US housing starts surged to an (almost) 11-year high in May—their highest level since July 2007—thanks to gains in both single-family and multi-family home construction driven by the Midwest region. However, the risk of escalating trade wars has recently spooked Wall Street as well as the housing sector; May denoted the second straight monthly drop in new building permits, which suggests that housing market activity may be flat lining.
Housing Starts, Permits & Completions
After decreasing 3.7 percent in April, housing starts were up 5.0 percent in May to a seasonally adjusted annual rate (SAAR) of 1,350,000 units. Single-family starts accounted for 936,000 units, which is 3.9 percent above the revised April figure of 901,000. Starts for the volatile multi-family segment rose 7.5 percent to a rate of 414,000 units in May.
Privately-owned housing authorizations dropped 4.6 percent to a rate of 1,301,000 units in May. Single-family authorizations fell to 844,000, which is 2.2 percent below the revised April figure.
Privately-owned housing completions increased to a SAAR of 1,291,000 in May, up 1.9 percent from April’s revised estimate of 1,267,000 and 10.4 percent above May 2017. Regional performance in May was mixed as confirmed by the US Census Bureau report, although the Midwest drove nearly all of the growth. Seasonally-adjusted total housing starts by region included:
- Northeast: -15.0 percent (-8.1 percent last month)
- South: -0.9 percent (+6.4 percent last month)
- Midwest: +62.2 percent (-16.3 percent last month)
- West: -4.1 percent (-12.0 percent last month)
Seasonally-adjusted single-family housing starts by region included:
- Northeast: +10.2 percent (-9.7 percent last month)
- South: -3.5 percent (+17.2 percent last month)
- Midwest: +44.4 percent (-29.8 percent last month)
- West: -0.5 percent (-10.1 percent last month)
Source: US Department of Commerce
The 30-year fixed mortgage rate increased from 4.47 to 4.59 percent in May, its highest level since January 2011. The National Association of Home Builders (NAHB)/Wells Fargo builder sentiment index was down two points to 68 in early June, which was due in part to sharply elevated lumber prices.
"Builders are optimistic about housing market conditions as consumer demand continues to grow," said NAHB Chairman Randy Noel. "However, builders are increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability. Record-high lumber prices have added nearly $9,000 to the price of a new single-family home since January 2017."
While January-March 2018 new-home sales data has been revised lower, several analysts are wondering if momentum in housing is wavering. Online real estate brokerage Redfin recently found fewer potential buyers requesting home tours or making offers—the first time in 27 months with a YoY decline. A 1Q2018 decline in first-time homebuyer sales “reflects a slowdown in cyclical momentum as the first-time homebuyer market approached its historical norms,” added Tian Liu, chief economist at Genworth Mortgage Insurance. “It also reflects a shortage of available homes priced at or below the median first-time homebuyer market price of $250,000.”
It makes little sense to refinance in an environment of rising interest rates, and some analysts suggest that an expanding pool of homeowners is choosing cash-out refinancing options over high-rate credit cards as a more affordable means of meeting household budgets. “Releveraging is as wrong now as it was in 2007,” argued Mike Shedlock of Sitka Pacific Capital Management, because if/when home prices finally do retreat in reaction to higher mortgage rates, the ranks of underwater homeowners could swell from their current level (variously estimated between 2.5 million and 5.2 million). Shedlock’s warning seems prescient given claims that 40 percent of the largest US housing markets are overvalued relative to their “long-run, sustainable levels.”
Looking forward, analysts apparently do not see the situation changing anytime soon, as recently reported by Delphi Advisors in Forest2Market’s Economic Outlook:
- “With mortgage rates continuing to rise, affordability is getting steadily worse,” noted Jonas Goltermann, developed market economist at ING.
- “We are not seeing a temporary phenomenon. House prices have been outrunning family incomes for several years in the US and while demand has cooled off a bit, the supply side is still very tight,” added Sal Guatieri, senior economist at BMO Financial Group. “I think house prices will continue to outrun family incomes for at least another year and it will take some time for demand to slow and to some extent supply to increase.”
- “Supply pressures will continue to drive price appreciation,” said Tian Liu, “and freeze out a large percentage of the 2.7 million first-time homebuyers who are still missing from the market.”
- Low inventory will be an issue during of 2018, observed David Berson, former chief economist at Fannie Mae. “We expect that this will be the high-water mark for sales in this cycle.”
- “Inventory has fallen on an annual basis for almost three straight years, especially among the kind of entry-level homes likely to be sought by first-time buyers, which makes it difficult to sell homes in large numbers. And the price of existing homes has been climbing for six straight years…the affordability problem remains incredibly challenging: mortgage rates aren’t going to come down; prices aren’t going to fall in the face of intense demand; and income growth, while steady, is unlikely to meaningfully pick up any time soon,” said Aaron Terrazas, Zillow’s senior economist. “Declining inventory, deteriorating affordability, stagnant sales volumes and unmet demand look to be the hallmarks of the existing home market for some time to come.”