While residential construction makes up only 3-5 percent of the US economy, it’s a very important overall piece. The combined contribution (new construction and consumption spending on housing services) to GDP generally averages 15-18 percent, which is an important component of growth.
Lately, however, housing hasn’t been as big of a contributor. Even with an increasing population of millennials, low interest rates and the lowest unemployment rate in decades, builders are having a difficult time filling new residential houses and securing the land and labor to keep building. The numbers from June seem to prove it.
Housing Starts, Permits & Completions
Privately-owned housing starts decreased 0.9 percent in June to a seasonally adjusted annual rate (SAAR) of 1.253 million units. Single-family starts increased 3.5 percent to a rate of 820,00 units; starts for the volatile multi-family segment dropped 9.2 percent to a rate of 406,000 in June.
Privately-owned housing authorizations plunged 6.1 percent to a rate of 1.220 million units in June. Single-family authorizations were up 0.4 percent at a pace of 813,000 units. Privately-owned housing completions were down 4.8 percent to a SAAR of 1.161 million units. Per the US Census Bureau Report, seasonally-adjusted total housing starts by region included:
- Northeast: +31.3 percent (-45.5 percent last month)
- South: -9.2 percent (+11.2 percent last month)
- Midwest: +27.1 percent (-8.0 percent last month)
- West: -4.9 percent (-2.4 percent last month)
Seasonally-adjusted single-family housing starts by region included:
- Northeast: -6.1 percent (-25.8 percent last month)
- South: +1.1 percent (+3.3 percent last month)
- Midwest: +8.0 percent (-5.8 percent last month)
- West: +9.8 percent (-19.9 percent last month)
“A sluggish first half of 2019 indicates that builders have so far not been as willing or able to put up as many new homes as the strong economy and milder summer weather might otherwise suggest,” said Matthew Speakman, economist at online real estate group Zillow.
Home builder confidence inched up one point in June to 65, per the National Association of Home Builders’ (NAHB) index. The 30-year fixed mortgage rate continued to decline in June, dropping to 3.80 percent for the month, which is 17 percent lower than a year ago. The rate has now dropped 22 percent since peaking at 4.87 in November 2018.
“Single-family permits usually track new home sales but are lagging behind, either because homebuilders doubt the recent revival in sales will last - we think it will - and/or because they have too much inventory still after the disastrous drop in sales in Q4 last year,” said Ian Shepherdson, chief economist for Pantheon Macro. “If we’re right, and new home sales rise in the second half of the year, new construction will follow.”
By all accounts, the new housing market should be booming. It’s a puzzling conundrum that it’s not, given all of the positive economic news. However, per the most recent issue of the Economic Outlook,”… other indicators suggest the US housing market may be in the final stages of its present growth cycle. The first involves home purchases by investors, who comprised 11.3 percent of all purchases in 2018—the highest level since 1999. Moreover, mom-and-pop investors are now the most active group, whereas between 2012 and 2014 it was big financial institutions. Purchases by investors (either to flip or rent) ramped up until the housing bust that began in 2006.”
The issue goes on to say, “Last month we highlighted an article by Zillow’s Skylar Olsen, who believes demographics justify long-term optimism. Olsen pointed out that between 2019 and 2028, 44.9 million people will turn 34, the median age of current first-time home buyers—an increase of 7.4 percent from the past decade. This month, we offer a counterpoint to that optimism. According to the latest provisional birth report from the Center for Disease Control and Prevention, the US birth rate fell to its lowest level in 32 years with under 3.8 million births recorded in 2018; this is down 2 percent from 2017 and the fourth consecutive annual decline.
“’Declining birth rates mean lower demand for rental housing two decades from now when those born in recent years will be entering the rental market,’ wrote NAHB’s Natalia Siniavskaia. ‘The effects will spread to the single-family market in the following years and will persist for years to come.’
“’The effects of declining birth rates on housing demand are not limited to the distant future. As fewer and fewer females get married and have children before they turn 35, the socio-demographic incentives to start their own household are weakening. This, in turn, suppresses housing demand for both for-sale and for-rent single-family housing, the preferred choices of families with children under 18 years,’ Siniavskaia concluded.”