Weather Dampens Housing Starts

Weather Dampens Housing Starts
Housing starts fell to a 1.29 million unit rate in April from a 1.34 million unit rate in March. The data for March was revised up slightly. Unusually harsh weather in the Midwest and Northeast delayed the usual spring ramping up of construction projects. In fact, the largest losses occurred in those two regions. The silver lining was a large rebound in the South, which is the single largest market for new housing construction in the country.

Single-family housing starts held up better than multifamily starts. Funding for multifamily residential has dried up relative to other commercial projects as some markets have shown signs of overbuilding. The mismatch between luxury buildings and demand for more affordable rentals has increased, particularly in larger cities. There are also concerns that a slowdown in investment from China will hit the multifamily market. Chinese investment already halved last year compared to 2016.

Building permits also fell during April but not as dramatically as starts, which underscores the ongoing strength of demand for new housing. Inventories of new homes, especially in the entry-level market, remain extremely tight. Builders are optimistic about their backlogs but remain cautious about moving downstream to build less expensive homes in larger volumes. Escalating land, materials and labor costs are crimping builder margins; data show construction wages are actually moving up. Tariffs on lumber and steel are becoming a drag on large multifamily projects.

Household formation has picked up from the lows of the financial crisis but remains well below the highs we saw during the housing market bubble. The problem is supply, which remains constrained. Housing analysts estimate that we are falling short of demand by about 350,000 new homes; this means we will continue to see prices moving up faster than construction and sales. That in turn is fueling the accumulation of equity in homes, which is encouraging older homeowners to borrow for renovations instead of trying to trade up. In fact, the value, as well as the number, of home equity lines of credit grew at the fastest pace in nine years in 2017 and is likely to surge in 2018.

Bottom Line
Weather distortions can shift construction activity from one month or quarter to another. The fundamental problem in the housing market is that rising costs are preventing builders from meeting demand where it is strongest, among entry-level buyers. Some of that is due to legacy effects of the crisis; many skilled carpenters left the industry or retired when the housing bubble burst. More recently, steel and lumber tariffs are adding to costs, while curbs on immigration are limiting the supply of workers in border states.

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

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