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U.S. Housing Starts Drop by Most Since ’16 to Nine-Month Low

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U.S. June Housing Starts, Permits Plunge to Nine-Month Low
U.S. June Housing Starts, Permits Plunge to Nine-Month Low

U.S. new-home groundbreaking and permits fell in June to the slowest paces in nine months, as higher mortgage rates and elevated costs for labor and materials pinch the housing market, government figures showed Wednesday.

HIGHLIGHTS OF HOUSING STARTS (JUNE)

  • Residential starts fell 12.3% to a 1.17m annualized rate (est. 1.32m) after downwardly revised 1.34m pace in prior month; biggest drop since Nov. 2016
  • Single-family home starts dropped 9.1%; multifamily starts dropped 19.8% 
  • Permits, a proxy for future construction of all types of homes, fell 2.2% to 1.27m rate (est. 1.33m) after unrevised 1.3m pace 

Key Takeaways

Shares of homebuilders fell after the report. While the data are volatile and often subject to significant revisions, the report suggests growth in the housing market may be more modest than previously thought amid constraints for both buyers and developers. Economists may wait for July data to judge whether the trend in construction has shifted. The figures mark the weakest activity since hurricanes Harvey and Irma struck the U.S. in August and September.

Potential customers are grappling with elevated interest rates and ever-rising home prices that are easily outpacing wage gains, even as a robust job market and tax cuts support demand. For builders, issues include elevated prices of lumber and other imported materials, partly due to tariffs. Developers have also cited difficulties finding qualified workers and ready-to-build lots.

The data follow a report Tuesday showing that a gauge of homebuilders’ confidence was unchanged in July from the prior month to match the lowest level this year. An index of the six-month sales outlook fell to the lowest since September, according to the survey from the National Association of Home Builders/Wells Fargo.

Wednesday’s report wasn’t as bad as the main numbers indicate, according to Ian Shepherdson of Pantheon Macroeconomics, who pointed out that the “most important” number, single-family permits, rose 0.8 percent from the prior month. At the same time, the trends in both construction and sales of such homes “have been about flat, more or less, since last fall,” and the housing market has probably peaked for this expansion, he wrote in a note.

Analyst’s View

“You could explain a decline, but not a decline of that magnitude,” Hugh Johnson, chief investment officer of Hugh Johnson Advisors LLC. He said Wednesday’s figures were “a one-month glitch and we’ll be somewhat back on track in the coming months, led by an economy that’s expanding, incomes which are expanding, employment which has been surprisingly strong, and although mortgage rates are rising, they’re not rising nearly as fast as they could.”

What Our Economists Say

June housing starts disappointed, and suggests that the gradual recovery in the housing market may be moderating further. However, digging into the details, at least some of the slowing is due to supply shortages — which is consistent with an economy that continues to grow above trend. Expect some easing in the pace of economic activity in the second half of the year.

— Tim Mahedy and Carl Riccadonna, Bloomberg Economics

Other Details

  • Single-family home starts fell to a 858,000 rate, slowest since December, from 944,000 the prior month
  • Groundbreaking on multifamily homes, such as apartment buildings and condominiums, fell to an annual rate of 315,000; data on these projects can be volatile
  • All four regions posted declines in starts, led by a 35.8 percent drop in the Midwest and a 9.1 percent decrease in the South
  • Some 160,000 homes were authorized but not yet started in June, up from 158,000 in May; the number of housing units currently under construction was 1.12 million, down slightly from the prior month
  • Report shows wide margin of error, with a 90 percent chance that the June housing-starts figure was between a 20.6 percent and 4 percent drop
  • Report released jointly by the Census Bureau and Department of Housing and Urban Development in Washington

— With assistance by Vince Golle, and Kristy Scheuble

Continue reading U.S. Housing Starts Drop by Most Since ’16 to Nine-Month Low

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Reasons to Suspect the US Housing Market is Starting to Coo

Low unemployment doesn’t ensure more Americans can afford a home, and rising home prices say more about target markets than the supply of motivated buyers

AUGUST 8, 2018
2018Housing Slowdown Inventory
Months of supply for existing homes ticked up year-over-year in June for only the second time in three years. Given the number of existing homes for sale has been falling, the uptick in months of supply is likely attributable to a slower pace of sales.
DATA: NATIONAL ASSOCIATION OF REALTORS; GRAPH: CURBED.COM

With housing inventory shortages rampant across the nation, the summer of 2018 was supposed to be “the most competitive housing market in recorded history.”

But as July turns to August, reports suggest the rush of buyers missed many markets. Existing homes sales have fallen, compared to the same months last year, in four of the last five months. New U.S. home sales fell 5.3% in June to an eight-month low. It was the second drop in new-home sales in three months. June housing starts plunged 12.3%. Residential building permits issued in June dropped for the third consecutive month.

2018Housing Slowdown Existing SalesExisting homes sales have fallen year-over-year in four of the last five months. New U.S. home sales fell 5.3% in June to an eight-month low. It was the second drop in new-home sales in three months.“It’s alarming that single-family construction permit growth is decelerating, at a time when homeownership is rising and Millennials are reaching their peak age to really enter the market and buy their first home,” said Sam Khater, chief economist for Freddie Mac, in a statement about the Commerce Department’s June housing estimates. “The growing imbalance between demand and supply is the reason home prices continue to escalate.”

Home price growth has yet to be affected but the apparent weakening of demand suggests that the housing market may finally be cooling.

Housing inventory shortages have been a primary factor in rising home prices over the last three years. At the same time, skyrocketing building costs and the demographics of those who have money to spend in a period of declining wages has ensured a steady flow of expensive premium housing. Home prices have been rising at least twice as fast as incomes for the past four years.

“Home sales, new home construction and outlays for renovations and repairs were collectively a net drag on overall growth during the first half of the year, even as real GDP growth ramped up to a 4.1% pace during the second quarter,” according to special commentary on housing by the Wells Fargo Economics Group.

After nine years of U.S. economic growth, the housing industry is starting about 30% fewer single-family homes than the 1.3 million units that the National Association of Homebuilders calls a normal level of housing starts. The pace of multifamily starts has trended down since January.

“Higher lumber prices in light of tariffs on Canadian softwoodAtlanta Fed Wage Growth TrackerU.S. wage growth has slowed since November 2016 more steeply than it rose between November 2013 and 2016. Despite strong employment, wage growth has lagged economists’ expectations. After accounting for inflation, today’s average wage has about the same purchasing power it did 40 years ago.FEDERAL RESERVE BANK OF ATLANTAlumber and higher building material prices in general may be causing some builders to hold off on some projects, particularly starts of lower priced homes, which simply do not have enough profit margin in them to absorb these higher costs,” according to analysis by Wells Fargo Economics of the U.S. Commerce Department’s June monthly housing construction estimates. “Those higher costs are likely weighing even more heavily on apartment projects, which have seen permits tumble at an astounding 58.2% annual rate over the past three months.”

With prices already at all-time highs in most markets, rising interest rates exacerbate affordability problems. Rates were hovering below 4% going into 2018 but have since shot to as high as 4.6%.

Although it can vary market to market, these factors all point to housing affordability being pushed beyond what many people can pay. The clearest evidence is that months of supply for existing homes ticked up year-over-year in June for only the second time in three years. Given the total number of existing homes for sale has been falling, the uptick in months of supply is likely attributable to a slower pace of home sales.

In some markets, the increase in inventory is more pronounced. According to Realtor.com, active listings in July were up 44% year-over-year in San Jose, 29% in Seattle, 19% in Portland, 18% in San Diego, and 15% in Dallas.2018Housing Slowdown RatesInterest rates were below 4% going into 2018 but have since shot to as high as 4.6%. Prospects of rising rates pushes premium buyers to buy sooner, but can put off first-time buyers indefinitely.

Moody’s just released a positive outlook for the U.S. homebuilding sector, reflecting enthusiasm for fundamental business conditions overcoming housing headwinds over the next 12 to 18 months:

Momentum – key underlying drivers of housing demand, with homebuilding growth, now in year seven, and the overall economic expansion, now in year nine, show few signs of slowing.

Millennials – the biggest population cohort in the U.S. workforce is entering the housing market – both for purchases and for rentals – in powerful and increasing numbers.

Consolidation – homebuilders are finding it cheaper and quicker to enter new markets, and easier to go much deeper in existing markets, by buying competitors rather than “green fielding.”

Credit metrics – for much of the homebuilding industry, debt leverage is gradually being reduced, interest coverage is strengthening and recent declines in gross margins are slowing and even stopping.

It does appear U.S. economic fundamentals are little changed over the past few years. Those fundamentals have produced two-thirds of normal housing construction volume since the economy turned solidly up five years ago. Those aren’t laurels to rest on.

It’s possible the larger economy’s momentum and the direction of home buying might diverge, as this spring and summer have already seen a few months’ declines in home sales, home construction and permits issued. Home prices and mortgage rates continue to rise, and mortgage-interest deductions have been curtailed. These conditions are unfolding in an environment where U.S. wage growth has slowed since November 2016 more steeply than it rose between November 2013 and 2016.

Millennials should be doing a significant portion of home buying, given 20-somethings’ high potential for forming new households. Instead, they earn 20% less than the Baby Boomer generation did when they were in their 20s. And Millennials also have exponentially more student loan debt to repay than any other generation before. Inflated home prices and limited starter inventory are not in their favor.

I’m not an economist, so even if I wanted to make predictions, they wouldn’t be worth much. But here’s an early warning from somebody who knows: “Housing market activity – sales and construction – likely has peaked for this cycle,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, told clients after the Commerce Department’s release of June housing construction data this month.

Continue reading Reasons to Suspect the US Housing Market is Starting to Coo

U.S. Housing Starts Top Forecasts on Multifamily Construction

U.S. new-home construction rose by more than forecast in March on a rebound in multifamily starts, giving a boost to first-quarter economic growth, government figures showed Tuesday.

HIGHLIGHTS OF HOUSING STARTS (MARCH)

  • Residential starts rose 1.9% to 1.32m annualized rate (est. 1.27m) after upwardly revised 1.3 mln pace in prior month
  • Multifamily home starts rose 14.4%; single-family fell 3.7%
  • Permits, a proxy for future construction of all types of homes, rose 2.5% to 1.35m rate (est. 1.32m) after 1.32m pace 

Key Takeaways

The results show a tight job market, improved finances and consumers’ elevated confidence to purchase big-ticket items are supporting construction. That means homebuilding probably contributed to economic growth for the second consecutive quarter. 

The strength in March was concentrated in multifamily construction such as apartment buildings. That category tends to be volatile; March’s advance in starts followed a 10.2 percent drop in the prior month. Permits for single-family homes were a weak spot, dropping 5.5 percent, the biggest decline in seven years, to the lowest level since September.

While demand remains solid, a shortage of workers, rising costs for materials and a scarcity of ready-to-build lots are limiting gains in building activity. With borrowing costs rising, affordability is also becoming a hurdle, as property values outpace potential buyers’ income growth.

 
 

Sentiment among homebuilders fell in April for a fourth straight month amid limited land availability and higher lumber prices, according to data Monday from the National Association of Home Builders/Wells Fargo.

Nevertheless, sentiment remains elevated, and in an indication that builders will remain busy in coming months, the number of homes under construction at the end of March reached 1.125 million, the highest level since July 2007. Single-family dwellings under construction inched up to 504,000, the most since mid-2008.

What Our Economists Say

The overall strength in March housing starts is all the more encouraging given that the colder-than-average weather is likely to have curtailed gains. Fundamentals appear to support a positive outlook for the construction sector, despite labor constraints and rising material costs. Demand should also be supported by a tight labor market and steady pay gains.

— Niraj Shah and Carl Riccadonna, Bloomberg Economics

Read more for the full reaction note.

Other Details

  • Single-family home starts fell to a 867,000 rate from 900,000 the prior month
  • Groundbreaking on multi-family homes rose to an annual rate of 452,000
  • Gains in housing starts were led by Midwest, with a 22.4 percent advance; Northeast rose 0.8 percent, while South and West dipped
  • Report shows wide margin of error, with a 90 percent chance that the March housing-starts figure was between a 10.5 percent drop and 14.3 percent gain
  • Report released jointly by the Census Bureau and Department of Housing and Urban Development in Washington

— With assistance by Chris Middleton

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