Multifamily Drives Rebound in Housing

Housing starts came in at a 1.32 million unit pace in March, well above expectations and above the upward revisions to the February data. Gains were concentrated in the multifamily market, which came back from a precipitous drop in February. The largest increases occurred in the Midwest, where the worst weather did not hit as hard as it did on the East Coast.

Starts on single-family homes, the part of the housing market with the tightest inventories, actually fell during the month. The largest blow affected the South on an actual unit basis; that is the largest market in the country for new construction. Unseasonal snows and other harsh weather contributed to weakness in the Southeast particularly. We expect to see a pickup in single-family home construction during the second quarter of the year. In fact, the raw data - prior to seasonal adjustment - revealed gains in the South, but not as many as is typical for this time of year.

Building permits for new home construction jumped to a 1.35 unit rate, The seasonally adjusted gains were again concentrated in the multifamily sector. Look for more broad-based gains when the weather is expected to return to “normal” patterns later in the season. We are still waiting for spring in Chicago.

Total housing starts are running about 11% ahead of last year’s pace in March. Multifamily starts are up nearly 17% while single-family construction is down from one year ago. We expect both multi- and single-family gains to settle into a 9% pace by year-end. That will be close to what we saw in 2017 but not enough to make up for the shortfall in inventories.

Escalating land and materials costs, including new tariffs for lumber and steel, are preventing builders from moving downstream to build the volume we usually see in more affordable housing this late in an expansion. Labor shortages are a problem as immigration, which have slowed dramatically, played an outsize role in providing labor for home builders, most notably in border states.

Recent census data reveal even more cause for concern; the slowdown in immigration - legal and illegal - has curbed projections for labor force growth in the years to come. The result is dampening estimates of the economy’s growth potential. Investment in labor-saving technologies, largely in manufactured housing, is the only offset in the near-term but there is not the necessary scale to meet demand for entry-level homes. The fear is that prices will continue to rise, which combined with rising mortgage rates will take a toll on demand. We could see a correction in the housing market in 2019.

Bottom Line
Today’s data were not as good as they appear on the surface, given the ongoing shortfall in single-family homes. The good news is that we should see a comeback for single-family construction in the second quarter. It is not expected to be enough, however, to alleviate the upward pressure on prices.

About the author
Diane Swonk Diane Swonk
Chief economist
Twitter: @DianeSwonk

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