Housing Starts Look Perfect!

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The Census Bureau report released today shows that housing starts missed their estimates for last month. But before I talk about this report, I would like give some observations about the housing market. When the stock market is down between 10%-15% from a peak, I typically get different groups of people asking me what is wrong. Similarly, in the last 3 weeks many people either involved in the housing market or regular folks who happen to be currently involved in a housing transaction, have been asking me what the heck is going on. These people were real estate agents, home buyers, home buyers in escrow, home sellers, loan officers, economist, builders and wall street analyst. This an outpouring of concern is more intense than what I experienced in 2014 when sales and purchase applications were down, year over year.  So why are people nervous just because inventory rose, year over year,  but demand didn’t?  This is confusing some people.

There is more discussion on this on my recent interview with Bloomberg.

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https://www.bloomberg.com/news/audio/2018-07-30/us-housing-market-continues-its-slow-steady-growth-mohtashami

Despite the concern, the housing market in 2018 looks exactly as I expected.  It’s only the housing market over hyping machine that can’t explain why total mortgage demand and housing starts are still low. I, on the other hand, have never wavered from my core belief that we will not see 1,500,000 housing starts in this decade because demand doesn’t warrant it. That number should be reached at some point in years 2020-2024. This thesis has proven to be correct this entire cycle even with this long economic expansion and over 156,000,000 people working.

The slow and steady housing start story continues!

From Census: https://www.census.gov/construction/nrc/index.html?CID=CBSM+EI

CENSUS Housing Starts

The Census Bureau report released today shows that housing starts missed estimates coming in at 1,168,000. Additionally, the previous month’s numbers were revised lower.  Even though the headline numbers were a miss, the housing starts and permits have had slow and steady growth for this entire cycle. These numbers should also be taken in the context of higher labor cost, higher lumber prices and higher mortgage rates this year.

From Census:
https://www.census.gov/construction/nrc/pdf/newresconst.pdf

Building Permits:

Privately-owned housing units authorized by building permits in July were at a seasonally adjusted annual rate of 1,311,000. This is 1.5 percent (±1.3 percent) above the revised June rate of 1,292,000 and is 4.2 percent (±1.7 percent) above the July 2017 rate of 1,258,000. Single-family authorizations in July were at a
rate of 869,000; this is 1.9 percent (±1.4 percent) above the revised June figure of 853,000. Authorizations of units in buildings with five units or more were at a rate of 410,000 in July.

Housing Starts:


Privately-owned housing starts in July were at a seasonally adjusted annual rate of 1,168,000. This is 0.9 
percent (±11.5 percent)* above the revised June estimate of 1,158,000, but is 1.4 percent (±11.7 percent)* below the July 2017 rate of 1,185,000. Single-family housing starts in July were at a rate of 862,000; this is
0.9 percent (±9.6 percent)* above the revised June figure of 854,000. The July rate for units in buildings with five units or more was 303,000.

This report showed that the recent down turn in housing starts has stopped.  Until we see at least 4-6 months of declining year over year numbers, with negative new home sales, I wouldn’t read too much into this. Housing starts data like new home sales data can be very volatile month to month, which is why revision trends are key. In the last few months revisions have tended to be negative for both housing starts and new home sales but still showing growth for the year.

From Calculated Risk:
https://www.calculatedriskblog.com/2018/08/housing-starts-at-1168-million-annual.html
StartsShortJuly2018
In order for total housing starts to grow, we will need more growth in single family starts.  For acceleration in single family starts we need more new home sales volumes. Today, new home sales are trending around 640,000 and I believe that is where they should be. I don’t subscribe to idea that new home sales are so strong that they warrant a boom in housing construction. The modest sales need to be considered in the context of the current economy. We are in the longest job expansion ever in U.S. history, soon to be the longest economic expansion ever, with mortgage rates below 5% since early 2011. Still for 2018, new home sales are beating my sales expectation as median sales price are falling, this is a plus for demand. New home sales are growing as builders include smaller homes to the mix. We have seen better growth data coming from town home construction lately, this is what is needed. However, keep an eye out on revisions on the next new home sales report. For now, new home sales still beating my estimates for the year.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2018/07/25/new-home-sales-down-5-3-in-june-worse-than-forecast
August New Home Sales ADJ POP

Single family starts are up 7.2% year to date which is good print and total starts are up 6.2% year to date. Yes, total starts are still up year to date. This growth looks normal to me considering how new home sales have been trending in this cycle. The slow and steady housing start story can continue as long as new home sales grow.

The number of construction job openings is basically back to cycle highs as a percentage of job openings.  Total employment for construction is roughly 484,000 jobs away from what it was during the peak of the housing bubble years.

From BLS:
 https://www.bls.gov/charts/job-openings-and-labor-turnover/opening-industry.htm

AUgust Construction workers JOLTS
From Fred:
https://fred.stlouisfed.org/series/USCONS
Construction employment

While this hasn’t been the best few months for housing starts data, keep in mind that the trend matters more than any one report, either positive and negative. The housing story has remained the same for years now; slow and steady growth for new home sales and housing starts. Once both data lines go negative year over year it will be a different story, but we just aren’t there yet. Still, housing starts in any context is still low.

Doug Short:
https://www.advisorperspectives.com/dshort/updates/2018/08/16/new-residential-housing-starts-inch-up-in-july
August Adj to population

Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data  daily on his own facebook page https://www.facebook.com/Logan.Mohtashami