Single Family Starts Are At Risk For 2019

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The Census Bureau report released today shows housing starts of 1,228,000, a tad under estimates. Additionally, the previous month’s numbers were revised higher. Even though some people are disappointed with the housing starts this year, the numbers look perfectly right to me because they show a slow tortoise crawl, as I expected. These numbers should be taken in the context of higher labor cost, higher mortgage rates and increases in existing inventory, which provide less expensive homes compared to the new homes.

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

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Building Permits

Privately‐owned housing units authorized by building permits in October were at a seasonally adjusted annual rate of 1,263,000. This is 0.6 percent (±2.4 percent)* below the revised September rate of 1,270,000 and is 6.0 percent (±1.6 percent) below the October 2017 rate of 1,343,000. Single‐family authorizations in October were at a rate of 849,000; this is 0.6 percent (±2.2 percent)* below the revised September figure of 854,000. Authorizations of units in buildings with five units or more were at a rate of 376,000 in October.

Housing Starts

Privately‐owned housing starts in October were at a seasonally adjusted annual rate of 1,228,000. This is 1.5 percent (±12.9 percent)* above the revised September estimate of 1,210,000, but is 2.9 percent (±10.4 percent)* below the October 2017 rate of 1,265,000. Single‐family housing starts in October were at a rate of 865,000; this is
1.8 percent (±10.8 percent)* below the revised September figure of 881,000. The October rate for units in buildings with five units or more was 343,000.

Housing Completions

Privately‐owned housing completions in October were at a seasonally adjusted annual rate of 1,111,000. This is 3.3 percent (±10.5 percent)* below the revised September estimate of 1,149,000 and is 6.5 percent (±9.2 percent)* below the October 2017 rate of 1,188,000. Single‐family housing completions in October were at a rate of 832,000; this is 1.2 percent (±10.6 percent)* below the revised September rate of 842,000. The October rate for units in buildings with five units or more was 269,000.

From my last housing start article:

https://loganmohtashami.com/2018/10/17/have-housing-starts-peaked-in-2018/

“When I am asked what would let me know if housing starts have peaked, “I tell people if new home sales start to show negative year over year sales and monthly supply stays over 6.5 months consistently, then we can start to be concerned– but that has not happened yet”.

What happened in the last new home sales report? Supply got over 6.5 months

november-supply

One should not read too much into a single report, whether it be a spike up or down. If we get a few more months with flat to negative new home sales and monthly supply remains over 6.5 months, then we can conclude that the rate of growth of single family starts is at risk of a decline year over year. On the plus side since this has been the weakest new home sales and housing start cycle ever, we don’t have to worry about a crash. We have no over-investment in this sector, thankfully.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2018/11/20/new-residential-building-permits-1-263m-in-october

November Permits adj population

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. I don’t subscribe to idea that new home sales are so strong that they warrant a boom in housing construction. In fact my call that housing starts won’t reach 1,500,000 this decade looks really good right now. The modest growth in new home 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 mostly below 5% since early 2011. Still for 2018, new home sales are in line with my sales expectation.  The median sales price is cooling and this could help demand. New home sales are growing as builders include smaller homes in the mix.

Single family starts are up 5.5% year to date which is a good print.  Total starts are up 5.6% 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 are at cycle highs with 317,000 construction jobs openings and over 7,200,000 construction workers. Total employment for construction is roughly 400,000 jobs away from what it was during the peak of the housing bubble when housing starts were 1,000,000 units more than what they are at today. Even if we just count residential workers, we are not that far from the total employment levels we saw at the peak of the housing bubble.

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

November JOLTS Construction

From Fred:
https://fred.stlouisfed.org/series/USCONS

COnstruction employment

From Fred:
https://fred.stlouisfed.org/series/USCONS
November Resi employment

While this hasn’t been the best few months for housing starts, 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. Still, housing starts in any context are still low.

For 2019, I will be interested to see if supply stays above 6.5 months with flat to negative growth in new home sales. My forecasts for new home sales or housing starts have never been negative in this cycle. I have always predicted low but steady growth.  However, this last report broke my 6.5 month supply rule for new home sales, one of the indicators I use to predict future negative year over year growth. At this point I need to see more evidence before I conclude that this is a trend rather than a one-time spike.

One final note:
At the recent housing economic conference in Orange County last week, I got the sense that many think California is in for another year of declines in home sales with rising inventory for 2019. California home sales have gone nowhere for years but when mortgage rates get to 4.5% or higher it does impact the rate of growth.

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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