Wednesday, 15 of August of 2018

Economics. Explained.  

Housing Starts

July 18, 2018

Housing starts fell 12.3% in June to 1,173 thousand after having jumped 4.8% in May. Starts have been in an increase one month and decline the next month cycle since November of last year.  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 1,262 thousand.

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.

Builders remain enthusiastic in part because they see traffic through the model homes climbing at a steady rate.

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

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.

At the same time 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 1.7% pace which is acceptable but somewhat below its long-term average of 2.7%.

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 145.0 the index  indicates that a median-income buyer has 45.0% 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 20 thousand per month.

As one might expect there is a fairly 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 and unskilled 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.

Another 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.  And because 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 2018.

What is interesting is that beginning in mid-2016 single family starts have begun to climb while multi-family buildings such as apartments have been slowing down.  It appears that many of the millennials who chose to rent for the last decade are getting older, perhaps starting families, and are now choosing to purchase a single family house.

As a result, multi-family construction as a percent of the total has slipped from 37% in mid-2015 to 30%.

Building permits declined 2.2% in June after having fallen 4.6% in May.  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 1,313  thousand which closes to 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 currently at 1,314 thousand, housing starts should surpass the 1.4 million mark by yearend.

Stephen Slifer

NumberNomics
Charleston, SC


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