“Investor” used to be a dirty word back during the housing boom when short-term flippers pumped up the demand for all types of homes, including new construction.  The downside to flipper investors was their short term horizon and their propensity to avoid options and upgrades and instead go for the cheapest homes available.  Additionally, even today many argue that investment activity is bound to re-enter the market at some point, so the perception is that investment activity is not good.  But for housing overall, the investor share of all purchases was actually higher in 2011 than in 2005, and we can be thankful for that as it is serving to clear much of the distress and oversupply of existing housing.

We measure investor activity as homes purchased by those who do not live in the home full time, so investment homes also include second homes and vacation homes.  According to data from Housing IntelligencePro, 40% of all bank sales of foreclosed homes, 28% of resales, and 13% of new home sales were to investors so far in 2011.  Just think of how bad the year would have been without this activity!

Clearly new homes have not been as appealing to investors, although the investor share is higher than in 2005.  Which markets proved to be most attractive to investors in 2011?  Generally markets where investment activity was high for all home sale types, which were markets that either had significant distress (Michigan), offered attractive second home destinations (Hawaii and Florida), or large urban markets with a lot of condominiums at relatively low prices (New York).  Want more detail?  Keep an eye out for the January edition of Builder Magazine, we’ll break down these trends further, and reveal which home builders are benefiting the most from investor activity.

In broader housing news, sales activity in October improved for both new and existing homes.  Both posted steady increases in sales from September levels while seeing home sales jump noticeably from October of last year.  It is important to keep in mind, however, that home sales this year are being compared to depressed levels this time last year after the federal homebuyer tax credit expired.  Existing home sales have increased for four straight months now while new home sales increased for the second consecutive month in October which does exhibit some underlying strength in demand currently in the housing market.

The U.S. economy continues to show further evidence of steady improvement.  Despite talk of a double-dip recession all year and recent reports putting chances of another recession next year at above 50%, GDP growth remains at a steady and healthy rate.  The economy grew 2% in the third quarter which marks the 9th consecutive quarter that it has expanded.  The labor market is looking better with the unemployment rate falling to its lowest levels since March 2009 in November.  Job growth is steady with its 14th consecutive month of payroll gains in November.  Consumer confidence is also recovering which is evidenced by a strong start to the holiday shopping season.  Leading economic indicators also point to continued growth in the months ahead.  In October, the leading index recorded its largest one-month gain since last November and increased for the sixth consecutive month.

If the labor market and economic conditions continue to improve, we can expect a solid year for housing in 2012.  But Europe continues to be the main focus.  If conditions in Spain and/or Italy start to crumble, all bets are off.

The Economy
The U.S. economy added 120,000 payrolls in November on a seasonally-adjusted basis.  This marks the fifth consecutive month that the economy has added at least 100,000 jobs.  It is also the 14th consecutive month that the economy has experienced job growth.  Job figures for September and October were also revised higher with an additional 124,000 more payrolls that previously reported.  Private-sector service industries continued to be the leader in job creation, adding 146,000 jobs in November.  The construction industry shed 12,000 payrolls in November while the government sector lost 20,000 jobs.

Continued gains in employment helped the U.S. unemployment rate improve to 8.6% in November from 9.0% in October.  This is the lowest the unemployment rate has been since March 2009.  The unemployment rate has not recorded a monthly increase since June and this is the second straight month that it has declined.  A combination of a smaller labor force and more unemployed people helped contribute to the decline in the unemployment rate last month.

The underemployment rate, which includes those that are looking for work but have given up and those who are working part-time but would prefer to be working full-time, decreased to 15.6% in November from 16.2% in October. It is also lower than it was this time last year when it stood at 17.0%.

First-time unemployment claims increased by 6,000 to a seasonally-adjusted figure of 402,000 in the week ended November 26th from an upwardly revised figure of 396,000 in the previous week.  This is the second straight week that claims have increased.  The rise in jobless claims was higher than most economists were expecting.  First-time jobless claims have hovered around the 400K level for the past couple of months.  With initial jobless claims at these levels, it will be difficult for the unemployment rate to experience any meaningful improvement going forward.

Consumer confidence in November rebounded after experiencing significant declines in two out of the past three months. The consumer confidence index jumped to a reading of 56.0 from an upwardly revised October figure of 40.9. The consumer confidence index was at its lowest level last month since April 2009 but increased 15.1 points in November to its highest reading since July.

Preliminary estimates for third quarter GDP growth showed the economy growing at a slower pace than advance estimates suggested.  The U.S. economy expanded at a 2.0% pace in the preliminary third quarter report which was revised down from 2.5% in advance estimates.  This marks the ninth straight quarter that the U.S. economy has expanded.  It is still the quickest rate of growth since the fourth quarter of last year.  A large downward revision in business spending was the main reason GDP was revised lower which offset positive revisions in trade activity.

Housing Market
National average mortgage increased from the previous week to 4.00% with an average 0.7 points in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on December 1st.  Mortgage rates remain historically low and have hovered around 4.0% for the past five weeks.  Rates have now averaged under 5.0% for 41 straight weeks and have averaged under 4.5% for 18 straight weeks.

In the week ending November 25th, the MBA’s seasonally-adjusted purchase index declined 0.77% from the previous week.  Before this week’s decline, the purchase index was at its highest levels since May.  Overall mortgage application activity this past week dropped 11.7% due to a significant decline in refinance activity along with a moderate decline in purchase activity.

Both new and existing home sales improved slightly in October.  However, pricing in both groups were lower than the previous month.  Record-low mortgage rates along with slightly lower home prices have made both new and existing homes as affordable as they have ever been.  High levels of affordability along with a moderately improving job market are starting to drive some demand for housing.

New home sales in October increased 1.3% from the previous month to a seasonally-adjusted annual rate of 307,000 units.  This is the fastest pace for new home sales since May.  This is the second straight month that the pace of new home sales has increased.  However, new home sales for the previous three months were revised lower by 15,000 units.

In October, median new home prices declined to $212,300 from a September figure of $213,300.  This is the fourth consecutive month that median new home prices have declined and the lowest they have been since October of last year.  Median new home prices are up 4.0% from this time last year but are 1.3% lower than they were this time two years ago.

Lower prices and falling mortgage rates helped the new home affordability reach a new all-time record high in October.  The new home affordability ratio increased again to a reading of 62.8% in October from a revised September reading of 62.4%.  The index has now increased for four straight months.

In October, new home inventories declined from the previous month to 162,000 units on a non-seasonally adjusted basis.  New home inventory on a non-seasonally adjusted basis has not recorded a monthly increase since May 2007.  On a seasonally-adjusted basis, new home inventory remained unchanged from the previous month also at 162,000 units.  New home inventories are at new all-time record lows.  Based on the current sales pace, there are now 6.3 months of new home inventory on the market in October.  This matches the lowest months of new home inventory on the market since June 2006.

Existing home sales increased in October to a seasonally-adjusted annual rate of 4,970,000 units which is 1.4% higher than the 4,900,000 units in September.  Sales activity in September was revised slightly lower by 10,000 units.  Existing home sales are 13.5% higher than they were compared to the 4,380,000 units in October of last year.  This is the fourth straight month that existing home sales have recorded year-over-year gains.  However, year-over-year comparisons may be a bit skewed because they are being compared to depressed levels this time last year after the federal homebuyer tax credit expired.

Pricing trends remained weak in October.  The median sales price of an existing home declined to $162,500 from $165,800 in September.  This is the second straight month that prices have declined. Existing home prices have not experienced a monthly increase since June.  Median existing home prices are now at their lowest levels since April.  The median existing home price is 4.75% lower than the same time last year when the median price was $170,600.

Lower home prices along with falling mortgage rates helped affordability rise to a new all-time record high in October.  The existing home affordability ratio increased to 72.2% in October from a revised reading of 71.4% in September.  This is the fourth consecutive month that the existing home affordability ratio has increased.

Existing home inventory continued to improve in October which will help home prices stabilize sooner.  Inventory of existing homes declined 2.2% from the previous month to a preliminary figure of 3.33 million units.  This is the fourth consecutive month that existing home inventory has declined and the lowest it has been since January 2010.  Months of inventory improved last month due to an increase in sales activity coupled with the decline in inventory levels.  At the current pace, there are 8.0 months of existing home supply on the market.

U.S. residential construction activity declined slightly in October.  Total housing starts declined 0.3% from the previous month to a seasonally-adjusted annual rate of 628,000 units.  Housing starts for the previous two months were revised lower by 15,000 units.  A 13.3% drop in multi-family starts (5+ units) was the primary cause for the decline in overall construction activity while single-family housing starts increased 3.9% last month.

Building permits jumped in October due to gains in both the single and multi-family segments.  Total building permits increased 10.9% from the previous month to a seasonally-adjusted annual rate of 653,000 units.  Single-family building permits increased 5.1% from September to a seasonally-adjusted annual rate of 434,000 units while total multi-family building permits, which include 2-4 unit and 5+ unit buildings, increased 24.4% from last month to a seasonally-adjusted annual rate of 219,000 units.

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