve as commuter towns and enable more
affordable construction due to greater availability of land.

Although the exurbs have only a
small share of permit activity and single-family permit activity consistently
exceeds that for multifamily construction, their first quarter annual growth
rate in single-family permit activity was high at 1.6 percent.  The annual
growth of 5.6 percent was the highest among the regional geographies in the
HBGI.

When interest rates
increased in 2018 housing affordability hit a 10-year low on the NAHB/Wells
Fargo Housing Opportunity Index. The lower
priced housing in the exurbs tends to be less sensitive to price changes and
were not as impacted by the higher rates as the closer-in suburbs.  As land is generally more available and
cheaper in exurbs than suburbs, permitting increased in an otherwise
challenging quarter.

Murali says that, geography aside,
it is important to consider where home building is today in comparison to the period
before the housing boom that preceded the financial crisis of 2008 and the Great
Recession.  The first quarter of 2003 is
a good point to compare the current single- and multifamily national permit
levels.

As of the first quarter of 2019,
single-family permit activity, adjusted for population, registered at 57
percent of that in the first quarter of 2003.  This share relative to 2003 was unchanged from
the fourth quarter of 2018. Additionally, multifamily permit activity, adjusted
for population was at 99 percent of the first quarter of 2003 level, up from 96
percent the prior quarter.

Turning to multi-family permitting, Murali says economic theory suggests
that apartment construction should expand first in high population, high
land-cost areas
and then move to lower-cost markets over the course of a
business cycle. The expected trends are reflected in HBGI data which shows 40
percent of apartment construction in the first quarter was in the category of large
metropolitan area core counties.  Another
26 percent in large metro suburbs and 21 percent in small metro cores.  The remaining 13% was spread out across
exurbs, small towns, and rural areas.

But the data also shows some apartment construction moving to outlying areas
with lower population density. For example, there was deceleration in the four-quarter
moving average growth rates of construction in those areas where most of it takes
place.  In large and small metro core
areas the rates declined by 1.2 percent and 0.2 percent respectively and by 4.4
percent in large metro suburbs.  In contrast,
double-digit gains for growth were recorded in the exurbs, small city suburbs
and some rural areas.

While challenging housing affordability conditions at the end of 2018, which
slowed single-family construction, had an impact on where apartment
construction is taking place the first quarter 2019 data gives some limited
indications the moving average may change direction again.  Core counties of large and small metro areas
posted a quarterly increase (first quarter 2019 compared to first quarter 2018
permit activity), as demand for rental units increased going into 2019.

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