Tuesday, 22 of January of 2019

Economics. Explained.  

Housing Starts

December 18,  2018

Housing starts rose 3.2% in November after having declined 1.5% in October . But hurricane activity in the South appears to have depressed starts in that region to some extent in both months.   It will take several months for these weather-related distortions to even out so we can get a true read on the pace of sales.  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 1,237 thousand.

Some economists dismiss the increase in  housing starts in November because it was often volatile multi-family starts category.  That is true, but it is also multi-family starts that were responsible for the bulk of the earlier decline.  Single family starts are only about 5.5% below their peak back in the spring.

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 both to some extent, but primarily the latter.

Both new and existing home sales fallen in recent month 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 33 days currently which is down from 100 days a few years ago.  One-half 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 are at 4.9% which are still 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 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 30 thousand per month but 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 4.5% next year and reach 1.3 million by the end of 2019.

Building permits jumped 5.0% in November after having declined 0.4% in October.  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 1,288  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 1,288 thousand, housing starts should be at roughly that same level by yearend.

Stephen Slifer

NumberNomics
Charleston, SC


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