Wednesday, 17 of October of 2018

Economics. Explained.  

Housing Starts

September 19,  2018

Housing starts jumped 9.2% in August to 1,282 thousand after having fallen 0.3% in July. Because these data are particularly volatile on a month-to-month basis, it is best to look at a 3-month moving average of starts (which is the series shown above).   That 3-month average now stands at 1,211 thousand.  Starts have cooled somewhat in recent months, but is that because demand has declined?  Or are constraints on production like a labor shortage and rising costs of materials the more likely cause?  We believe it is the latter.

Both new and existing home sales continue to trend upward but they are being constrained by a lack of supply.   Thus, the demand for housing remains robust.

The average home stays on the market for 26 days currently which is down from 100 days a few years ago.  One-half of the homes coming on the market sell within one month.  This statistic provides compelling evidence that the demand for housing remains robust.

Monthly  employment gains are about 190 thousand per month which is boosting income.  As a result, real disposable income (what is left after inflation and taxes) is growing at a 3.1% pace which is  somewhat above its long-term average of 2.7%.

Mortgage rates are at 4.5% which is quite low by any historical standard.

Housing remains affordable for the median-price home buyer.  Mortgage rates may have risen, but income has been rising almost as quickly, hence affordability has not dropped much.  At 140.0 the index  indicates that a median-income buyer has 40.0% more income than is necessary to purchase a median-priced house.

The problem in housing is not a lack of demand.  Rather it is a constraint on the production side.  Builders have had difficulty finding an adequate supply of both skilled and unskilled labor.  Construction employment has been growing by about 30 thousand per month but will be difficult for it to grow any faster.

There are plenty of homes that have already been authorized but construction has not yet begun because of builders inability to find workers, and because the cost of materials has risen so sharply in the wake of tariffs on steel, aluminum, and lumber.  Once supply constraints begin to abate we will see starts climb at a more robust pace as builders begin construction on these previously authorized houses.

Given the continuing strength in demand we expect starts to reach 1.3 million by the end of 2018 and continue upwards next year.

Building permits fell 5.7% in August to 1,229 thousand after having risen 0.9% in July.  Because  permits are another volatile  indicator it is best to look at a 3-month average (which is shown below).  That 3-month moving average now stands at 1,275  thousand which is somewhat below the fastest pace thus far in the business cycle (1,355 thousand) and continues to point towards steady improvement in housing.   The reason people look at permits is because a builder must first attain a permit before beginning construction.  Thus, it is a leading indicator of what is likely to happen to starts several months down the road.  If permits are at 1,275 thousand, housing starts should easily rebound to the 1.3 million mark by yearend.

Stephen Slifer

NumberNomics
Charleston, SC


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