Don’t Count Out Housing Starts Just Yet!

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The Census Bureau report released today shows housing starts for last month were 1,078, 000 which was a big miss. Even though some are disappointed with the number of housing starts in 2018, the numbers look perfectly right to me. They show a slow tortoise crawl upward, as I expected. We have had recent weakness in new home sales which is impacting single family starts. However, we are not at any risk of a major collapse in starts in 2019. 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 what has happened. Monthly supply was above 6.5 months, with a recent big spike higher. But, in the November report supply went below 6.5 months and we had change in new home sales of 95,000, which will need to be confirmed by revisions.

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

febmonthlysupply

The housing market index has fallen recently but is making a comeback. It looks like to me like the big monthly spike to 7.4 months in supply was a short-term peak. 

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2019/02/19/nahb-housing-market-index-lower-interest-rates-rising-consumer-confidence

Feb HMI data

Single family starts are trending negative recently.  We need to see more new home sales growth to get single family starts off the ground and back into the fight.

From Calculated Risk:
https://www.calculatedriskblog.com/2019/02/housing-starts-decreased-to-1078.html

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Despite the terrible optics for the new home sales market, don’t assume that we have hit our peak and are heading for an epic crash.  New home sales and starts are still very low. In order to lift us off the mat and grow stronger again we need new home sales to get back to 640,000 with 3 months revisions confirmed. Until that happens, housing is in the penalty box.

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

Building Permits:

Privately‐owned housing units authorized by building permits in December were at a seasonally adjusted annual rate of 1,326,000. This is 0.3 percent (±1.2 percent)* above the revised November rate of 1,322,000 and is 0.5 percent (±1.1 percent)*
above the December 2017 rate of 1,320,000. Single‐family authorizations in December were at a rate of 829,000; this is 2.2 percent (±0.7 percent) below the revised November figure of 848,000. Authorizations of units in buildings with five units or more were at a rate of 460,000 in December. An estimated 1,310,700 housing units were authorized by building permits in 2018. This is 2.2 percent (±0.6%) above the 2017 figure of 1,282,000.

Housing Starts:

Privately‐owned housing starts in December were at a seasonally adjusted annual rate of 1,078,000. This is 11.2 percent (±14.0 percent)* below the revised November estimate of 1,214,000 and is 10.9 percent (±16.1 percent)* below the December 2017
rate of 1,210,000. Single‐family housing starts in December were at a rate of 758,000; this is 6.7 percent (±15.3 percent)* below the revised November figure of 812,000. The December rate for units in buildings with five units or more was 302,000.
An estimated 1,246,600 housing units were started in 2018. This is 3.6 percent (±2.1%) above the 2017 figure of 1,203,000.

Permits came in at 1,326,000, so give up on housing starts just yet.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2019/02/26/new-residential-building-permits-1-326m-in-december-better-than-forecast
Feb Housing Permits for December

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 expectations.  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 ended the year up 2.8 % year to date which is seems right with demand.  Total starts are up 3.6% 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 will continue as long as new home sales grow.  The number of construction job openings are near cycle highs with 382,000 openings and over 7,400,000 construction workers. Total employment for construction is roughly 270,000 jobs less than what it was during the peak of the housing bubble when housing starts were 1,000,000 units more than 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:
https://www.bls.gov/charts/job-openings-and-labor-turnover/opening-industry.htm

Feb construction JOLTS

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

Fed total construction jobs

From Fred:
https://fred.stlouisfed.org/series/CES2023610001

Feb Resi jobs

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. Builders can help boost demand by including smaller, less expensive homes in their offerings and provide proper discounting.  Demand doesn’t need to go 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 below 6.5 months and we can get sales back to the 640,000 level. My forecasts for new home sales and housing starts have never been negative in this cycle. I consistently predicted low but steady growth but for me to get confident again on my slow and steady growth calls I need to see a clear sales trend of 640,000 plus with revisions confirmed and monthly supply back down below 6.5 months.

On another note: 

If my negative existing home sales call comes true for 2019, it would be healthy for the real home prices to have some negative year over year prints in 2019. This would mean sellers are adjusting to the realities of the market.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2019/02/26/s-p-case-shiller-home-price-index-annual-gains-fall

Feb Real YoY

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