Housing Starts Need More New Home Sales

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The Census Bureau report released today shows housing starts for last month were 1,230, 000 a nice snap back from the previous report. Even though some are disappointed with the number of housing starts recently, 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.  We did have a nice sharp come back in single family starts in this report.  While some might  think housing has peaked, 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 it has started to come back down. Once new home sales can get back to 640,000 with 3 months revisions confirmed, we can get back to the slow and steady uptrend in housing starts without worrying about new home sales.

From Fred: https://fred.stlouisfed.org/series/MSACSR
March Monthly Supply for December

Single family starts were really showing some weakness recently but snapped backed nicely in this report.

From Calculated Risk:
https://www.calculatedriskblog.com/2019/03/housing-starts-increased-to-1230.html

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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 January were at a seasonally adjusted annual rate of 1,345,000.  This is 1.4 percent (±0.8 percent) above the revised December rate of 1,326,000, but is 1.5 percent (±1.0 percent) below the
January 2018 rate of 1,366,000. Single‐family authorizations in January were at a rate of 812,000; this is 2.1 percent (±1.0 percent) below the revised December figure of 829,000. Authorizations of units in buildings with five units or more were at a rate of 482,000 in January.

Housing Starts:

Privately‐owned housing starts in January were at a seasonally adjusted annual rate of 1,230,000. This is 18.6 percent (±26.6 percent)* above the revised December estimate of 1,037,000, but is 7.8 percent (±12.7 percent)* below the January 2018 rate of 1,334,000. Single‐family housing starts in January were at a rate of 926,000; this is 25.1 percent (±29.0 percent)* above the revised December figure of 740,000. The January rate for units in buildings with five units or more was 289,000.

In order for total housing starts to grow more, 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.  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 around 300,000 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.

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

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

CON feb

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

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.

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