The Census Bureau report released today shows housing starts for last month were 1,139,000, a miss from estimates. Now, housing starts will be in the penalty box until building permits get to 1,400,000 for 12 months. Permits have not been at this level for 27 months now because new home sales are simply too low to warrant more building.
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.
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 some better new home sales reports showing positive revisions in monthly supply and new home sales. The next new home sales report should show that we have at least 3 straight months of monthly supply under 6.5 months.
At this stage of the economic cycle the housing starts sector needs more new home sales and less monthly supply. For now we are making a positive push to get monthly supply back in line.
Single family starts have been showing some weakness earlier in the year, then snapped back only go down again. This data line has been more wild than normal so we will need to wait for a clear trend before we draw any conclusions. However, single family starts have been in a holding pattern for the last 27 months as well.
From Calculated Risk:
Privately‐owned housing units authorized by building permits in March were at a seasonally adjusted annual rate of 1,269,000. This is 1.7 percent (±1.4 percent) below the revised February rate of 1,291,000 and is 7.8 percent (±1.9 percent) below the March 2018 rate of 1,377,000. Single‐family authorizations in March were at a rate of 808,000; this is 1.1 percent (±1.5 percent)* below the revised February figure of 817,000. Authorizations of units in buildings with five units or more were at a rate of 425,000 in March.
Privately‐owned housing starts in March were at a seasonally adjusted annual rate of 1,139,000. This is 0.3 percent (±14.6 percent)* below the revised February estimate of 1,142,000 and is 14.2 percent (±8.8 percent) below the
March 2018 rate of 1,327,000. Single‐family housing starts in March were at a rate of 785,000; this is 0.4 percent (±15.2 percent)* below the revised February figure of 788,000. The March rate for units in buildings with five units
or more was 337,000.
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 in this decade looks 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 286,000 with over 7,447,000 construction workers. Total employment for construction is roughly 250,000 jobs away 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 these 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. The next new home sales report should show monthly supply below 6.5 months with a 3 month trend will be a step in the right direction.
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