Real Estate Research
Real Estate Research provides analysis of topical research and current issues in the fields of housing and real estate economics. Authors for the blog include the Atlanta Fed's Kristopher Gerardi, Carl Hudson, and analysts, as well as the Boston Fed's Christopher Foote and Paul Willen.
November 23, 2016
Commercial Construction Update: Third-Quarter 2016
The Atlanta Fed's Center for Real Estate Analytics conducts a quarterly commercial construction poll to keep a finger on the pulse of the industry as it relates to the performance of the economy. In this post, we will discuss a few of the more interesting results from our third-quarter poll. To view all of the results, please visit the Construction and Real Estate Survey web page.
Pace of multifamily construction appears to be slowing
After several years with most incoming reports indicating that the pace of multifamily construction activity had increased from the year-earlier level, it seemed noteworthy that indications from contacts were much more mixed in the third-quarter report. Half of respondents noted that activity had increased from the year-ago level, but the rest indicated that activity was flat to down.
These reports seem to align with the incoming Census Bureau data on multifamily starts through November 17, which, when aggregated to a quarterly frequency, reveal a slight decline (-6.2 percent) from the year-earlier level.
Available finance perceived to be sufficient to meet demand
Since about the second quarter of 2013, the majority of our commercial construction contacts have indicated that the amount of available commercial construction finance has been sufficient to meet demand. Interestingly, the share reporting that credit was insufficient to meet demand spiked in the first quarter of 2016 and remained high into the second quarter. The reports from our commercial construction contacts seemed to align closely with the results of the April and July Federal Reserve Board's Senior Loan Officer Opinion Survey (SLOOS) on the lending environment in the first and second quarters. The survey suggested that banks had tightened their standards for commercial real estate loans.
Interestingly, the most recent survey results deviated from the SLOOS. The share of contacts in our commercial construction poll that indicated credit was insufficient to meet demand continued to drop in the third quarter despite the fact that results from the October 2016 SLOOS indicated that banks continued to tighten their standards for commercial real estate loans. Granted, our commercial construction poll and the SLOOS pose slightly different questions to different types of respondents, but the divergence in results that have typically trended in a similar fashion seems notable nonetheless.
More hiring on the horizon?
Each quarter, we poll our contacts about their hiring plans. The majority (74 percent) in the third quarter indicated that their fourth-quarter hiring plans entail increasing head count by a modest to significant amount. This increase is more or less consistent with the entire history of responses; most respondents have always indicated their hiring plans were flat to up.
The last time such a large fraction of respondents indicated they had plans to increase their head count was more than two years ago, back in the second quarter of 2014. Since a large share of respondents answered the same way, can this be taken as a signal that hiring will indeed increase in the coming quarter? To investigate, we charted quarterly figures for construction new hires using the Bureau of Labor Statistics' Job Openings and Labor Turnover Survey to get a sense for what happened the last time contacts overwhelmingly indicated they had plans to increase hiring and used markers to call attention to second- and third-quarter figures of 2014.
It appears the number of construction hires did in fact increase between the second and third quarters that year, so perhaps this most recent result will serve as a leading indicator. We will keep an eye on this series to see if there is an increase in the number of construction hires in the fourth quarter of 2016.
August 27, 2015
The Multifamily Market: Is a Hot Market Overheating?
Moody's/RCA National commercial property price index, which is based on repeat-sales transactions, has risen 36 percent over the past two years. Such increases in commercial real estate (CRE) prices have raised concerns that the market is overheating (see here). Multifamily is one CRE property type that for a couple of years has been attracting a great deal of lender interest and thus growing concern regarding potential overheating (see here).
Looking around Midtown Atlanta, it is easy to wonder if multifamily housing construction is getting ahead of itself. According to the Midtown Alliance, within just a 0.5-square-mile portion of Midtown Atlanta, 981 units have been recently delivered, 3,392 units are under construction and 4,732 are in various stages of planning. Dodge Pipeline reports that the entire Midtown/Five Points submarket has 4,865 units under way. For reference, peak activity in the Midtown/Five Points area from 2003 to 2007 was 4,636 units under construction with a total of 10,831 units completed. The question arises as to what extent are happenings in Midtown indicative of the broader market trend.
Yield spreads—the capitalization rate on recent apartment transactions (current rental income divided by sales price) minus the yield on Treasury bonds—serve as one indicator of optimism in a market. A narrow spread is consistent with reduced pricing for risk, which is associated with “frothiness.” According to Real Capital Analytics, apartment yield spreads in the second quarter of 2015 stood at 366 basis points (bps), which is around 250 bps higher than prerecession lows and in line with 2003–04 levels (see chart 1). So by this measure, apartment activity does not appear too frothy on a nationwide market basis.
Of course, yield spreads vary significantly by market area and by property type. Breaking the U.S. market into six major markets (Boston; New York; Washington, D.C.; Chicago; San Francisco; and Los Angeles) and all others reveals that the major markets have seen yield spreads fall relative to all other markets. (The major markets account for 36 percent of transaction dollars with New York and San Francisco alone accounting for 20 percent of the U.S. total.) Though shrinking during the last several quarters, the current 150 bps gap between the major and non-major markets is wider than at any time since 2002. One possible explanation is that the anticipated rent growth of the projects sold in the major markets is higher than in nonmajor markets.
So what to make of this? While multifamily markets have been active during the postrecession period, this activity is not necessarily unjustified. Given that the population of 20- to-34-year-olds will continue to grow, demographics point to greater demand for rental property (see chart 2). Supply has not yet shown signs of deteriorating fundamentals since vacancy rates have remained low as new product has been delivered, and rent growth has held steady (see chart 3).
How long will preferences for renting persist? How long can real rents continue to grow? How is this new activity being financed? If new projects are penciled out using unrealistic rent growth assumptions and demand falls, rent growth expectations won't be met and the projects may look overdone in retrospect. Regardless of whether current activity indicates overheating, it seems important to keep a close eye on demand.
By Carl Hudson, director for the Center for Real Estate Analytics in the Atlanta Fed's research department
February 25, 2015
Has the Pendulum Swung Back to Neutral? Looking at Credit Availability
Statements since March 2014 from the Federal Open Market Committee, including the last one, indicate that the recovery in the housing sector remains slow. Last year, when the Atlanta Fed looked at measures of housing affordability (see, for example, these posts from the Atlanta Fed blogs macroblog, SouthPoint, and Real Estate Research ), we concluded that in light of the still relatively high readings of affordability measures, it was likely that some other factor was the main culprit in dampening the housing recovery. Access to credit is not included in affordability measures, so in this post, we turn our attention to the question of whether financing might be a headwind to a more robust housing recovery.
The availability of credit is an important driver of housing market activity. During the downturn, our contacts often mentioned that the pendulum had swung too far in the direction of looseness when economic times were good. And during the recovery, they said the pendulum had swung too far in the direction of tightness. In this post, we'll discuss several indicators of credit availability and answer the question, where does the credit availability pendulum hang now?
First, let's look at the Atlanta Fed's monthly poll* of residential brokers and home builders. Beginning with the late 2012 poll, we occasionally included a special question for our panel of real estate business contacts about how available they perceived credit to be. When the Consumer Financial Protection Bureau's (CFPB) Qualified Mortgage (QM) rule went into effect in January 2014, we began asking the credit availability question every month to pick up on subtle changes in perceptions. (The dots on the blue line in chart 1 show the frequency of the question.)
Results from the latest poll suggest that mortgage credit availability is improving. A growing share of business contacts (three-fourths of residential brokers and two-thirds of home builders) reported that the amount of available mortgage finance was sufficient to meet demand. To track the direction of the trend over time, we charted the results in the form of a diffusion index (see the blue line in chart1). A diffusion index value greater than zero signifies that the majority of builders and agents reported that there is enough available credit to meet demand, while a value less than zero signifies that the majority do not believe available credit is sufficient to meet demand. The chart clearly shows that many builders and agents believe there is enough available credit.
Second, let's consider the Mortgage Credit Availability Index (MCAI) that the Mortgage Bankers Association produces on a monthly basis (the green line in chart 1). The MCAI is an index constructed using underwriting criteria from more than 95 lenders and investors. Even though the diffusion index is a qualitative measure and the MCAI is a quantitative measure, the series are highly correlated (ρ=0.73), and both suggest that credit availability has been slowly but steadily improving since early 2013.
Third is the Federal Reserve Board's Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), which polls large domestic and foreign banks every quarter about demand for and the availability of credit. In the SLOOS, banks are asked to indicate whether credit standards for approving mortgage loan applications have tightened, remained unchanged, or eased over the past three months. The latest results, shown in chart 2, reflect recently introduced categories that align with the Consumer Financial Protection Bureau's qualified mortgage rule. Like the previous two series, seen in chart 1, the SLOOS also appears to suggest that lending standards have eased. Note that the net tightening response for prime lending is loosening by a similar or greater magnitude as it did some years during the boom—2006, for example.
So has the credit availability pendulum returned to its neutral resting position? It's hard to say for certain, but there is clearly evidence to suggest that it is at least slowly moving in that direction.
*The monthly poll of brokers and builders was conducted January 12–21, 2015, and reflects conditions in December 2014. Fifty-seven business contacts around the Southeast participated: 23 homebuilders and 34 residential brokers. To explore the latest results in more detail, visit the Construction and Real Estate Survey web page.
By Jessica Dill, senior economic research analyst in the Atlanta Fed's research department
November 18, 2014
Can the Atlanta Fed Construction and Real Estate Survey Predict Home Sales?
The slow recovery in housing remains an item of note in statements from the Financial Open Market Committee. That it's still something of a concern means that many people pay attention to housing-related data releases, several of which are due out this week, because they can shed some light on the direction of housing and the economy. The builder confidence index, released today, got things off to a good start by showing a four-point rise, from 54 to 58 (values greater than 50 mean that more builders view conditions as good rather than as poor). House starts and existing sales are due Wednesday and Thursday, respectively.
At the Atlanta Fed, we conduct a monthly survey of regional builders and real estate brokers to get their perspectives of the market. In August, we began to look at the results a little differently to see if they could tell us anything about subsequent housing-market data releases. In that exercise, we investigated the correlation between the expectations of our homebuilder contacts for construction activity and subsequent housing starts. We found that our builders are on point, more or less, and we reported on that discovery in an August post. We recently repeated the exercise, this time to explore the predictive power of the outlook for home sales of our homebuilders and residential brokers for subsequent new and existing home sales data releases. We report on our findings in this post.
Brokers and builders expect new home sales to rise
The September home sales data showed us that existing single-family home sales increased by 1.9 percent from the year-earlier level and new home sales increased by 22.6 percent. This news is fairly consistent with the reports we received from our real estate business contacts about September sales activity; more brokers and builders noted an increase than noted a decrease in home sales activity from the year-ago level.
But what exactly did our survey respondents tell us about their outlook for home sales? Diving deeper into the data, we find that brokers' and builders' outlooks remain mildly positive and that the two groups have tracked each other fairly closely in recent years. (In the pre-2011 period, brokers and builders diverged more sharply.) Specifically:
- Of builder respondents, 40.0 percent indicated that they expect new home sales to increase over the next three months, 32.0 percent expect activity to decline, and 28.0 percent expect home sales activity to remain about the same. The home sales outlook diffusion index value for builders was 0.08.
- Of broker respondents, 22.5 percent indicated that they expect new home sales to increase over the next three months, 27.5 percent expect activity to decline, and 50.0 percent expect home sales activity to remain about the same. The home sales outlook diffusion index value for brokers was -0.05.
The chart below features two scatter plots of the diffusion index value for the broker and builder home sales outlook on the horizontal axis and the year-over-year change in the three-month moving average of single-family home sales (for Alabama, Florida, Georgia, Louisiana, Mississippi, and Tennessee) on the vertical axis. Given that we are asking contacts to be forward-looking, we lag the contact responses.
Do home sales expectations correlate with subsequent sales data?
Three things stand out on this chart. First, if builders and especially brokers (who tend to be an optimistic lot) predict a decline, the subsequent home sales data release will probably be poor. Only a modest bit of net optimism is of little comfort—some of the worst declines occurred in years with net positive (albeit small net positive) outlooks.
Second, for builders, if the index is greater than 0.3, we find that sales generally grow—except for between August 2012 and April 2013, when sales did not match builders' optimism. When the broker index is above 0.3, sales either grow or decline by a smaller amount than when the index is negative. Like the builders, the broker panel missed the sales declines from August 2012 and April 2013. The brokers also missed the declining real estate market in 2006 to early 2007 (see the green triangles in the chart above)—despite a declining market, the broker index remained lofty until May 2007.
Third, the official statistics on housing sales could go either way when index values are between ‑0.1 and 0.3. This shouldn't come as a complete surprise, particularly because a diffusion index value near zero (regardless of whether that value is positive or negative) indicates that responses from contacts were mixed. And as we can see in the scatter plot above, large declines were much more likely given the time period covered.
A simple regression indicates that the outlook could explain just under 50 percent of the variation in sales measure, which indicates that our poll does a decent job of predicting subsequent sales. Given this finding, what do we now expect home sales to look like? The most recent downward trend in respondents' outlook puts the diffusion index in the center, suggesting that declines in seasonally adjusted sales over the next several months are just as likely as increases in sales.
The poll was conducted October 6–15, 2014. Sixty-five business contacts across the Southeast participated (40 residential brokers and 25 builders). To explore the latest poll results in more detail, please visit our Construction and Real Estate Survey page.
By Carl Hudson, director for the Center for Real Estate Analytics in the Atlanta Fed´s research department, and
Jessica Dill, senior economic research analyst in the Atlanta Fed's research department
June 11, 2014
Signs Point to Slow but Steady Construction Growth
After bottoming out in early 2011 and following an upward trend for two years, national new house sales on a seasonally adjusted basis have been essentially flat since January 2013 and are at a pace about half that of 2000–01. Over the past month, speeches by Fed Chair Janet Yellen and Reserve Bank presidents John Williams, William Dudley, and Charles Plosser have included references to a slowing housing sector in the face of strong fundamentals as a source of economic uncertainty. They mentioned many reasons for the slow pace of housing´s recovery, including difficulties in increasing housing supply (that is, construction).
In the Southeast, we hear from our housing contacts that it remains difficult to acquire construction financing and that funding of land acquisition and development projects is extremely difficult. In the most recent Southeast Housing Market Poll, most builders continued to report that the amount of available construction and development finance fell short of demand (see the chart). Concern regarding the lack of readily available construction financing is not unique to the Southeast and may be part of the reason for the recent slowing in the housing sector. Fortunately, it appears that construction financing may in fact be getting a bit more accessible.
A key input to construction is the availability of financing. We explored construction lending trends in a few of our posts last year (here and here). The most recent bank lending data indicate several reasons to believe that banks continue to return to construction and development as a line of business.
Aggregate bank construction and development lending remains well below its 2008 peak (see the table). That said, more than half of the banks with a construction business line are expanding their single-family residential construction lending. Interestingly, the median March 2013 year-over-year growth rate in residential construction lending was positive, yet aggregate 1–4 family construction loans fell from March 2012 to March 2013, which means that lots of smaller lenders were growing. The good news is that the March level of 1–4 family construction loans increased in 2014 for the first time since the recession ended.
Although banks appear to be lending for residential construction (the "vertical" part of homebuilding), we cannot say the same for lot development (the "horizontal" portion). The data is a bit less clear on this front because lending for raw land and land development is lumped together with loans for all construction that is not for 1–4 family structures. Aggregate lending for "other construction, all land development and other land" increased year over year, but the median growth rate was negative. That is, more banks are pulling back from this activity than are growing, but the ones that are growing are the ones with larger volumes. Considering that lenders have viewed multifamily construction favorably, it is more likely that the growth in lending is attributable to multifamily loans rather than to lot acquisition and development.
The Fed presidents I mentioned in the first paragraph were optimistic about housing in large part because population growth and household formation both point to an inevitable increase in housing demand. The evidence from bank construction lending supports this idea that growth will continue, but it also suggests that the recovery will continue at its slow and steady pace.
By Carl Hudson, Director, Center for Real Estate Analytics in the Atlanta Fed´s research department