Housing Starts Drop Sharply in October

The building season is quickly coming to an end in many parts of the country, and it looks like housing starts will not experience the end-of-year rally that economists and industry watchers were hoping for. This sector has, after all, been the lone bright spot in the US economy for the last several months as the stock market continues its wild roller coaster ride based on diminishing global growth reports and strained geopolitical relations in much of the world.

October housing starts were at a seasonally-adjusted annual rate (SAAR) of 1,060,000, or 11 percent below the revised September estimate of 1,191,000. This number is also 1.8 percent below the October 2014 rate of 1,079,000, and represents a seven-month low for the sector. That said, it is also the seventh straight month that starts have remained above 1 million units.

Building permits increased in October suggesting that the housing market will retain solid footing in the near-term. Privately-owned housing unit permits in October were at a SAAR of 1,150,000, or 4.1 percent above the revised September rate of 1,105,000. Single-family authorizations were at a rate of 711,000, 2.4 percent above the revised September figure of 694,000.

"The October permit requests were above the starts number, and for the past three months permits have been running a little ahead of the building pace, so don't be surprised if housing activity rebounds solidly in November," noted Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

Homebuilders remain positive about the current market and the outlook for residential real estate; home builder confidence was down slightly in October to 62 coming off a decade-high of 65 last month. Borrowing costs have also remained competitive, as the average 30-year fixed mortgage rate was 3.80 percent for the month of October. That figure is in line with the 3.83 percent average for 2015. (As a frame of reference, consider that the pre-recession rate in 2007 was 6.34 percent.)

Stronger hiring has helped drive purchases in certain geographic pockets as payroll growth surged in October. But what about the tight inventories and lending practices we have been reading about for months? USA Today provides some perspective on what’s happening within the larger market:

• “The percentage of Americans who own homes has fallen to nearly a 48-year low of 63.7%. And the growth in home sales enjoyed this year appears unsustainable without significant income growth. Relatively low supplies of homes on the markets have pushed prices upward, straining down payments savings.

• Sales of existing homes jumped 4.7% last month to a seasonally adjusted annual rate of 5.55 million, the National Association of Realtors said last month.

• The housing market contains 4.8 months’ supply of homes, significantly lower than the six months associated with a strong market.

• Tight inventories have fueled rising home values. The median home sales price was $221,900 in September, a 6.1% annual increase.”

What will this data mean for lumber prices in the near term? Forest2Market’s index for kiln-dried SYP lumber has trended up in recent weeks; from a yearly low in mid-September of $275/mbf, the index finished the third week of November at $322/mbf, which represents a 17 percent increase. There may be a drop-off as we approach the end of the year but historically, these prices have remained fairly stable during the end of 4Q/beginning of 1Q period.

PNC senior economist Gus Faucher recently wrote that "Multi-family building has benefited from the move away from homeownership in the aftermath of the Great Recession and rising rents. The run in multi-family construction is likely coming to an end, but single-family building will continue to improve throughout 2016." While our own forecast calls for housing to dip below the 1 million unit mark next year, we’ll see if the current momentum, albeit very slight, will keep housing starts afloat as we head into 2016.