Housing Starts Slowed by Hurricane Florence

Housing starts fell more than 5% in September from August to a 1.2 million-unit rate. Much of that decline was due to disruptions created by heavy rains and flooding in the South in the wake of Hurricane Florence. There was also a bit of weakness in the market in the Midwest. Other regional markets posted gains for the month.

Housing starts remains subdued overall with reports that builders are still overbuilding in the high-end market and underbuilding in the entry-level market. Everything from escalating land-use costs to tariffs on materials and a shortage of skilled workers is making it more difficult for builders to move downscale where demand has been strongest. Even in Dallas where business is booming, we have seen an uptick in inventories in the million-plus market.

Recent increases in prices and interest rates are a problem as they have begun to take a toll on first-time buyer demand. Affordability is fast becoming as much of an issue for buyers as a shortage of suitable inventories.

We should see a bounce-back in starts later this year when rebuilding associated with Hurricane Michael, which was even more devastating, begins. The overall housing market looks like it is in the process of peaking as existing sales now trail year-ago levels. Applications for new mortgages have slipped. This is key because the housing market is usually the first to cross the peak of the expansion.

A drop in sales can occur up to 18 months prior to the onset of a recession but is nonetheless a signal that the expansion may be growing long in the tooth. We expect the expansion to continue well into summer 2019, which would make it the longest of the postwar era. Everything is relative; the expansion of the 1990s was much more robust with stronger wage gains.

Bottom Line
The expansion continues but is starting to show signs of age. Housing has been the canary in the coal mine in previous recessions.

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