Single-Family Starts Offset Multi-Family Weakness

Today census reported on housing starts, which the headline was a miss from estimates due to the weakness in the multi-family sector. As we all know, America’s rental market has more underlying stress than the home-buying sector during this pandemic. Single-family starts still showing growth, which is the critical data line for this sector going out this decade. Single family starts are up 6.2% year to date. Also, permits came in a bit stronger than forecast.

From Census:

Building Permits Privately-owned housing units authorized by building permits in September were at a seasonally adjusted annual rate of 1,553,000. This is 5.2 percent (±1.6 percent) above the revised August rate of 1,476,000 and is 8.1 percent (±1.8 percent) above the September 2019 rate of 1,437,000. Single-family authorizations in September were at a rate of 1,119,000; this is 7.8 percent (±1.1 percent) above the revised August figure of 1,038,000. Authorizations of units in buildings with five units or more were at a rate of 390,000 in September.

Housing Starts Privately-owned housing starts in September were at a seasonally adjusted annual rate of 1,415,000. This is 1.9 percent (±8.8 percent)* above the revised August estimate of 1,388,000 and is 11.1 percent (±11.3 percent)* above the September 2019 rate of 1,274,000. Single-family housing starts in September were at a rate of 1,108,000; this is 8.5 percent (±9.2 percent)* above the revised August figure of 1,021,000. The September rate for units in buildings with five units or more was 295,000.

If you want more housing construction, it needs to be driven by single-family starts. Multifamily construction has its limits; this means that unless we push for deficit financing to try to overbuild homes, it’s all about new home sales.

From Calculated Risk:

This is a crucial factor to remember; in previous decades, the builders had a less existing home supply for the builders to compete with. After many decades of building homes, the builder’s main competition is the existing home sales market. Those homes are cheaper and have a geographical advantage over the more expensive new home.

Right now, the new home sales data is on fire. However, this will revert to trend growth. Housing data is making up for the lost time due to Covid19, so the data looks a bit hot right now that will naturally cool off. 

The most impressive housing chart we have is the monthly supply data for new homes. As long as this chart looks like this, we have legs to walk higher for single family starts. Once we get a noticeably increase in this data line, you need to be mindful of housing starts data because we are no longer working from the low bar that we had from 2008-2019. People forget housing starts had a near 40% year over year growth print in February before Covid19. I truly believe that the worst take we have on housing this year is that everyone focuses on cities vs. subs; this is the simple raw power of demographics and mortgage rates. This runs in line with all my work over the years that have expressed that the years 2020-2024 is when we would be talking about the housing market better.

Be the detective, not the troll. In the future, you keep an eye on rising yields because this sector is susceptible to higher rates, and it no longer has a low bar to work with. The new home buyer is older and makes more money than the existing home buyer profile. So, the marginal homebuyer gets hit with higher rates and can look for a cheaper existing home.

Yesterday I talked about what can lead mortgage rates higher as my last variable on my AB (America is Back) economic model for 2020 is that for the 10-year yield to go over 1%.

Logan Mohtashami is a Lead Analyst for Housing Wire, financial writer, and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami, now retired, was a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1987.