The Housing Market Has Materially Changed… But


The Census Bureau report released today shows housing starts for last month were 1,256,000, which beat estimates with the help of strong multifamily construction and we saw decent growth in permits. Even though some are disappointed with the number of housing starts this year, the numbers look perfectly right to me. They show a slow tortoise crawl upward, as I expected. The number of starts need to 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.

However, something has changed recently in the new home sale market that should be noted. My rule of thumb for the new home sales market is the following:

” If monthly supply breaks over 6.5 months and the sales trend is negative, year over year, then we may have an issue” 

This is exactly what has happened. Monthly supply is now above 6.5 months, with a recent big spike higher.

From Fred:

Housing market index, has fallen down noticeably.

From Doug Short:


Single family starts data is trending negative.

From Calculated Risk:

New home sales are trending negative, year over year.

From Doug Short:

December New Home Sales Adj population

Despite the terrible optics for the new home sales market, I caution everyone not to assume that we have hit our peak and are heading for an epic crash in housing starts and new home sales.  New home sales and starts are still very low. In order to lift the dark cloud hovering over the new home sales we will need to see the following:

“You need to see monthly supply get back down below 6.5 months and new home sales show trend growth of 640K with revisions confirming this.” 

That isn’t a tall order, especially if the builders start to discount, but until this happens, don’t expect to see too much action in housing starts.

From Census:


Building Permits:

Privately‐owned housing units authorized by building permits in November were at a seasonally adjusted annual rate of 1,328,000. This is 5.0 percent (±1.6 percent) above the revised October rate of 1,265,000 and is 0.4 percent (±1.7 percent)* above the November 2017 rate of 1,323,000. Single‐family authorizations in November were at a rate of 848,000; this is 0.1 percent (±1.4 percent)* above the revised October figure of 847,000. Authorizations of units in buildings with five units or more were at a rate of 441,000 in November.

Housing Starts:

Privately‐owned housing starts in November were at a seasonally adjusted annual rate of 1,256,000. This is 3.2 percent (±9.8 percent)* above the revised October estimate of 1,217,000, but is 3.6 percent (±9.4 percent)* below the November 2017 rate of 1,303,000. Single‐family housing starts in November were at a rate of 824,000; this is 4.6 percent (±8.4 percent)* below the revised October figure of 864,000. The November rate for units in buildings with five units or more was 417,000.

Housing Completions

Privately‐owned housing completions in November were at a seasonally adjusted annual rate of 1,099,000. This is 0.4 percent (±8.7 percent)* above the revised October estimate of 1,095,000, but is 3.9 percent (±11.5 percent)*below the November 2017 rate of 1,144,000. Single‐family housing completions in November were at a rate of 772,000; this is 5.4 percent (±7.6 percent)* below the revised October rate of 816,000. The November rate for units in buildings with five units or more was 314,000.

One should not read too much into a single report, whether it be a spike up or down. However, we definitely have a recent slowdown in housing confirmed by the revisions as well. 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. However, we need to see more new home sales growth to get things back in line with the slow and steady growth to which we have become accustomed in housing cycle.

From Doug Short:
December Housing Starts ADJ ))))))))))

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 needs 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 3.9% year to date which is seems right with demand.  Total starts are up 5.1% 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 will continue as long as new home sales grow.  The number of construction job openings are near cycle highs with 292,000 openings and over 7,300,000 construction workers. Total employment for construction is roughly less than 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 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:

December JOLTS consturction

From Fred:

Dec Construction total

From Fred:
Residental construction
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. For the first time in this cycle I can say that the recent trends don’t look healthy. However, builders can help to boost demand by including smaller, less expensive homes in their offerings and provide proper discounting.  Demand doesn’t really need to go too much higher to continue the slow and steady housing growth that we have been seeing.

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 and housing starts have never been negative in this cycle. I consistently predicted low but steady growth.  However, the last two reports 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 downward trend rather than a recent soft patch in the new home sales data.

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