The Census Bureau report released today shows housing starts for last month were 1,162,000 a miss from estimates. 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 noticeable drop 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”
Recently we had a solid new home sales report showing better revisions on monthly supply and new home sales. More on that here and we have another new home sales report coming this week
However, at this stage of the economic cycle, the low bar housing thesis which has gotten this sector by for years is starting to fade away. The housing starts sector needs more new home sales to get real growth and less monthly supply.
Single family starts were really showing some weakness recently but snapped backed in the last report to only go down again. This data line has been more wild than normal so lets wait for some more clear trends before making too much of any one print.
From Calculated Risk:
Privately‐owned housing units authorized by building permits in February were at a seasonally adjusted annual rate of 1,296,000. This is 1.6 percent (±1.2 percent) below the revised January rate of 1,317,000 and is 2.0 percent (±1.7 percent)
below the February 2018 rate of 1,323,000. Single‐family authorizations in February were at a rate of 821,000; this is 0.0 percent (±0.7 percent)* below the revised January figure of 821,000. Authorizations of units in buildings with five units or more were at a rate of 439,000 in February.
Privately‐owned housing starts in February were at a seasonally adjusted annual rate of 1,162,000. This is 8.7 percent (±10.3
percent)* below the revised January estimate of 1,273,000 and is 9.9 percent (±11.5 percent)* below the February 2018 rate of
1,290,000. Single‐family housing starts in February were at a rate of 805,000; this is 17.0 percent (±11.2 percent) below the
revised January figure of 970,000. The February rate for units in buildings with five units or more was 352,000.
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 at 302,000 openings and over 7,440,000 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.
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.
From Doug Short:
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