April 18, 2017
Housing starts declined 6.8% in March to 1,215 thousand after having risen 5.0% in February. 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 in blue above). That 3-month average now stands at 1,253 thousand which is close to the fastest pace of construction thus far in the cycle. It should continue to climb slowly.
Both new and existing home sales continue to climb. Thus, the demand for housing remains robust.
Builders remain enthusiastic in part because they see traffic through the model homes accelerating.
Mortgage rates have risen 0.6% since the election in early November but at 4.1% they are still quite low by any historical standard.
At the same time employment gains are about 170 thousand per month which is boosting income. As a result, real disposable income (what is left after inflation and taxes) is growing at a 2.0% pace.
As a result housing remains affordable for the median-price home buyer. Mortgage rates may have risen, but income has been rising at almost as quickly, hence affordability has not dropped much. At 161 the index indicates that a median-income buyer has 61% 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 skilled labor although construction industry jobs have picked up in recent months.
As one might expect there is a tight correlation between home builder confidence and the starts data which probably makes a great deal of sense. Judging by the homebuilder confidence data we should expect starts to eventually climb to 1.5 million or so from about 1.3 million currently. However, as noted above, many home builders report an inability to get the skilled workers they require. Overcoming the labor shortage on a long-term basis will be challenging. Employment in the construction industry will continue to climb, but slowly, which will limit the speed with which starts rise in the months ahead.
The other thing worth noting is that about 1.3 million new households are being formed every year. Those families all need a place to live, either a single-family home or an apartment. Thus, we need to see housing starts rise by 1.3 million just to keep pace with growth in households. However, the fact that housing starts were substantially below the growth in households for so long, there is pent-up demand. We expect starts to reach 1.4 million by the end of 2017 and 1.5 million in 2018.
Building permits rose 3.6% in March to 1,260 thousand after having declined 6.0% in February. 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 1,256 thousand which continues to point towards slow but 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 currently at 1,256 thousand, housing starts will gradually approach the 1.4 million mark.