The government furlough in January delayed the release of official housing starts data for nearly two months, as analysts and industry watchers waited anxiously for December—as well as FY2018—numbers. As it turns out, the long-awaited news was not so welcomed: US housing starts dropped to a more than two-year low in December as construction of both single and multi-family housing units weakened. While not exactly robust, FY2018 figures were not as disappointing.
Housing Starts, Permits & Completions
For our last report on this segment of the market, US housing starts jumped 3.2 percent to a seasonally adjusted annual rate (SAAR) of 1.256 million units in November, 2018. However, data for that month was revised down in the latest release to show starts at a 1.214 million unit rate—a decline of 3.3 percent. For December, 2018, privately-owned housing starts fell 11.2 percent to a seasonally adjusted annual rate of 1.078 million units. Single-family housing starts declined 6.7 percent to 758,000 units while multi-family starts plunged 20.4 percent to a seasonally adjusted annual rate of 302,000 units.
Despite the monthly losses in December, an estimated 1.246 million units were started in 2018, which is 3.6 percent above the 2017 figure of 1.203 million units. Both single- and multi-family starts posted annual gains for 2018; single-family units increased 2.8 to a rate of 872,800, and multi-family units increased 5.5 percent to 373,700 units in 2018.
Privately-owned housing authorizations were up 0.3 percent to a rate of 1.326 million units in December, 2018. Single-family authorizations decreased to 829,000, which is 2.2 percent below the revised November figure. Privately-owned housing completions were down 2.7 percent to a SAAR of 1.097 million units. Per the US Census Bureau Report, seasonally-adjusted total housing starts by region included:
- Northeast: 0.0 percent (+37.8 percent in prior month)
- South: -6.0 percent (+15.1 percent in prior month)
- Midwest: -13.2 percent (-19.2 percent in prior month)
- West: -26.3 percent (-14.2 percent in prior month)
Seasonally-adjusted single-family housing starts by region included:
- Northeast: -20.3 percent (-9.5 percent in prior month)
- South: +2.2 percent (+6.8 percent in prior month)
- Midwest: -14.2 percent (-3.2 percent in prior month)
- West: -18.5 percent (-24.4 percent in prior month)
Despite the dismal performance in December, a recent survey showed growing confidence among single-family homebuilders. In February, the index component that tracks views of current sales conditions rose three points to a reading of 67, and the tracker of expectations for the next six months jumped five points to 68.
Mortgage Rates & Builder Outlook
The 30-year fixed mortgage rate has dropped substantially since peaking at 4.87 in late November. Mortgage rates over the last three months were 4.64 in December, 4.54 in January and 4.46 in February.
“Looking back, the December drop in housing production correlated with the peak increase in mortgage rates and corresponding decline in builder sentiment,” said NAHB Chairperson Greg Ugalde. “During that time, builders adopted a cautious wait-and-see approach as demonstrated in the rise of single-family and multifamily units that were permitted but not under construction.”
Affordability Issues Continue
The larger US housing market continues to be plagued by affordability issues that intensified last year. “Artificially high prices have created affordability constraints, resulting in a situation where builders cannot deliver supply in scale," said Brad Dillman, chief economist for the multi-family developer Cortland. "The result is that today's housing market is undersupplied."
We covered this very topic extensively last year, citing research that demonstrates housing supply has indeed failed to keep pace with population growth. Builders have cited soaring land, lumber and materials costs, as well as labor shortages as major obstacles. The steady rise in interest rates and home prices through most of 2018 and the recent stock market volatility also combined to price many prospective homebuyers out of their desired markets.
This combination has driven builders to the “safe” areas of multi-family units or the niche expensive end of the single-family market, which negatively impacts young and first-time homebuyers. As a result, single-family construction is about half of what it was at the peak of the bubble in 2006 and 30 percent below normal levels. However, even the niche markets are beginning to show signs of weakening. Soft conditions in California and New York sent luxury homebuilder Toll Brothers’ new home orders tumbling 24 percent in early 2019, the company’s worst showing since the depths of the Great Recession.
Current housing supply also differs dramatically by price point, and the data does not favor first-time homebuyers. In February, the number of homes priced at or above $750,000, which is close to three times the national median, increased by 11 percent annually, according to Realtor.com. The converse is occurring in the entry-level market, where the supply of homes priced at $200,000 or below has decreased 7 percent year-over-year, further constricting the availability of affordable homes.
“Looking ahead, we expect single-family production will be relatively flat in 2019 and multifamily starts will level off as well,” said National Association of Home Builders (NAHB) Chief Economist Robert Dietz. “The biggest challenge facing builders this year will be ongoing housing affordability concerns as they continue to grapple with a shortage of construction workers, a lack of buildable lots and excessive regulatory burdens.”