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Beige Book: Housing for rest of 2014 won’t make up for Jan-April slump

Weakness in housing shines through in Fed report

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Residential real estate activity was mixed across the country, with some reports of low inventories constraining sales, while home prices continue to increase driven by investor purchases, according to the new Beige Book from the Federal Reserve.

Residential construction activity was mixed, with half the Districts reporting increases but a few indicating some weakening in activity.

“Overall lending activity increased throughout the nation. Roughly two-thirds of the Districts reported rising loan demand, with particular strength reported in New York and San Francisco,” said the comprehensive report from the central bank released Wednesday. “Credit quality and delinquency rates generally improved, while credit standards were mostly unchanged.”

National Sales

Residential real estate activity has been mixed since the last report, with a lack of inventory at times cited as a constraining factor more than weather for a change.

Boston, New York, and Kansas City indicated that existing home sales were being held back due to low or dwindling inventories.

Sales rose modestly in the Cleveland, Richmond, Atlanta, Chicago, and Dallas Districts, with inventories described as low in Richmond and Chicago and declining in Cleveland.

Sales activity, however, softened in the Philadelphia, St. Louis, Minneapolis, and San Francisco Districts, though Philadelphia did note some signs of improvement in May. San Francisco attributed some of the weakness to severe weather. Home prices continued to increase across most of the Districts; Boston reported some pullback in prices of single-family homes, though condo prices in that District, as well as in New York, rose. New York, Chicago, and Dallas reported strengthening demand for apartment rentals, whereas Boston noted some slackening in demand. 

National Construction

Homebuilders gave mixed reports on new home sales and construction in recent weeks: Residential construction strengthened, to varying degrees in the New York, Richmond, Atlanta, Chicago, Kansas City, and Dallas Districts. However, Philadelphia, St. Louis, and Minneapolis indicated some weakening in new home sales and construction.

Overall residential construction activity was mixed across the San Francisco District, though contacts there expect activity will increase over the next year. Both Boston and New York reported a good deal of recent multi-family development at the high end of the market, while Cleveland, Richmond, Atlanta, Chicago, and Dallas noted strength in multi-family construction more generally. 

First District – Boston

Sentiment across First District residential real estate markets can be summarized as generally positive, as contacts express optimism despite March data indicating year-over-year declines in single family home sales and in median sales price for single family homes in four of the six states. (Contacts in New Hampshire were unavailable for comment, while Maine saw an increase in sales and Rhode Island saw median prices rise.)

For Rhode Island, Massachusetts, and Connecticut, sales also declined year-over-year in February. Respondents attribute the declines in single family homes sales to inventory shortages, weak employment security, and uncertainty surrounding changes to flood maps and flood insurance legislation. Lack of inventory remains the predominant constraint in Massachusetts, which once again saw available inventory decline relative to last year.

While contacts indicate that inventories are beginning to expand in parts of Massachusetts as new sellers enter the market, they emphasize that inventory shortages cannot be resolved without new construction. Need for additional units, especially in the first time homebuyers market, is also noted in Connecticut, where multiple bids have started to occur and contacts state that developers are beginning to build. In Maine and Connecticut, short sales and foreclosures continue to be released to market, partially contributing to the decline in median sales prices.

Second District–New York

The District's housing markets have picked up since the last report, buoyed by improving weather; however, low inventories are said to be a restraining factor in some areas. Contacts in the Buffalo-Niagara region indicate that housing demand remains brisk, though an exceptionally low inventory of available homes has held back sales volume; bidding wars are reported to be fairly common for prime properties.

More broadly, the number of existing homes on the market is lower than a year ago across both New York State and northern New Jersey. One industry contact in New Jersey reports that, while there remains a big overhang of distressed properties, the inventory of available new and existing homes is very low; builders are seeing improved activity and are increasingly optimistic, but remain reluctant to build inventory. 

New York City's sales market remains robust–particularly in the outer boroughs. While sales volume has not kept pace with elevated 2013 levels, one contact surmises that the weather may have pushed the peak spring season back a couple months. A major appraisal firm reports that prices of Manhattan co-ops and condos have risen moderately this year and are now nearly back to their peak levels of 2008; this contact also notes that nearly half of all residential (apartment) sales have been all-cash deals, in part from foreign buyers. Selling prices for Brooklyn and Queens apartments continue to rise briskly. Manhattan's rental market, which had been flat, has shown signs of a modest pickup in recent months, while strong demand continues to drive up rents in Brooklyn and Queens. The inventory of available condos and co-ops across the city remains lean, except at the high end of Manhattan's market, where there has been a good deal of new development. 

Third District–Philadelphia

After weathering the cold winter slump followed by a little pick up in March, Third District homebuilders reported a renewed slowdown. The strong spring sales season – for which many Third District builders had hoped – did not materialize.

Instead, builders reported that contracts for new homes were well below last year's levels and even further below their 2014 plan. This is also true for their local competitors, large and small.

One Pennsylvania builder indicated a general malaise, citing less customer traffic, more competition from existing homes sales, and a resurgence of concern among potential buyers that they would be unable to sell their existing homes. Residential real estate brokers reported some improvement in May; however, April sales were uniformly negative in most major markets on a year-over-year basis.

Throughout the Third District, brokers expect sales to improve, but they no longer expect to recapture all of the "lost" sales from the first four months of the year.

Fourth District–Cleveland

Sales of new single-family homes improved during the past six weeks, and the number of units sold was higher than during the February/March time frame. Most of the Fed’s contacts noted that year-over-year sales were slightly higher. Existing single-family home purchases also started to improve in April. Reports indicated that the inventory of existing homes decreased, while the number of days on the market rose slightly. New-home contracts were mainly in the move-up price-point categories. First-time buyers continued to experience difficulty obtaining credit, especially for condominiums. Selling prices of new homes are trending slowly higher (5 to 10 percent from a year ago) due to rising labor, development, and material costs. Buyers are reportedly more accepting of the higher prices. Homebuilders believe that the housing market will grow at a slow but sustained pace in 2014.

Fifth District–Richmond

There was slight improvement in the District's housing market since the last report, with increased buyer traffic and mild strengthening in sales for low to mid-priced homes. Home sales rose slightly in the Charlotte, Fairfax, Greensboro, Fredericksburg, and Richmond metro areas. In contrast, a broker in Myrtle Beach and another in Washington, D.C. reported flat sales. Most contacts said that home prices increased mildly.

Housing inventory increased, but remained at low levels throughout the District. The absorption rate improved in the past few weeks. While buyers were generally described as cautious and conservative, brokers reported that multiple offers and sales above asking price had become more common. A Charleston, South Carolina Realtor stated that the market for mid-range homes was tight and the average "days on the market" was in single digits. New single family construction increased in South Carolina, North Carolina, and Virginia. A Washington, D.C. Realtor said that new home prices were rising faster than prices for existing homes.

Sixth District–Atlanta

More District brokers reported growth this period than the previous report. Roughly two-thirds of broker reports indicated that home sales had increased from the year earlier level. Most brokers indicated that inventory levels continued to decline on a year-over-year basis. The majority of contacts continued to report that home prices remained ahead of the year earlier level. The sales outlook among brokers was notably stronger relative to the Fed’s last report. 

Reports on current conditions from District builders were also more positive than the previous report. Most contacts reported that recent activity either met or exceeded their plan for the period. The majority of builders reported that construction activity and new home sales were ahead of the year earlier level. Reports on the level of unsold inventory were somewhat mixed. The majority of contacts continued to report modest home price appreciation. The outlook among builders for new home sales and construction activity was somewhat less optimistic than the previous report.

Seventh District–Chicago

Growth in construction and real estate activity picked up, but remained modest in April and May. Contacts attributed the increase in activity to more favorable weather conditions, and expected moderate growth for the remainder of the year.

Demand for both single- and multi-family residential construction improved. Existing home sales rose slowly, but real estate contacts expected activity to pick up as inventories return to levels that are more normal. Home prices and residential rents grew moderately.

Eighth District–St. Louis

Sales of new and existing homes have declined across most of the largest metro areas in the District. Compared with the same period last year, April 2014 year-to-date total home sales were down 12 percent in Little Rock, 5 percent in Louisville, 5 percent in Memphis, and 14 percent in St. Louis. Residential construction also has declined across the District. Compared with the same period last year, March 2014 year-to-date single-family housing permits decreased 26 percent in Little Rock, 17 percent in Louisville, 4 percent in Memphis, and 4 percent in St. Louis.

Ninth District–Minneapolis

The extended winter negatively affected commercial construction activity. The value of April commercial and hotel permits in Billings, Mont., fell from last year. In Sioux Falls, S.D., April permits were down 69 percent from a year ago. Residential construction decreased from last year. The value of April residential permits in Sioux Falls fell by 10 percent from a year earlier. In the Minneapolis-St. Paul area, April residential permitted units decreased compared with April 2013. The value of April single-family residential building permits in Billings was up from last year, but multifamily building was down.

Tenth District–Kansas City

Real estate and construction activity increased modestly in late April and early May, with stronger seasonal activity anticipated in the coming months. Construction supply and builder contacts reported stronger activity compared with both the previous survey period and last year. Builders reported moderate growth in the number of starts and potential buyer traffic, and housing starts were expected to rise over the next few months. Residential realtors reported steady home sales since the last survey period but expected a modest increase in sales due in part to seasonal factors. Residential home inventories continued to drop and home prices increased further. The market for low- and medium-priced homes remained more robust than the market for higher-priced homes. Mortgage activity was moderately lower than a year ago due to a decline in refinancing activity, but increased since the last survey and was expected to increase in coming months.

Eleventh District–Dallas

Activity in the housing sector was strong over the reporting period. Respondents reported a seasonal pickup in both traffic and home sales, although one contact noted a slight slowing in the pace of activity. Home prices continued to increase but at a slower pace than last year. Land and lot prices remained elevated due to limited supply, and one contact noted that it is becoming difficult to underwrite loans in a few areas at these prices. Robust apartment demand continued to keep vacancies low even with high levels of construction activity. Moderate increases in rents were reported in several major Texas metros. Housing and multifamily contacts were optimistic in their outlooks.

Twelfth District–San Francisco

Demand for homes stepped down, while activity in commercial real estate markets expanded. Home prices across the District continued to move up, although at a slower pace in parts of Arizona, Idaho, and Washington relative to the previous Beige Book. The pace of home sales slowed or declined in some areas as well, but most contacts expect sales to pick up later this year. Contacts indicated that severe weather conditions and low expected future growth of house prices were the most important factors holding back home sales on a national level. Reports on current construction of residential properties varied substantially across geographic areas, although the vast majority of contacts expect housing starts in their region to rise over the next 12 months. Commercial real estate activity improved, with lower vacancy rates reported in many areas. Contacts reported robust demand for large blocks of high-quality commercial space in the San Francisco Bay Area. In several regions, public infrastructure projects and a number of high-rise commercial construction projects have been announced or are under way.

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