Data from the most recent Survey of Construction (SOC), which is conducted by the Census Bureau’s Manufacturing and Construction Division and partly funded by the Department of Housing and Urban Development (HUD), reveals some interesting trends on new home building. This particular study focuses on recently released information for homes that were started in 2012.
The interesting thing about looking at homes is that a start occurs before a completion and can therefore detect changing trends slightly earlier, according to Paul Emrath, Ph.D. who writes on Economics and Housing Policy for the National Association of Home Builders’ (NAHB).
“During the latest downturn, for example, the median size of new single-family homes started began to decline in 2007, a year before the annual trend showed up in homes completed,” he reports. “After 2009, however, that trend reversed itself and the median size of new homes started increased steadily, with the annual number breaking above 2,300 square feet for the first time in 2012.”
In addition to square footage, several other new home characteristics show an upward trend after 2009 based on SOC findings.
The average number of bathrooms in new single-family homes rose to a new high of 2.56 in 2012 following a period in which it edged down to as low as 2.20 in 2009. The average number of bedrooms in newly started homes also declined during the downturn, but has since very gradually increased. In fact, at just under 3.5, the average number of bedrooms remained fairly flat when compared with the trends in both median square footage and average number of bathrooms.
According to Emrath, the pattern of temporary decline in house size during a downturn followed by recovery and resumption of the upward trend has happened before - the last time coincident with the recession and recovery of the early 1980s. Many experts thought that the decline in the 2000s was due to factors that would prove to be more permanent, such as desire to keep energy costs down.
When the size of new homes began to rise again in 2010, tight credit conditions were squeezing many first time and other marginal buyers out of the market. As of 2012, housing markets had only recovered to a modest extent, so an atypical mix of buyers in the market could still be a factor behind the ongoing upward trend in the size of new homes.
With the size of new homes edging up slightly, the SOC data shows financing trends remained relatively stable through 2012, underscoring the importance of government insured loans in the new home market.
“During most of recent history, conventional loans have accounted for at least 80 percent of new home financing. During the peak years of 2005 and 2006, for example, conventional loans accounted for over 85 percent of the new home market. At that time, the share financed with FHA or VA insured loans shrank to 5 percent, leading some observers to wonder at the time if government insured loans were serving a significant purpose,” Emrath reports.
Beginning in 2008, the effects of the financial crisis and housing downturn result in a declining share of conventional financing in favor of alternatives. Then, as the new home market contracted, the conventional loan share of the market dropped sharply to under 60 percent. Cash or other made up part of the difference, but the increasing share of loans insured by FHA and VA was particularly dramatic - from 5 percent in 2006 to as high as 27 percent in 2010. Last year, those numbers were in the same ballpark with 59 percent conventional, 24 percent FHA/VA and 18 percent cash/other.
The policy implication is clear, according to Emrath.
During boom times, government insured mortgages may seem unnecessary, but the insurance is sorely needed to prop up activity during a severe downturn and subsequent recovery.