More housing starts will lead to an increase in ready-mixed concrete volume.

We have been hearing about the downdrafts that have kept a lid on new housing starts and new home sales for a couple of years now: lack of lots, rising interest rates, labor shortages throughout all the trades, and the biggest downdraft of all: housing affordability, or so we are told.

So now we read that the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index (HOI) reports that housing affordability actually improved in the first quarter.

What?

It appears strong wage growth more than offset an increase in mortgage interest rates to boost nationwide housing affordability in the first quarter of 2018, according to the report. In all, 61.6% of new and existing homes sold between the beginning of January and end of March were affordable to families earning the U.S. median income of $71,900. This is up from the 59.6% of homes sold that were affordable to median-income earners in the fourth quarter of 2017. Average mortgage rates jumped by nearly 30 basis points in the first quarter to 4.34% from 4.06% in the fourth quarter of 2017.

Of the 237 metropolitan areas recorded in the first quarter HOI, 167 markets registered a gain in affordability from the fourth quarter of 2017, 68 posted a loss, and 2 were unchanged. Youngstown-Warren-Boardman, Ohio-Pa., was the nation’s most affordable major housing market. There, 90.9% of all new and existing homes sold in the first quarter were affordable to families earning the area’s median income of $60,100. Meanwhile, Cumberland, Md.-W.Va., was rated the nation’s most affordable smaller market, with 98.5% of homes sold in the first quarter being affordable to families earning the median income of $55,500.

And it comes as no surprise that San Francisco, for the second straight quarter, was the nation’s least affordable major market. There, just 9.2% of the homes sold in the first quarter of 2018 were affordable to families earning the area’s median income of $119,600. But all five of the least affordable small housing markets were also in California. At the very bottom of the affordability chart was Salinas, where 10.7% of all new and existing homes sold were affordable to families earning the area’s median income of $69,100.

And separately, it appears while wage growth is strengthening, which I wrote about recently, and is therefore driving up affordability, this trend has buoyed the confidence levels of America’s homebuilders. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI), which is a monthly measure of builder confidence in the market for newly-built single-family homes, rose two points to a level of 70 in May after a downward revised April reading. This is the fourth time the HMI has reached 70 or higher this year.

The solid May report shows that builders are enthusiastic about growing consumer demand for single-family homes. Tight housing inventory, employment gains, and demographic tailwinds should continue to boost demand for newly-built single-family homes, the report says, a sentiment very consistent with our own. With these fundamentals in place, the housing market should improve at a steady, gradual pace in the months ahead.

I have written about these indexes in the past, and for ready-mixed concrete producers, they are the ideal “wet finger in the wind” to measure the direction of homebuilder confidence, which is a factor in housing starts, and in turn an important component of ready-mixed concrete volume. Derived from a monthly survey that NAHB has been conducting for 30 years, the NAHB/Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

The HMI chart gauging current sales conditions increased two points to 76 in May while the indexes measuring buyer traffic and expectations in the next six months remained unchanged at 51 and 77, respectively. Looking at the three-month moving averages for regional HMI scores, the West and Northeast held steady at 76 and 55, respectively. Meanwhile, the South and Midwest each edged down one point to respective levels of 72 and 65.

Both the HOI and the HMI are indexes we watch closely in our practice, and they can be an early indicator the market direction, and in turn, pull-through of ready-mixed concrete volume from the housing industry.

 

Pierre Villere Pierre Villere

Pierre G. Villere has been a contributing editor for The Concrete Producer for over a decade, and serves as the President and Senior Managing Partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry. He has a career spanning more than four decades, and volunteers his time to educating the industry through his regular articles and presentations. Contact Pierre via email.