The Census Bureau report released today shows housing starts for last month were 1,235,000, a good number from estimates. However, permits came in 1,296,000 and have been stalling out for 28 months now because once again new home sales are still too low. As evident below with the permit chart, we haven’t really gone anywhere for some time now.
While some might think housing has peaked, we are not at any risk of a significant collapse in starts in 2019. The number of starts and permits needs to be taken in the context of higher labor costs, recent softness in new home sales which is turning positive and increases in existing inventory, which provides less expensive homes compared to the new homes.
On a hugely positive note for housing, it looks like I can take the new home sales sector out of the penalty box when the next report comes out.
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 real 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. We did see a slight rebound in this report. This data line has been more wild than average 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 28 months as well. The last few months for single-family permits have been soft too.
From Calculated Risk:
Privately‐owned housing units authorized by building permits in April were at a seasonally adjusted annual rate of 1,296,000. This is 0.6 percent (±2.6 percent)* above the revised March rate of 1,288,000, but is 5.0 percent (±1.4 percent) below the April2018 rate of 1,364,000. Single‐family authorizations in April were at a rate of 782,000; this is 4.2 percent (±1.2 percent) below the revised March figure of 816,000. Authorizations of units in buildings with five units or more were at a rate of 467,000 in April.
Privately‐owned housing starts in April were at a seasonally adjusted annual rate of 1,235,000. This is 5.7 percent (±13.0 percent)* above the revised March estimate of 1,168,000, but is 2.5 percent (±10.4 percent)* below the April 2018 rate of
1,267,000. Single‐family housing starts in April were at a rate of 854,000; this is 6.2 percent (±13.7 percent)* above the revised March figure of 804,000. The April rate for units in buildings with five units or more was 359,000.
For total housing starts to grow faster, we will need more growth in single-family starts. For acceleration in single-family starts, we need a lot more new home sales. I don’t subscribe to the 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 360,000, with over 7,486,000 construction workers. Total employment for construction is roughly 239,000 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 anyone 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. This has been something the builders have been doing in recent years. 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 the supply stays below 6.5 months and we can get the sales trends 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 a monthly supply below 6.5 months with a 3-month trend that 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