Monday, 25 of March of 2019

Economics. Explained.  

Housing Starts

March 8, 2019

Housing starts soared by 18.6% in January to 1,230 thousand after having plunged 14.0% in December.  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 1,158 thousand but it is biased downwards because of the December drop.  Starts should quickly rebound to 1,250 thousand or so in the months ahead.

The January rebound was largely in single-family homes.  Multi-family starts rose only slightly.

While the  housing sector has cooled during the past year,  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 primarily the latter.

Both new and existing home sales fallen in recent months but they are being constrained by a lack of supply so it is unclear that demand has softened as much as the sales data suggest.

The average home stays on the market for 49 days currently which is down from 100 days a few years ago.  About 40% of the homes coming to 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 3.0% pace which is  somewhat above its long-term average of 2.7%.

Mortgage rates have recently declined by 0.5% to 4.4%.  That should provide some  lift to the housing sector in the months ahead.

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 150.0 the index  indicates that a median-income buyer has 50.0% 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 but it will be difficult for it to grow any faster.  At the same time tariffs on lumber, steel and aluminum  are driving up the cost of production.

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 climb 5.5% this year and reach 1.2 million by the end of 2019.

Building permits rose 1.4% in January to 1,345 thousand.  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 1,331  thousand.   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 1,331 thousand, housing starts should be at roughly that same level by yearend.  Thus, our forecast for starts to be 1,200 thousand by yearend may be too low.  However, keep in mind that builders continue to have difficulty finding enough workers.  The demand for  housing is solid, but can builders get enough workers to push them sharply higher?

Stephen Slifer

NumberNomics
Charleston, SC


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